Reporting on the Japanese Dai-ichi nuclear situation, this blog emphasized the risk from the spent fuel pool in building #4.
While the large risk from the Dai-ichi spent fuel pool at building #4 has been reduced significantly, the risk of spent fuel pools at reactors in general is ongoing. The U.S. has many spent fuel pools perched high in reactor buildings, where under massive natural disasters, some might possibly lose water and begin significant nuclear emissions if not addressed quickly.
The safe storage solution, for up to 100 years or more, is to move spent fuel out of pools and into dry casks in concrete bunkers.
This is an existing technique, already proven in use.
The only obstacle? Cost. A cost that is moderate compared to the size of the industry and the market value of the electricity it produces.
Potentially larger costs are currently imposed on all of us already in the form of risk, to the profit of the plant operators. By avoiding this safety expense, they impose a risk of much greater costs onto the public at large, onto you and me. Correctly placing this cost back onto the plant operators would raise electric prices only a tiny amount, and make little difference on your monthly bill ($7 bn is an amount consumers of electricity from these plants pay for power over about 5 months, but that cost could be amortized over 10-20 years). This relatively modest cost could save much larger costs someday. It's akin to whether automobile seat belts are worth the money.
Showing posts with label Corruption. Show all posts
Showing posts with label Corruption. Show all posts
April 20, 2011
Updated 5-18: Reverse Corruption And Breathe Easier
Some facts speak for themselves:
This topic is so relevant that I prefer to update it for a while instead of rushing on to other topics.
(4-20 update at bottom of post)
(4-27 update at bottom of post)
(update 5-18: David Leonhardt at the NYTimes, and new papers on this true cost of power)
Logically, even if you are lucky enough to avoid much of this pollutant load where you live, you occasionally breathe it right into your lungs, when the wind direction happens to bring it to you. When that happens, your body takes in, among other toxins, mercury. Mercury damages the nervous system.
Understanding the true extent of coal burning pollutants will give the well-informed a lot more concern than the tiny extra radioactive particle load from Japan lately. The health effects are orders of magnitude more serious.
But no health costs created by the actions of businesses should be paid by the victims alone, while little or none of the costs are born by those making the profits from emitting these toxins.
When the utilities and businesses emitting toxins bear little or none of the costs, it is a form of corruption. And in fact, often such corruption has literally been enacted into law.
Liability limits are a prime example of such corruption enacted into law.
...
Consider whether nuclear power in the form we have subsidized and tolerated so long is a good idea to begin with.
This is a complex question, and without trying to review how we got here (but for those that wish to hear some on that: here's a good Fresh Air interview) -- we can instead apply a powerful concept to discriminate whether this kind of nuclear power, or future kinds, are really worthwhile.
It is the wisdom of the crowd combined with the maximization of utility and the internalization of externals.
Simply put, every source of electric power for businesses and consumers should have its true, full costs put into the final price the consumers of electricity pay. The same should apply to oil products like gasoline.
This would look very different than what we have now.
For example, about 45% of US electricity comes from coal, but that is in part because we subsidize coal electricity production by allowing coal burning utilities to emit harmful emissions without paying their true health and environmental costs. We subsidize coal burning profoundly.
The degree of subsidy would be a surprise to many, no doubt.
We know we have subsidized nuclear power in several ways also, including costs of emissions.
In short, we subsidize the wasting of energy by making energy prices artificially cheap compared to true costs.
The full costs of an energy source includes all the costs -- health costs such as asthma and deaths from coal burning, coal-emitted mercury contamination of soil and people, massive climate change costs of carbon burning, nuclear contamination and storage costs, the costs of naval fleets and operations in the Persian Gulf to protect oil shipping lanes, and....finally, direct subsidies.
If all the true costs of every energy source -- nuclear, coal, oil, wind, solar -- were fully included in the final prices consumers pay, then we would all be able to choose more wisely and choose how to conserve, and which source to use.
True pricing would drastically alter our energy use for the better, and greatly aid the environment, and greatly improve the lives of our children through direct health effects.
How to do this? End all subsidies of all kinds for all energy sources now, and include in oil taxes the true full costs of defense and climate change, and for coal the true costs of pollutants and climate change cost estimates directly as fees on the users (utilities) in proportion to emissions, all the costs of nuclear that haven't been included like disposal and health costs (one way to figure health costs for a reactor type is to use a global average of health costs per year to date for that reactor type), and for solar the costs of solar panel production pollutants, and for wind energy the electrical transmission build out costs. Simply include the costs in the price to each source!
Likely many existing nuclear plants in the US, having had so much of their costs paid via subsidies from taxpayers already, would be viable as they exist now. Current operational costs are low, while spent fuel storage costs for newly spent fuel are diluted due to the existing necessity to store large amounts of spent fuel from decommissioned reactors and military sources (the marginal cost for new electricity generation creating more spent fuel doesn't add much to the existing large (overhead) costs all nuclear activities have already incurred.). In short, the storage costs are already here, and a little more doesn't amount to much.
The more interesting and significant consequence would arise from including costs based on risk assessments. Risk-assessed insurance costs -- without a liability cap -- would force some reactor operators to do significant modifications to reduce risks so as to remain economically viable.
Some reactors might not be modifiable enough to sustain risk-costs and become uneconomic and get shut down. Imposing true costs would lead to a more thorough and rapid change in improving backup systems and strategies. It's one thing to be regulated, another thing to have to pay for risk-costs in actual dollars.
It's far, far stronger incentive.
Finally, as wind power transmission and storage technology improves some of the plants might become uneconomic and get shut down earlier than they would have before. True costs make this timing rational and economic.
Once we approach that true pricing, the wisdom of the crowd will take over and make wise choices. People will conserve due to higher costs becoming finally visible -- you pay in your electric bill instead of in your tax bill or in your health insurance bill.
Conservation would sharpen and quicken.
The environmental and health outcomes would amaze those skeptical of economics and markets, who typically don't realize how profound are the effects of corruption and subsidy on this scale.
------------
Update 4-20 PM:
I just visited the NYTimes and this caught my eye:
When I started writing parts of this post earlier this month I had no idea such a negotiation was on. On one level, this is delightful. But when we compared this to the total emission load of coal burning in the US, these TVA changes will still be only a modest fraction of the problem.
That such a large step still falls far short of the overall problem shows how much benefit we would get from true pricing across the board.
Imagine if true pricing was imposed 12 months from now. Do you think it would take some large part of a decade for those modifications mentioned above? I'd bet more like 1-3 years.
-------------
4-27: NPR's Talk of the Nation goes over some of my points (listen below).
By the way, I was reading James Fallows when I was in my early twenties (in The Atlantic probably). That was 25 years ago. It seems like he's been around forever. Wouldn't it have been fun if he, say, referenced my blog. No doubt, many sources have pointed out various of these points, but it's better in a consistent economic framework, as I've tried to lay it out above. While the talk show is worthwhile, the needed insight comes across better in a broad view presented all together.
Heh, perhaps I should try to be a blogger at The Atlantic. Anyone know Fallows personally?
"Coal-fired power plants...produce more hazardous air emissions than any other industrial pollution sources....Over 386,000 tons of 84 separate hazardous air pollutants spew from over 400 plants in 46 states."
