The Rich Make Bad Investments, too

From Bloomberg online:

...anyone who ever felt bad about the fact that their stock trading could serve as a road map for how not to make money, here is some comfort: Really rich people make the same mistakes managing their money as everyone else. Unless they’re really, really rich.

A group of researchers...analyzed households with an average net worth of $90 million during the years 2000 to 2009.

They looked at where such folks put their money, how diversified it was, the level of risk they took, and the taxes they paid on their earnings.

They found that most of the ultrawealthy aren’t privy to a secret formula that helps ensure profit no matter the market conditions. They make about an equal share of dumb mistakes.

For one, they are more than willing to pile into the latest faddish investment, according to the Financial Times. For example, they poured money into hedge funds after 2005 when most funds had already reached their peak, and they piled into mortgage securities right before the bubble burst.

One thing that wealthy investors have been doing right, according to the researchers, is regularly rebalancing their portfolios to maintain consistent proportions of their assets in different classes such as stocks, bonds, and alternative investments like hedge funds and private equity funds.

...although, the rich folks didn’t seem to do this after the market collapse of 2008 and instead engaged in panic selling like everyone else.

But: The very richest among the group—the top 10 percent of the research sample—resisted this urge.

Exhibiting what might be described as billionaire’s telepathy, many of them started liquidating their investments in 2007, thereby avoiding the financial bloodbath that swept up nearly everyone else in 2008 and beyond.

This might help explain why, even as the top 1 percent of Americans have done multitudes better than the bottom 99 percent over the last 20 years, the incomes of the top 0.01 percent have gone up even more, rising 32 percent in 2012 alone.
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Link: http://www.businessweek.com/articles/2013-11-22/the-rich-make-bad-investments-just-like-you-and-me-sort-of

The new American nightmare: 80 is the new 60

From the NYPost.com:

Call it the new American nightmare: Running out of money in retirement is scaring the hell out of record numbers of older workers, forcing them to stay in the workforce.

Now 80 is the new 60 when it comes to retirement. Many older workers who finally clock out have sharply underestimated their financial needs in retirement, raising the specter of personal financial disaster....

By putting off retirement, the Baby Boomers are a large reason for the high levels of unemployment for those looking to enter the workforce. According to the latest Bureau of Labor Statistics the rate of joblessness in people 20- to 25-years old is 12.5 percent, twice the rate of people 25 and older.

These Boomers have plenty of company. The American Dream of retirement at 65 is looking more like a pipe dream to many.

Nearly half of older workers are on the job longer than they had planned to be — on average, by three more years than they estimated at age 40, according to a recent survey of Americans 50 and over by the Associated Press-NORC Center for Public Affairs Research.

And the latest studies shed additional disturbing light:

* Pre-retirees underestimate how much it will take to finance a long and phased-in retirement. Their average expectation is that 58 percent of prior annual income will sustain them. The industry recommends 75 percent to 80 percent.

* The percentage of older middle-class Americans who said their day-to-day financial concern is “paying the monthly bills” has climbed from 52 percent last year to 59 percent today ... Saving for retirement comes in second. Four in 10 say saving and paying the bills is “not possible.”  

* Older adults are now the fastest-growing share of the US labor force.

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Link: http://nypost.com/2013/11/16/80-is-the-new-60-when-it-comes-to-retirement/

Here is why Labor's share of Income has fallen: Welfare Payments

From Investors.com:

So far in 2013,

• employee compensation is up 11.5% from 2007, 
• proprietors' income is up 3.7%, and 
• income from transfer payments is up 41.5%. 
• Investment income, by contrast, was barely 1% higher this year than in 2007, and that gain was entirely due to rental income. Interest income is down because of the Fed, and dividends have not regained their 2007 level.

In short, the only reason income from work has fallen as a share of personal income in the past six years is not because investors have been collecting a larger share (they haven't), but because the U.S. government has been energetically transferring a much larger share from those who earned it to those who didn't.
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Link: http://news.investors.com/ibd-editorials-viewpoint/111513-679471-entitlement-state-is-to-blame-for-decline-in-labor-income-not-profits.htm?p=full

From Forbes.com: Imagine For A Moment If President Obama Ran Disneyworld

By Jeffrey Dorfman, professor of economics at the University of Georgia and consultant on economic issues to corporations and local governments:

...it seems worthwhile to conduct a hypothetical experiment about what it would be like if the federal government ran a theme park.