- Fine particle pollution from U.S. power plants cuts short the lives of nearly 24,000 people each year, including 2800 from lung cancer.
- The average number of life-years lost by individuals dying prematurely from exposure to particulate matter is 14 years.
- Hundreds of thousands of Americans suffer each year from asthma attacks, cardiac problems, and respiratory problems associated with fine particles from power plants. These illnesses result in tens of thousands of emergency room visits, hospitalizations, and lost work days each year.
- Power plant pollution is responsible for 38,200 non-fatal heart attacks per year.
This topic is so relevant that I prefer to update it for a while instead of rushing on to other topics.
(4-20 update at bottom of post)
(4-27 update at bottom of post)
(update 5-18: David Leonhardt at the NYTimes, and new papers on this true cost of power)
Logically, even if you are lucky enough to avoid much of this pollutant load where you live, you occasionally breathe it right into your lungs, when the wind direction happens to bring it to you. When that happens, your body takes in, among other toxins, mercury. Mercury damages the nervous system.
Understanding the true extent of coal burning pollutants will give the well-informed a lot more concern than the tiny extra radioactive particle load from Japan lately. The health effects are orders of magnitude more serious.
But no health costs created by the actions of businesses should be paid by the victims alone, while little or none of the costs are born by those making the profits from emitting these toxins.
When the utilities and businesses emitting toxins bear little or none of the costs, it is a form of corruption. And in fact, often such corruption has literally been enacted into law.
Liability limits are a prime example of such corruption enacted into law.
...
Consider whether nuclear power in the form we have subsidized and tolerated so long is a good idea to begin with.
This is a complex question, and without trying to review how we got here (but for those that wish to hear some on that: here's a good Fresh Air interview) -- we can instead apply a powerful concept to discriminate whether this kind of nuclear power, or future kinds, are really worthwhile.
It is the wisdom of the crowd combined with the maximization of utility and the internalization of externals.
Simply put, every source of electric power for businesses and consumers should have its true, full costs put into the final price the consumers of electricity pay. The same should apply to oil products like gasoline.
This would look very different than what we have now.
For example, about 45% of US electricity comes from coal, but that is in part because we subsidize coal electricity production by allowing coal burning utilities to emit harmful emissions without paying their true health and environmental costs. We subsidize coal burning profoundly.
The degree of subsidy would be a surprise to many, no doubt.
We know we have subsidized nuclear power in several ways also, including costs of emissions.
In short, we subsidize the wasting of energy by making energy prices artificially cheap compared to true costs.
The full costs of an energy source includes all the costs -- health costs such as asthma and deaths from coal burning, coal-emitted mercury contamination of soil and people, massive climate change costs of carbon burning, nuclear contamination and storage costs, the costs of naval fleets and operations in the Persian Gulf to protect oil shipping lanes, and....finally, direct subsidies.
If all the true costs of every energy source -- nuclear, coal, oil, wind, solar -- were fully included in the final prices consumers pay, then we would all be able to choose more wisely and choose how to conserve, and which source to use.
True pricing would drastically alter our energy use for the better, and greatly aid the environment, and greatly improve the lives of our children through direct health effects.
How to do this? End all subsidies of all kinds for all energy sources now, and include in oil taxes the true full costs of defense and climate change, and for coal the true costs of pollutants and climate change cost estimates directly as fees on the users (utilities) in proportion to emissions, all the costs of nuclear that haven't been included like disposal and health costs (one way to figure health costs for a reactor type is to use a global average of health costs per year to date for that reactor type), and for solar the costs of solar panel production pollutants, and for wind energy the electrical transmission build out costs. Simply include the costs in the price to each source!
Likely many existing nuclear plants in the US, having had so much of their costs paid via subsidies from taxpayers already, would be viable as they exist now. Current operational costs are low, while spent fuel storage costs for newly spent fuel are diluted due to the existing necessity to store large amounts of spent fuel from decommissioned reactors and military sources (the marginal cost for new electricity generation creating more spent fuel doesn't add much to the existing large (overhead) costs all nuclear activities have already incurred.). In short, the storage costs are already here, and a little more doesn't amount to much.
The more interesting and significant consequence would arise from including costs based on risk assessments. Risk-assessed insurance costs -- without a liability cap -- would force some reactor operators to do significant modifications to reduce risks so as to remain economically viable.
Some reactors might not be modifiable enough to sustain risk-costs and become uneconomic and get shut down. Imposing true costs would lead to a more thorough and rapid change in improving backup systems and strategies. It's one thing to be regulated, another thing to have to pay for risk-costs in actual dollars.
It's far, far stronger incentive.
Finally, as wind power transmission and storage technology improves some of the plants might become uneconomic and get shut down earlier than they would have before. True costs make this timing rational and economic.
Once we approach that true pricing, the wisdom of the crowd will take over and make wise choices. People will conserve due to higher costs becoming finally visible -- you pay in your electric bill instead of in your tax bill or in your health insurance bill.
Conservation would sharpen and quicken.
The environmental and health outcomes would amaze those skeptical of economics and markets, who typically don't realize how profound are the effects of corruption and subsidy on this scale.
------------
Update 4-20 PM:
I just visited the NYTimes and this caught my eye:
The new settlement between the Environmental Protection Agency, other plaintiffs and the Tennessee Valley Authority resolving clean air violations at 11 T.V.A. coal-fired power plants...
Under the deal, the federally run authority will close 18 of its oldest and dirtiest coal-fired boilers in Tennessee, Kentucky and Alabama, spend $3 billion to $5 billion over the next decade to install state-of-the-art pollution controls at about three dozen other units, and invest $350 million in energy efficiency and renewable energy projects.
The E.P.A. estimates that the agreement will reduce emissions of nitrogen oxides and sulfur dioxide by nearly 70 percent, preventing 1,200 to 3,000 premature deaths, 2,000 heart attacks and 21,000 asthma attacks annually.
When I started writing parts of this post earlier this month I had no idea such a negotiation was on. On one level, this is delightful. But when we compared this to the total emission load of coal burning in the US, these TVA changes will still be only a modest fraction of the problem.
That such a large step still falls far short of the overall problem shows how much benefit we would get from true pricing across the board.
Imagine if true pricing was imposed 12 months from now. Do you think it would take some large part of a decade for those modifications mentioned above? I'd bet more like 1-3 years.
-------------
4-27: NPR's Talk of the Nation goes over some of my points (listen below).
By the way, I was reading James Fallows when I was in my early twenties (in The Atlantic probably). That was 25 years ago. It seems like he's been around forever. Wouldn't it have been fun if he, say, referenced my blog. No doubt, many sources have pointed out various of these points, but it's better in a consistent economic framework, as I've tried to lay it out above. While the talk show is worthwhile, the needed insight comes across better in a broad view presented all together.
Heh, perhaps I should try to be a blogger at The Atlantic. Anyone know Fallows personally?
December 18, 2009
Would Republicans Filibuster a $626 Billion Defense Bill?
What? you may ask.
For a fleeting moment, something in us hopes.
Why would Senate Republicans try to block the Defense appropriations bill?
Might it be because of the strain of such a large appropriation on the federal budget?
$626 Billion in one...single...year...is far more money than the contemplated health care reform spending of about $900 Billion over ten years (starting slowly in 2010 with new subsidies for state high-risk health insurance pools).
Any conservative could reasonably consider defense spending efficiency, yes?
How about during a time when the U.S. faces no enemy or rival in the world capable of credibly challenging our navy, air force, or land forces? How about considering we spend far more on defense as a portion of our total economy than any other developed nation?
If we spent 1/2 as much, we would could still overwhelm any current or likely foe.
The answer unfortunately is a Washington game, from the Republican party, which seems enamored of Washington games lately:
Imagine...just for a moment...a more sane world.
A world in which the Republican party filibustered the Defense appropriations bill because it is a massive, budget-destroying $626 BILLION DOLLARS!
Oh....we can only hope we'll have genuine conservatives in the Republican party again someday...
It seems most of the Senators in Washington calling themselves "Republicans" have little or no regard at all for the actual federal deficit, in spite of much repetitive rhetoric.
They want to have it both ways.
They want to talk restraint on Washington spending.
But they been spending America into crisis for years, with budget-busting defense appropriation after appropriation, where even canceling a single out-of-date jet fighter (F-22) that the Pentagon did not want, took a determined effort from the administration so that it was considered a significant victory....
We are in sad, sad shape.
What would put us into better shape?
Sizing defense spending down to proportion to the actual threats we face, instead of being ready to instantly fight a major war (what is "major" you may ask -- "major" is a situation where there is an actual hostile opponent that is fielding organized armies of hundreds of thousands of well-armed and trained troops supplemented by powerful naval and/or air forces that is seriously preparing to fight us; the last such major situation ended in the 1990s as the Warsaw Pact dissolved. The Iraq of 2003 was at most a medium-sized war).
We are ready to fight massive enemies not because there are any massive enemies anywhere in the world.
There are not.
We spend this much because it is profitable for military contractors and attracts votes in the current set of Senators and Representatives that represent these for-profit military contractors.
President Eisenhower, who was also Supreme Allied Commander during World War II, warned us about this -- the "military-industrial complex" -- but somehow his party, the Republican party, seems to have little regard for this wise and experienced conservative leader of the 1950s.
We need to bring troops home from around the world, reduce new weapons purchases, and focus more on intelligence and research, so as to increase our real basis of security.
(For perspective, it might help readers to know I was an avid supporter of Reagan (from 1975) and his massive defense spending, though I was not old enough to vote in a presidential election until 1984. I favored Reagan's military buildup, until Gorbachev began to clearly signal major change in 1986-1988. By 1988 it was clear that ideas and technology and information were changing the world, not military strength.)
For a fleeting moment, something in us hopes.
Why would Senate Republicans try to block the Defense appropriations bill?
Might it be because of the strain of such a large appropriation on the federal budget?
$626 Billion in one...single...year...is far more money than the contemplated health care reform spending of about $900 Billion over ten years (starting slowly in 2010 with new subsidies for state high-risk health insurance pools).
Any conservative could reasonably consider defense spending efficiency, yes?
How about during a time when the U.S. faces no enemy or rival in the world capable of credibly challenging our navy, air force, or land forces? How about considering we spend far more on defense as a portion of our total economy than any other developed nation?
If we spent 1/2 as much, we would could still overwhelm any current or likely foe.
The answer unfortunately is a Washington game, from the Republican party, which seems enamored of Washington games lately:
If the filibuster on the $626 billion defense bill had succeeded, Democrats would have had to scramble to find a way to fund the military operations, because a stopgap funding measure for the Pentagon will expire at midnight Friday. Such an effort to come up with another stopgap defense bill might have disrupted the very tight timeline on health care.
Imagine...just for a moment...a more sane world.
A world in which the Republican party filibustered the Defense appropriations bill because it is a massive, budget-destroying $626 BILLION DOLLARS!
Oh....we can only hope we'll have genuine conservatives in the Republican party again someday...
It seems most of the Senators in Washington calling themselves "Republicans" have little or no regard at all for the actual federal deficit, in spite of much repetitive rhetoric.
They want to have it both ways.
They want to talk restraint on Washington spending.
But they been spending America into crisis for years, with budget-busting defense appropriation after appropriation, where even canceling a single out-of-date jet fighter (F-22) that the Pentagon did not want, took a determined effort from the administration so that it was considered a significant victory....
We are in sad, sad shape.
What would put us into better shape?
Sizing defense spending down to proportion to the actual threats we face, instead of being ready to instantly fight a major war (what is "major" you may ask -- "major" is a situation where there is an actual hostile opponent that is fielding organized armies of hundreds of thousands of well-armed and trained troops supplemented by powerful naval and/or air forces that is seriously preparing to fight us; the last such major situation ended in the 1990s as the Warsaw Pact dissolved. The Iraq of 2003 was at most a medium-sized war).
We are ready to fight massive enemies not because there are any massive enemies anywhere in the world.
There are not.
We spend this much because it is profitable for military contractors and attracts votes in the current set of Senators and Representatives that represent these for-profit military contractors.
President Eisenhower, who was also Supreme Allied Commander during World War II, warned us about this -- the "military-industrial complex" -- but somehow his party, the Republican party, seems to have little regard for this wise and experienced conservative leader of the 1950s.
We need to bring troops home from around the world, reduce new weapons purchases, and focus more on intelligence and research, so as to increase our real basis of security.
(For perspective, it might help readers to know I was an avid supporter of Reagan (from 1975) and his massive defense spending, though I was not old enough to vote in a presidential election until 1984. I favored Reagan's military buildup, until Gorbachev began to clearly signal major change in 1986-1988. By 1988 it was clear that ideas and technology and information were changing the world, not military strength.)
December 15, 2009
Republicans and Lieberman Trying to Keep Their Familiar Place
Every opponent of good health reform ideas are in the end only trying to secure a place for themselves and make a living and have a decent life, personally.
When Joe Lieberman (Senator of Connecticut) basically kills or puts off into the future one of the best reform ideas to date -- the Medicare buy-in for ages 55-64, which would lower overall national (public and private) health care spending, strengthen Medicare, and reduce federal deficits -- well, he's only trying to keep the life he knows.
Joe feels important, at the center of things. He loves it.
That's the life he wants.
In Connecticut are big insurers, such as health insurers like Aetna (in Hartford.)
Aetna itself is part of Senator Lieberman's constituents.
Joe wants to protect Aetna, and help it thrive.
Aetna represents a part of Connecticut jobs. Jobs in Hartford.
Joe wants to be important, and wants to preserve and strengthen Aetna's profitability.
...
Republicans....want to have a place.
If Health Care Reform is tremendously successful -- such as would follow from the recently proposed ideas of the Medicare buy-in for ages 55-64, from regulating the Medical Loss Ratio (percentage of health insurance premium income health insurers must pay out for actual health care) up to 90%....
Well, such pieces of reform would accelerate the benefits of health care reform and make good results clearer, sooner.
And having a social program designed largely by the Democrats thrive and benefit Americans in a more obvious and rapid fashion would make the Republican party seem less useful.
Less useful, less needed.
Who needs Republicans if Senators like Ron Wyden already offer the best market-based ideas?
Republicans don't want to lose more elections and become a smaller party.
They want to be important.
They want to regain that heady power they loved.