First, if tourists planning a trip to our theme park try to get information about the park or make reservations online, they will fail. Unfortunately, our government-run theme park has very little information on its website, you need to create an account and provide personal financial information before you can find out more about visiting the park, and the website will freeze when you try to actually purchase tickets for your planned visit.

There is a phone number you can call and after an average three hour wait, tickets can be purchased over the phone.

If our tourists still show up for a theme park vacation, the first surprise will be the admission price to the park. Instead of the usual tickets with set prices for adults, children, and senior citizens, the government-run theme park has prices that vary by family income. If the family makes less than $40,000 per year, the tickets are free. Families earning between $40,000 and $75,000 per year pay $25 per ticket and those earning from $75,000 to 100,000 pay $50 per ticket. All these families get to visit the theme park for prices less than the true cost of a visit to the park; the government is subsidizing their vacations.

The government pays for these subsidies partly by over-charging the wealthier tourists. If a family makes between $100,000 and $200,000 per year, they pay $100 per ticket. Families that earn over $200,000 per year must pay $500 per ticket.

Once in the park, the family is faced with three hour waits for the popular rides, but the park managers don’t care that customers have to wait; after all, they are government employees and their pay in no way depends on the profitability of the theme park or on customer satisfaction.

In fact, the employees are paid an average of $30 per hour with great benefits, more pay and better benefits than the average private sector worker. Plus, the park closes at 5:00 p.m. every day because the government employee unions fought against longer work hours in their latest contract negotiation.

At lunchtime, you have to go to the far corner of the theme park to find the single restaurant. Once there, you wait 30 minutes to order your lunch and another 30 minutes for the food to arrive.

The prices are again based on income, with free lunches for anyone with family income below $40,000, lunch prices of $5 per person if the family income is between $40,000 and $100,000, and lunches costing $20 per person for families earning over $100,000 per year. About one quarter of the orders are wrong when the food is delivered, but nobody sends the food back because it would be another 30 minute wait for the corrected order.

Another surprise for the vacationers is that 40 percent of the park is Senior Land, a special section of the theme park designed for senior citizens.

People over 65 years old get free admission to the park and are the only visitors allowed into Senior Land. There, they can enjoy gentle rides and live shows for entertainment all designed especially for the older visitor. The seniors are not disturbed by unruly children and there are very rarely any lines in the Senior Land section of the theme park.

Even with the higher-priced tickets for wealthier families, the park loses money, partly due to the cheaper tickets for poorer families but mostly due to all the expenses of running Senior Land without any offsetting ticket revenue.

However, the politicians and bureaucrats in charge of the government-run theme park do not consider cutting back on the expenses in Senior Land nor do they consider charging senior citizens for the benefits enjoyed because seniors vote at much higher rates than other citizens and so have a lot of political clout.

To improve the park’s finances the government passes a new regulation and a new tax. The regulation requires everyone to make one visit per year to the theme park.

If a family does not visit the park, they must pay a penalty on their income taxes. The government knows it can require actions under threat of a tax penalty thanks to the Supreme Court ruling on the Affordable Care Act. The new tax charges every working adult in the country $50 per year in exchange for the free admission to the park once they turn 65.

It turns out that these changes are not sufficient to fix the park’s finances because the extra tax revenue is offset by the (mandatory) extra visits by lower-earning families who get in for free or reduced prices. Unable to solve the problem by tax increases and unwilling to cut the subsidies to lower-income or elderly park visitors, the government decides to take a different route.

The government declares that its attempt to reform the theme park industry with a hybrid model combining private sector features with government control has failed because of the private sector components and competition from corporate theme parks who are too interested in profit and keeping customers happy instead of social engineering. Therefore, the government nationalizes the theme park industry.

All privately owned theme parks are forced to close or sell to the government.

The government leaves many of the parks closed, but it operates several using the same system as in the theme park described above. While the government is now losing several hundred billion dollars per year on theme parks, it forgoes further actions to address this deficit and declares its new theme park reform a success because all families in the country can now afford to go to a theme park.

This hypothetical discussion of theme parks may seem silly to some readers, but nobody should believe that big government aficionados are planning to stop with health care.