Power, importance, control.
Reform opponents are pushed to ignore the best interests of America as a whole by three strong motivations.
1. Because they want to be important and have power.
2. Because they want to have a place and make a living.
3. Because they believe in the evolving narrative, the invention, the fiction of a certain Russian emigre who renamed herself Rand. It's a powerful, self-serving world view in which only select individuals are important and produce the good things in the world, and everyone else is second class -- a lower class of people that should look up to their superiors. (More is coming about this very important fact in a later post.)
But of these motivations, the second -- just a need to have a place, to make a living -- is the one that counts, that increases the number of opponents of reform from a scattered few to an important minority that are unable to see all the sides of important issues.
When Joe Lieberman (Senator of Connecticut) basically kills or puts off into the future one of the best reform ideas to date -- the Medicare buy-in for ages 55-64, which would lower overall national (public and private) health care spending, strengthen Medicare, and reduce federal deficits -- well, he's only trying to keep the life he knows.
Joe feels important, at the center of things. He loves it.
That's the life he wants.
In Connecticut are big insurers, such as health insurers like Aetna (in Hartford.)
Aetna itself is part of Senator Lieberman's constituents.
Joe wants to protect Aetna, and help it thrive.
Aetna represents a part of Connecticut jobs. Jobs in Hartford.
Joe wants to be important, and wants to preserve and strengthen Aetna's profitability.
...
Republicans....want to have a place.
If Health Care Reform is tremendously successful -- such as would follow from the recently proposed ideas of the Medicare buy-in for ages 55-64, from regulating the Medical Loss Ratio (percentage of health insurance premium income health insurers must pay out for actual health care) up to 90%....
Well, such pieces of reform would accelerate the benefits of health care reform and make good results clearer, sooner.
And having a social program designed largely by the Democrats thrive and benefit Americans in a more obvious and rapid fashion would make the Republican party seem less useful.
Less useful, less needed.
Who needs Republicans if Senators like Ron Wyden already offer the best market-based ideas?
Republicans don't want to lose more elections and become a smaller party.
They want to be important.
They want to regain that heady power they loved.
Power, importance, control.
Reform opponents are pushed to ignore the best interests of America as a whole by three strong motivations.
1. Because they want to be important and have power.
2. Because they want to have a place and make a living.
3. Because they believe in the evolving narrative, the invention, the fiction of a certain Russian emigre who renamed herself Rand. It's a powerful, self-serving world view in which only select individuals are important and produce the good things in the world, and everyone else is second class -- a lower class of people that should look up to their superiors. (More is coming about this very important fact in a later post.)
But of these motivations, the second -- just a need to have a place, to make a living -- is the one that counts, that increases the number of opponents of reform from a scattered few to an important minority that are unable to see all the sides of important issues.
May 19, 2009
Usury is OK, and Guns in Parks...
The Senate passed its version of credit card reform today. Several current tricks of credit card issuers will be out of bounds...in the future....eventually...when the rules finally come into effect. But if your card issuer just hiked your rate in a big way, well....
Current usurious rates aren't even on the table. 18%, 25% or 29.99% are all just fine.
One article mentioned that about 1/5 of card holders pay over 20%. Was that data from today?
One of our rate hike notices, which arrived a few weeks back, will raise one card of ours from 12% to about 19%. While these hikes won't affect us much at our house, it's quite easy to imagine the effect on other households. But compare this to the above seemingly reassuring statistic. Our new rate will be below 20%, and isn't in effect yet.
In 6 months, we may find that the above statistic of 1/5 has increased....
The elephant in the room is the question of the rate hikes that have just recently occurred or are on the way, since the card industry could see the new rules coming for miles. Card rate hikes are on the way, notices already sent, and these will slow the economy.
You can check out how your own Senators voted on the question of how many more of your dollars should go to the card industry right now, instead of, for instance, to local businesses where you live. If you are just now starting to pay an extra $40 or $80 a month in interest (a 12 percentage point rise in interest rate on an $8000 balance costs $80/month), will you spend the same amount on local goods and services that you have recently?
If you pay $40 a month more in interest now, will you tip the waiter the same amount? For that matter, will you cut back on eating out even further?
But, while usurious rates are OK with Congress, it's still up in the air whether the guns we need in parks can be loaded:
Current usurious rates aren't even on the table. 18%, 25% or 29.99% are all just fine.
One article mentioned that about 1/5 of card holders pay over 20%. Was that data from today?
One of our rate hike notices, which arrived a few weeks back, will raise one card of ours from 12% to about 19%. While these hikes won't affect us much at our house, it's quite easy to imagine the effect on other households. But compare this to the above seemingly reassuring statistic. Our new rate will be below 20%, and isn't in effect yet.
In 6 months, we may find that the above statistic of 1/5 has increased....
The elephant in the room is the question of the rate hikes that have just recently occurred or are on the way, since the card industry could see the new rules coming for miles. Card rate hikes are on the way, notices already sent, and these will slow the economy.
You can check out how your own Senators voted on the question of how many more of your dollars should go to the card industry right now, instead of, for instance, to local businesses where you live. If you are just now starting to pay an extra $40 or $80 a month in interest (a 12 percentage point rise in interest rate on an $8000 balance costs $80/month), will you spend the same amount on local goods and services that you have recently?
If you pay $40 a month more in interest now, will you tip the waiter the same amount? For that matter, will you cut back on eating out even further?
But, while usurious rates are OK with Congress, it's still up in the air whether the guns we need in parks can be loaded:
One amendment attached to the Senate bill by Senator Tom Coburn, Republican of Oklahoma, would restore a Bush administration policy allowing loaded guns in national parks. That provision is not in the House version, so there may be discussions between the two chambers over the issue.
May 15, 2009
Check to See How Your Senators Voted on Credit Card Reform (Updated)
Here is the first vote to check:
A Yes vote supported a 15% cap on credit card interest rates, limiting usury. A No vote was against the 15% limit on credit card interest. (note that this vote was on whether to include amendment 1062 in HR 627)
Senate Vote on H.R.627: Motion to Waive CBA Sanders Amdt. No. 1062; To establish a national consumer credit usury rate.
People, let's hold them accountable. Let's pay attention. Let's know how they voted, and let's remember and tell our friends.
---------Somehow it doesn't occur to all our Senators that 20% or 25% interest is a bad thing.
Bad for the nation.
One can imagine the lobbying arguments they heard, probably carefully targeted to individual Senators, depending on their temperament and beliefs.
Here are a couple I can imagine:
For a Senator that is a "staunch" "free enterprise" "pro-market" person, but doesn't really understand the basic necessities of markets or enterprise (non-finance enterprise) -- the necessity of having enough potential customers with disposable income left over to buy your product(!) -- an effective pitch could go:
"We gave them a low introductory rate, and planned our business on the premise that the rate later would be higher. Now that defaults are up everywhere, we need higher rates."
For a Senator that is more realistic and down-to-earth, perhaps he'd hear:
"Senator, we'd really like to help you again during your next campaign, but we need your help now."
The 2nd hardly needs any further examination here, but the first pitch is worth batting down.
If a credit card issuer cannot make enough profit at 15% even with a background default rate rising towards 8%-11% for instance (some credit issuers are more careful than others), if that company cannot make it on a 4%-7% spread, then....that isn't a well run company. For issuers that fold at a 15% cap (if any would), we should pleased to let the free market run them out of business and replace them with a company that can live on a 5% or 7% spread of interest (more if the issuer is prudent), which the market would indeed quickly do, in only months. Prohibiting 20%+ interest credit card rates is similar to outlawing an addictive substance that is harmful to health.
---------
Let's illustrate how 20% or 25% interest is ruinous.Consider a typical family carrying a commonplace level of household credit card debt of about $7,000 who then suffer a few (commonplace) financial hits -- too many major expenses at one time, such as multiple large auto repairs in a few months, and some expensive dental work and all of this just after a major replacement expense for a quality refrigerator or money sent to help a kid or relative. (Of course some households could have a previous balance on their cards from items such as furniture before the new expenses...but less discretionary expenditures are also common in debt ramp-ups.) It could easily be the case that after some bad luck for a few months they could end up carrying a significant credit card balance, perhaps even as much as 40% of their annual income for instance.
Let's suppose a family with a household income of $50,000 ended up with a temporary balance on their credit cards of $20,000. Otherwise they are quite average, with a house costing $160,000 at purchase (just a bit over 3 times their annual income) which they bought with 10% down and a good prime mortgage at a nice low fixed 30-year rate of 5.25%.
In other words, a financially responsible family that pays their bills, with excellent credit, who just had some large bills all at once, and not really more than they could handle over time...
...given a normal, reasonable interest rate, such as they expected they would have, due to the advertising of the credit card issuers.
Normally, a credit-worthy family could expect to carry such a balance on a few cards and at an interest rate in the range of 11%-14%.
First, clearly the credit card companies are making a nice, fat profit on balances carried at 12% or 14% interest that are paid over time (account holders that pay on significant balances without defaulting are very profitable for card issuers). In fact, you'll see that shortly.
Do the credit card companies need a higher rate here? Can the family handle a significant rate hike on this existing balance, a practice that is now commonplace according to the news.
So, let's imagine the outcome for this family financially if the $20,000 is carried at 12% in one scenario, and at 22% (21.99%) in the alternative scenario.
What will happen?
Suppose our responsible family with excellent credit spends quite carefully during the next few years, and even gives up their previous plan for a ski trip, settling for a much less expensive trip to SeaWorld once a year.
So, the family is cutting back, paying what they can.
What will happen?
Let's see.
A plan that reduces financial risk is to aim to pay back a high balance like this in around 4 years, because it is likely there will eventually be further expenses, and the family needs to be making real progress reducing debt before those unpredictable future expenses hit.
Putting our balance of $20,000 into the calculator for a 4-year payoff at 12% and 22% yields the following monthly payments:
12% -- $527/month
22% -- $630/month
So, only a difference in our scenario of $103/month more. Is that enough to matter?
Let's see, over 4 years, the roughly $103/month extra adds up to about $4,944 in extra payments (all interest).
Leaving aside for a moment what that $4,944 could have bought, such as two years of $2,470 contributions to an IRA, or $4,944 put into a 529 plan for college for the kids, while the years until college are still enough to earn some returns on the contribution, or....say a replacement used car when the old wagon goes.
Well....the last isn't a trivial example (though neither are the first). Because, in our example this frugal and responsible family has already chosen to repair their old car instead of buying a replacement, because the repair was still cheaper than buying another used-car as replacement....but, in several years, that old car is going to need some more repair, or replacement finally with a newer used car.
hmmm.....
So, there is already a danger this budget difference could put the family on a "crash" course.
But, let's go ahead and look at the budget numbers carefully.
For their monthly mortgage payment on the house described above with $2000 in annual property taxes and a quality $700/year homeowners insurance policy, and PMI (loan to value is 90%) of about $60/month, we arrive at a monthly house payment of $1,080/month.
Let's suppose our family has 1 child, 2 cars, one with a payment of $420/month for another 2 years, and the other older car paid off.
While both parents work, they pay $500/month for daycare for their 3 year-old.
While neither employer provides health insurance, the family has a good quality blue cross policy with a $3500 deductible for which they pay $750/month. To cover their deductible in case of a major medical expense (their regular office visits are covered at a $25 co-pay and no deductible), they funded an traditional IRA last year with $2500, as an emergency fund for medical care (IRA withdrawals are allowed for medical expenses).
For comparison note that the national average health insurance cost for a family is $12,000/year. This family is carefully aiming at a lower cost, but using a significant deductible, for which they have saved up money to help cover.
This is a frugal, money-careful family.
Normally, they contribute $2000/year to a Roth IRA, and this is the only retirement savings they have.
Being an old hand at Turbotax, I ran through all of this family's 2008 tax year. They were able to itemize deductions, due to the costs of medical insurance and home mortgage interest.
With only 5 $25 office visits during 2008, the family had no major medical expenses other than just the basic cost of health insurance. They are healthy and lucky, and don't have significant health costs other than the braces they just had to get for their kid's teeth.
Turbotax revealed they received $600 for their child tax credit, and also a significant child-care tax credit of $1,000, which was a major help, reducing their family federal taxes from about $2800 down to under $1200.
We'd like to list the federal income taxes in our budget, so to figure the family take home pay, we'll subtract only FICA taxes (social security and medicare taxes), and nothing else. All other expenses -- income taxes, health insurance, and retirement will not be withheld, but paid in our budget below.
Take home pay after FICA for our family is then $46,175 or $3848/month.
Also, our lucky family lives in a state with no income tax.
Nice. So this careful, prudent family, who are in many ways lucky and who Uncle Sam has treated very well in 2008, how will things turn out for them financially?
So, with all these advantages, with all these favorable basic facts, but with a few typical large expenses all at once of $20,000, will our family make it financially???
Let's suppose the family doesn't mind sweating some in the summer and is lucky enough to choose a low-cost electricity plan at only 10 cents/KwH. Nice. Their electric bill will average out over a year to only $120/month.
This is a careful, conservative, prudent family, remember?
So here are the budget results (on a few items like gasoline I just use some commonplace amounts):
Monthly Expenses before Credit Card Payments:
Housing Payment: $1080
Health Insurance: $750
Roth IRA Savings: $167
Auto Payment: $420 (5-yr, 6% auto loan for a car just under $22K)
Auto Insurance: $80 (they have good $100K/$300K insurance but comprehensive on 1 car).
Auto tags/inspections: $12 (about $140/year)
Child Care: $500
Federal Taxes: $100
Electric Utility: $120 (average over year)
Gas Utility: $35 (average over year)
Trash/sewer/water: $65
Grocery Budget: $600
Eating Out: $80 (yes, that's only $80 for a whole month -- they cook a lot at home)
Gasoline: $110
Phone and Internet: $75 (our frugal family forgoes cable TV and uses an antenna)
HOA fees: $20
Cell Phones: $65 (this may seem low, but these people are frugal)
Movie Rentals: $15 (cheap entertainment)
Clothing: $35 (some work clothes, some GoodWill clothes)
Dog food: $30 (most families have a pet)
Haircuts, cosmetics, toiletries: $45
Life Insurance: $50 (both parents, prudent, are insured with term life insurance)
Health Club: $20 (they have a deal!)