Theme parks are unlikely to be the next government takeover target, but some industry will be targeted. Make no mistake about that.
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Link: http://www.forbes.com/sites/jeffreydorfman/2013/11/07/imagine-for-a-moment-if-president-obama-ran-disneyworld/

Why Don’t More People Want a Job?

From the Wall Street Journal online:

The Labor Department publishes estimates of “discouraged workers” — those who have given up looking because they can’t find a job — but it uses a narrow definition.

Someone who decides to take care of the kids rather than keep looking for work might not count as discouraged — even if the person wants a job and plans to look for one in the future.

But in a new paper, economists ... divide up those out of the labor force using a simpler standard: whether or not the person says they want a job.

And they uncover an interesting previously unnoticed trend: As a share of all those “not in the labor force,” the number of people who want a job has been generally declining since the early 1980s.

Three decades ago, more than 10% wanted a job; on the eve of the latest recession, the share dipped below 6%....

What’s behind the decline? ... the decline in those who want a job is concentrated among three groups: Young people, women and the less educated.

The decline among young people mirrors a long-term decline in employment rates among young adults, especially teenagers. The reasons for that aren’t entirely clear, but may include a rising focus on college attendance, the disappearance of many low-skilled jobs and cultural factors that put less of a premium on working while in school.

The decline among women yields perhaps the authors’ most intriguing hypothesis: They note that the trend was strongest in the mid-to-late 1990s, also a period of strong income growth. Among married couples, at least, rising incomes could have made it less attractive — or less necessary — for both spouses to work. Indeed, the trend flattened out during the 2000s, a period of much weaker income growth.

Whatever the reason, the shift has significant implications for the labor market in both the short and long term...

The long-run decline in the share of people who want a job, then, means there’s less movement in and out of the labor market than there was in the past, and especially less movement from “not in the labor force” to “unemployed.”

That means that today’s unemployment rate is lower than it would have been under the same economic conditions two decades ago, which means the unemployment rate could be giving policymakers an artificially rosy view of the labor market.

“It’s one more argument saying that unemployment is not necessarily a very good measure of the state of the labor market,” Mr. Barnichon says.

The trend identified by Messrs. Barnichon and Figura also has long-term implications for economic growth. Right now, with unemployment high and hiring weak, whether people want a job or not doesn’t make much difference –there aren’t many jobs for them anyway.

But when hiring picks up, people who want a job will be far more likely to rejoin the labor market. Those who don’t want job, though, might not return, even in a strong job market. That could mean slower growth in the decades ahead.
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Link: http://blogs.wsj.com/economics/2013/11/02/number-of-the-week-why-dont-more-people-want-a-job

Obamacare's Fatal Flaw

From Martin Feldstein, Professor of Economics, Harvard:

Individuals who do not receive insurance from their employers are required to purchase insurance on their own, with low-income buyers receiving a government subsidy.

But neither the employer mandate nor the personal requirement is likely to prove effective. Employers can avoid the mandate by reducing an employee’s workweek to less than 30 hours (which the law defines as full-time employment).  

But even for full-time employees, firms can opt to pay a relatively small fine rather than provide insurance. That fine is $2,000 per employee, much less than the current average premium of $16,000 for employer-provided family policies.

Not providing insurance and paying the fine is a particularly attractive option for a firm if its employees have incomes that entitle them to the government subsidies (which are now available to anyone whose income is below four times the poverty level).

Rather than incur the cost of the premium for an approved policy, a smart employer can pay the fine for not providing insurance and increase employees’ pay by enough so that they have more spendable cash after purchasing the subsidized insurance policy. Even after both payments, employers can be better off financially. News reports indicate that many employers are already taking such steps.

But the biggest danger to Obamacare’s survival is that many individuals who do not receive insurance from their employer will choose not to insure themselves and will instead pay the fine of just 1% of income (rising permanently after 2015 to 2.5%). The preferred alternative for these individuals is to wait to buy insurance until they are ill and are facing large medical bills.

That wait-to-insure strategy makes sense if the medical condition is a chronic disease like diabetes or a condition requiring surgery, like cancer or a hernia. In either case, the individual would be able to purchase insurance after he or she receives the diagnosis....
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Link: www.project-syndicate.org/commentary/on-how-america-s-health-care-reform-could-unravel-by-martin-feldstein