Babysitter: $25 (obviously, this is about 1 night's worth, again: think frugal)
Ok....let's see where we are at with this very basic, frugal family budget
-----------------------------------------------
Basic Frugal Budget $4499
....
UH OH
(it seems paying the full cost of health insurance has shot this family's budget)
....
It seems our family can't quite....live....this basic budget on $50,000/year.
OK, let's suppose the parents have been working quite hard at their jobs, and are great at them, and they just got BIG raises....(perhaps in part due to their employers canceling health insurance benefits).
Let's revise the family income upwards to a very average family level of $60,000
$10,000 is a nice raise, yes?
But...we'll keep that credit card debt unchanged at $20,000, now about 1/3 annual income.
Federal taxes increase (TurboTax says) to about $232/month.
Take home pay after FICA withholding only is now increased to $55,410 or $4618/month.
The basic budget though is increased by only the new income tax increase, or another $132/month:Basic Frugal Budget $4631
whew....not so good...
It seems $60,000 is not enough for our "frugal budget" above.
Notice that some or several of the items are *less* than your own family spends?
Ok, let's cut costs to the bone, and put on a 2nd job for dad.
Of course, some families don't have a $420/month auto payment.
Let's give them a cheaper car there.
Let's cut that car payment to $350/month -- they bought a cheaper car to begin with, say. This cuts the basic Budget by $70/month.
Dad is now working 55/hours week (40hrs + 15 hours on the 2nd job at $9/hour) and brings in an extra $6750/year now in 50 weeks.
The little boy sees less of dad now, but....life is sometimes hard (and sometime made harder by decisions of other people though), and that's a reality.
Of course, another job will require a little more gasoline, and probably the family will need fast food a few times also, being too exhausted to cook sometimes. Let's suppose $20 more for gasoline, and $25 more for fast food.
This brings home another 6233/year after FICA, or $520/month, for a total of $5,137/month. Federal taxes increase by another $91 to $323/month now. Against the increase of $91/month in taxes we decrease the car payment by $70, then add $45 for more fast food and gasoline for a net increase of $66 in the budget:
Basic Frugal Budget $4697/month
Ok, now with 3 jobs and a cheaper car the family is bringing in enough for their basic frugal budget and will have
$440/month left to pay on... credit cards.
hmmm.....
remember this payment amount on the $20,000?:
12% -- $527/month
22% -- $630/month
We are still not making it here...
ok, we have to be somehow more favorable, less desperate. Let's say that that credit card balance for those unexpected expenses all at once was only $15,000.
We are now under 1/4th of family income from that expensive, unlucky 4 months.The new 4-year payment amounts (on $15,000) are:
12% -- $395/month
22% -- $473/month
Ok, now we've made it. The family can pay the credit cards. Sort of.
They can pay about $400/month at 12% interest. Or with the help of Congress, they can pay more, about $470/month, lining the pockets of bank executives and investors. Perhaps they can save somewhere else in the budget to close that $33 a month gap needed to make the $473 payment when the interest rate is 22%.
Is one scenario better for the economy than the other?
I'm not just being rhetorical with that question. The $78 more each month the family has available under the lower interest rate is sustainable (non-credit) money that will be spent, sooner or later (more later if saved first), in the ordinary economy -- giving a waitress an extra tip, or buying a little iPod. It's discretionary money like this that ultimately provides you and I with our jobs. If that is sent off instead as extra interest, it can go to investors overseas, or into an U.S. high-wealth portfolio of securities somewhere, and be socked away for decades.
-----------
Update: A helpful reader pointed out that the example of buying a couch (in addition to medical and repair bills) suggested the example family wasn't prudent enough, so I substituted an equally realistic example without a couch. But ultimately the issue wasn't what a family chose to buy in piling up debt, so much as just simple usury, and worse usury after the fact.
I liked this metaphor from Austan Goolsbee in a NYTimes article on the credit card reform bill to describe the practice of raising rates exorbitantly on existing balances:
A Yes vote supported a 15% cap on credit card interest rates, limiting usury. A No vote was against the 15% limit on credit card interest. (note that this vote was on whether to include amendment 1062 in HR 627)
Senate Vote on H.R.627: Motion to Waive CBA Sanders Amdt. No. 1062; To establish a national consumer credit usury rate.
People, let's hold them accountable. Let's pay attention. Let's know how they voted, and let's remember and tell our friends.
---------Somehow it doesn't occur to all our Senators that 20% or 25% interest is a bad thing.
Bad for the nation.
One can imagine the lobbying arguments they heard, probably carefully targeted to individual Senators, depending on their temperament and beliefs.
Here are a couple I can imagine:
For a Senator that is a "staunch" "free enterprise" "pro-market" person, but doesn't really understand the basic necessities of markets or enterprise (non-finance enterprise) -- the necessity of having enough potential customers with disposable income left over to buy your product(!) -- an effective pitch could go:
"We gave them a low introductory rate, and planned our business on the premise that the rate later would be higher. Now that defaults are up everywhere, we need higher rates."
For a Senator that is more realistic and down-to-earth, perhaps he'd hear:
"Senator, we'd really like to help you again during your next campaign, but we need your help now."
The 2nd hardly needs any further examination here, but the first pitch is worth batting down.
If a credit card issuer cannot make enough profit at 15% even with a background default rate rising towards 8%-11% for instance (some credit issuers are more careful than others), if that company cannot make it on a 4%-7% spread, then....that isn't a well run company. For issuers that fold at a 15% cap (if any would), we should pleased to let the free market run them out of business and replace them with a company that can live on a 5% or 7% spread of interest (more if the issuer is prudent), which the market would indeed quickly do, in only months. Prohibiting 20%+ interest credit card rates is similar to outlawing an addictive substance that is harmful to health.
---------
Let's illustrate how 20% or 25% interest is ruinous.Consider a typical family carrying a commonplace level of household credit card debt of about $7,000 who then suffer a few (commonplace) financial hits -- too many major expenses at one time, such as multiple large auto repairs in a few months, and some expensive dental work and all of this just after a major replacement expense for a quality refrigerator or money sent to help a kid or relative. (Of course some households could have a previous balance on their cards from items such as furniture before the new expenses...but less discretionary expenditures are also common in debt ramp-ups.) It could easily be the case that after some bad luck for a few months they could end up carrying a significant credit card balance, perhaps even as much as 40% of their annual income for instance.
Let's suppose a family with a household income of $50,000 ended up with a temporary balance on their credit cards of $20,000. Otherwise they are quite average, with a house costing $160,000 at purchase (just a bit over 3 times their annual income) which they bought with 10% down and a good prime mortgage at a nice low fixed 30-year rate of 5.25%.
In other words, a financially responsible family that pays their bills, with excellent credit, who just had some large bills all at once, and not really more than they could handle over time...
...given a normal, reasonable interest rate, such as they expected they would have, due to the advertising of the credit card issuers.
Normally, a credit-worthy family could expect to carry such a balance on a few cards and at an interest rate in the range of 11%-14%.
First, clearly the credit card companies are making a nice, fat profit on balances carried at 12% or 14% interest that are paid over time (account holders that pay on significant balances without defaulting are very profitable for card issuers). In fact, you'll see that shortly.
Do the credit card companies need a higher rate here? Can the family handle a significant rate hike on this existing balance, a practice that is now commonplace according to the news.
So, let's imagine the outcome for this family financially if the $20,000 is carried at 12% in one scenario, and at 22% (21.99%) in the alternative scenario.
What will happen?
Suppose our responsible family with excellent credit spends quite carefully during the next few years, and even gives up their previous plan for a ski trip, settling for a much less expensive trip to SeaWorld once a year.
So, the family is cutting back, paying what they can.
What will happen?
Let's see.
A plan that reduces financial risk is to aim to pay back a high balance like this in around 4 years, because it is likely there will eventually be further expenses, and the family needs to be making real progress reducing debt before those unpredictable future expenses hit.
Putting our balance of $20,000 into the calculator for a 4-year payoff at 12% and 22% yields the following monthly payments:
12% -- $527/month
22% -- $630/month
So, only a difference in our scenario of $103/month more. Is that enough to matter?
Let's see, over 4 years, the roughly $103/month extra adds up to about $4,944 in extra payments (all interest).
Leaving aside for a moment what that $4,944 could have bought, such as two years of $2,470 contributions to an IRA, or $4,944 put into a 529 plan for college for the kids, while the years until college are still enough to earn some returns on the contribution, or....say a replacement used car when the old wagon goes.
Well....the last isn't a trivial example (though neither are the first). Because, in our example this frugal and responsible family has already chosen to repair their old car instead of buying a replacement, because the repair was still cheaper than buying another used-car as replacement....but, in several years, that old car is going to need some more repair, or replacement finally with a newer used car.
hmmm.....
So, there is already a danger this budget difference could put the family on a "crash" course.
But, let's go ahead and look at the budget numbers carefully.
For their monthly mortgage payment on the house described above with $2000 in annual property taxes and a quality $700/year homeowners insurance policy, and PMI (loan to value is 90%) of about $60/month, we arrive at a monthly house payment of $1,080/month.
Let's suppose our family has 1 child, 2 cars, one with a payment of $420/month for another 2 years, and the other older car paid off.
While both parents work, they pay $500/month for daycare for their 3 year-old.
While neither employer provides health insurance, the family has a good quality blue cross policy with a $3500 deductible for which they pay $750/month. To cover their deductible in case of a major medical expense (their regular office visits are covered at a $25 co-pay and no deductible), they funded an traditional IRA last year with $2500, as an emergency fund for medical care (IRA withdrawals are allowed for medical expenses).
For comparison note that the national average health insurance cost for a family is $12,000/year. This family is carefully aiming at a lower cost, but using a significant deductible, for which they have saved up money to help cover.
This is a frugal, money-careful family.
Normally, they contribute $2000/year to a Roth IRA, and this is the only retirement savings they have.
Being an old hand at Turbotax, I ran through all of this family's 2008 tax year. They were able to itemize deductions, due to the costs of medical insurance and home mortgage interest.
With only 5 $25 office visits during 2008, the family had no major medical expenses other than just the basic cost of health insurance. They are healthy and lucky, and don't have significant health costs other than the braces they just had to get for their kid's teeth.
Turbotax revealed they received $600 for their child tax credit, and also a significant child-care tax credit of $1,000, which was a major help, reducing their family federal taxes from about $2800 down to under $1200.
We'd like to list the federal income taxes in our budget, so to figure the family take home pay, we'll subtract only FICA taxes (social security and medicare taxes), and nothing else. All other expenses -- income taxes, health insurance, and retirement will not be withheld, but paid in our budget below.
Take home pay after FICA for our family is then $46,175 or $3848/month.
Also, our lucky family lives in a state with no income tax.
Nice. So this careful, prudent family, who are in many ways lucky and who Uncle Sam has treated very well in 2008, how will things turn out for them financially?
So, with all these advantages, with all these favorable basic facts, but with a few typical large expenses all at once of $20,000, will our family make it financially???
Let's suppose the family doesn't mind sweating some in the summer and is lucky enough to choose a low-cost electricity plan at only 10 cents/KwH. Nice. Their electric bill will average out over a year to only $120/month.
This is a careful, conservative, prudent family, remember?
So here are the budget results (on a few items like gasoline I just use some commonplace amounts):
Monthly Expenses before Credit Card Payments:
Housing Payment: $1080
Health Insurance: $750
Roth IRA Savings: $167
Auto Payment: $420 (5-yr, 6% auto loan for a car just under $22K)
Auto Insurance: $80 (they have good $100K/$300K insurance but comprehensive on 1 car).
Auto tags/inspections: $12 (about $140/year)
Child Care: $500
Federal Taxes: $100
Electric Utility: $120 (average over year)
Gas Utility: $35 (average over year)
Trash/sewer/water: $65
Grocery Budget: $600
Eating Out: $80 (yes, that's only $80 for a whole month -- they cook a lot at home)
Gasoline: $110
Phone and Internet: $75 (our frugal family forgoes cable TV and uses an antenna)
HOA fees: $20
Cell Phones: $65 (this may seem low, but these people are frugal)
Movie Rentals: $15 (cheap entertainment)
Clothing: $35 (some work clothes, some GoodWill clothes)
Dog food: $30 (most families have a pet)
Haircuts, cosmetics, toiletries: $45
Life Insurance: $50 (both parents, prudent, are insured with term life insurance)
Health Club: $20 (they have a deal!)
Babysitter: $25 (obviously, this is about 1 night's worth, again: think frugal)
Ok....let's see where we are at with this very basic, frugal family budget
-----------------------------------------------
Basic Frugal Budget $4499
....
UH OH
(it seems paying the full cost of health insurance has shot this family's budget)
....
It seems our family can't quite....live....this basic budget on $50,000/year.
OK, let's suppose the parents have been working quite hard at their jobs, and are great at them, and they just got BIG raises....(perhaps in part due to their employers canceling health insurance benefits).
Let's revise the family income upwards to a very average family level of $60,000
$10,000 is a nice raise, yes?
But...we'll keep that credit card debt unchanged at $20,000, now about 1/3 annual income.
Federal taxes increase (TurboTax says) to about $232/month.
Take home pay after FICA withholding only is now increased to $55,410 or $4618/month.
The basic budget though is increased by only the new income tax increase, or another $132/month:Basic Frugal Budget $4631
whew....not so good...
It seems $60,000 is not enough for our "frugal budget" above.
Notice that some or several of the items are *less* than your own family spends?
Ok, let's cut costs to the bone, and put on a 2nd job for dad.
Of course, some families don't have a $420/month auto payment.
Let's give them a cheaper car there.
Let's cut that car payment to $350/month -- they bought a cheaper car to begin with, say. This cuts the basic Budget by $70/month.
Dad is now working 55/hours week (40hrs + 15 hours on the 2nd job at $9/hour) and brings in an extra $6750/year now in 50 weeks.
The little boy sees less of dad now, but....life is sometimes hard (and sometime made harder by decisions of other people though), and that's a reality.
Of course, another job will require a little more gasoline, and probably the family will need fast food a few times also, being too exhausted to cook sometimes. Let's suppose $20 more for gasoline, and $25 more for fast food.
This brings home another 6233/year after FICA, or $520/month, for a total of $5,137/month. Federal taxes increase by another $91 to $323/month now. Against the increase of $91/month in taxes we decrease the car payment by $70, then add $45 for more fast food and gasoline for a net increase of $66 in the budget:
Basic Frugal Budget $4697/month
Ok, now with 3 jobs and a cheaper car the family is bringing in enough for their basic frugal budget and will have
$440/month left to pay on... credit cards.
hmmm.....
remember this payment amount on the $20,000?:
12% -- $527/month
22% -- $630/month
We are still not making it here...
ok, we have to be somehow more favorable, less desperate. Let's say that that credit card balance for those unexpected expenses all at once was only $15,000.
We are now under 1/4th of family income from that expensive, unlucky 4 months.The new 4-year payment amounts (on $15,000) are:
12% -- $395/month
22% -- $473/month
Ok, now we've made it. The family can pay the credit cards. Sort of.
They can pay about $400/month at 12% interest. Or with the help of Congress, they can pay more, about $470/month, lining the pockets of bank executives and investors. Perhaps they can save somewhere else in the budget to close that $33 a month gap needed to make the $473 payment when the interest rate is 22%.
Is one scenario better for the economy than the other?
I'm not just being rhetorical with that question. The $78 more each month the family has available under the lower interest rate is sustainable (non-credit) money that will be spent, sooner or later (more later if saved first), in the ordinary economy -- giving a waitress an extra tip, or buying a little iPod. It's discretionary money like this that ultimately provides you and I with our jobs. If that is sent off instead as extra interest, it can go to investors overseas, or into an U.S. high-wealth portfolio of securities somewhere, and be socked away for decades.
-----------
Update: A helpful reader pointed out that the example of buying a couch (in addition to medical and repair bills) suggested the example family wasn't prudent enough, so I substituted an equally realistic example without a couch. But ultimately the issue wasn't what a family chose to buy in piling up debt, so much as just simple usury, and worse usury after the fact.
I liked this metaphor from Austan Goolsbee in a NYTimes article on the credit card reform bill to describe the practice of raising rates exorbitantly on existing balances:
Austan Goolsbee, an economic adviser to President Obama, said that while the credit card industry had the right to make a reasonable profit as long as its contracts were in plain language and rule-breakers were held accountable, its current practices were akin to “a series of carjackings.”“The card industry is giving the argument that if you didn’t want to be carjacked, why weren’t you locking your doors or taking a different road?” Mr. Goolsbee said.
March 19, 2009
Our Real Economic Problem
We hear endless analysis by intelligent writers and reporters of all stripes on our economic situation, but rarely hear of one of our most central economic problems.
Much damage in our economy results from incentives -- many of the most productive workers in our society are earning barely enough, and some struggle, while much greater rewards (and thus incentives) go to activities of little net benefit .
Average wages (including benefits):
Teachers -- $43,000
Engineers -- $66,000
Carpenters -- $30,000
Auto Mechanics -- $32,000
While the average derivatives trader in New York state makes about 3 times the average New York state wage:
Derivatives Trader in NY state (NYC is only $8000 more) -- $126,000
Average NY state wage -- $46,000
But traders make their living off of the rest of us.
How?
The value of money is created by what it can buy -- goods and services that working people produce. Money has value because people create goods or services you actually need to live and want to have for enjoyment.
But traders do not produce goods or services we need or want. Instead, they find ways to make stocks or gasoline supplies or other things we need or want to buy more expensive when we purchase them, pocketing the extra cost they have created.
We set up our economy to reward gambling and trading that adds costs to average American lives, and at a salary rate of two and three times that of ordinary American jobs.
This set of incentives created our our Real Economic Problem, as trading expanded until it destroyed the structure of the whole economy.
We are now suffering the outcome and consequences.
Much damage in our economy results from incentives -- many of the most productive workers in our society are earning barely enough, and some struggle, while much greater rewards (and thus incentives) go to activities of little net benefit .
Average wages (including benefits):
Teachers -- $43,000
Engineers -- $66,000
Carpenters -- $30,000
Auto Mechanics -- $32,000
While the average derivatives trader in New York state makes about 3 times the average New York state wage:
Derivatives Trader in NY state (NYC is only $8000 more) -- $126,000
Average NY state wage -- $46,000
But traders make their living off of the rest of us.
How?
The value of money is created by what it can buy -- goods and services that working people produce. Money has value because people create goods or services you actually need to live and want to have for enjoyment.
But traders do not produce goods or services we need or want. Instead, they find ways to make stocks or gasoline supplies or other things we need or want to buy more expensive when we purchase them, pocketing the extra cost they have created.
We set up our economy to reward gambling and trading that adds costs to average American lives, and at a salary rate of two and three times that of ordinary American jobs.
This set of incentives created our our Real Economic Problem, as trading expanded until it destroyed the structure of the whole economy.
We are now suffering the outcome and consequences.
March 15, 2009
(Major Update 3/18) Huge Bonuses at AIG (but Not for the specific individuals that created the CDS disaster!)
A rare moment has arrived.
The New York Times reports:
Executives of the unit that made the huge derivative bets that A.I.G. could never cover if the housing market went south (but, see update 3-18 below) -- those are the people getting the big money, here. Since these were bets A.I.G. could not cover, the implicit situation from the beginning was that the U.S. taxpayer -- you and I -- would be on the hook to cover their greedy bets if things went too badly.
I seriously doubt the intelligent, knowledgeable reporters of the Times and other national media understand how explosive this is.
They reasonably report the rationales in the article -- contractual obligations made in early 2008 that "cannot" be broken.
I don't think most people in D.C. or in much of the national media really know what is going on in the middle class.
The median wage in the U.S. is about $41,000.
National reporters and members of Congress and lobbyists bring in quite a lot more than that. They simply don't have a direct experience of being in the middle class recently, and don't know what most people will think once they learn of this.
So they won't be able to fully anticipate the fallout from this is instance of corruption.
The contracts should have been broken. If necessary, the Chairman of the Board should have been immediately dismissed if he would not do so, no matter how competent and excellent a chairman he is otherwise. He should be immediately dismissed if he would not carry out the will of the majority stockholders -- you and me.
The U.S. would then have likely had to go to court, and defend this abrogation. The correct course of action would be to defend an abrogation, regardless of outcome, all the way to the U.S. Supreme Court. It would not be important to win. It's vastly important to fight for what is right.
That might have been enough to prevent most of the coming fallout.
Even now, correct action would be dramatic -- to seize the bonus money or freeze the deposits that have been transferred, pending an outcome.
The coming fallout is unpredictable, but it will happen, whether it is dramatic and soon, or more subtle and lasting like the aftermath of a neutron bomb, where little damage is readily apparent at first.
Congress and the Administration have a few days in which to do something.
Saying they are "outraged" is not enough. It is worse than nothing.
The Obama administration should consider whether they are willing to lose as much as 5 or 10 points (and possibly more) of their national approval rating in a week or two.
What could be done now?
"I am directing [The Department of Justice] to temporarily freeze these bonus funds and already deposited amounts pending further legal review as to whether we should challenge these contracts [in a court of law] due to the exceptional circumstances of contradiction here between performance and reward."
Update 3-17 (good news):
Link to CNN story here:
The New York Times reports:
The American International Group, which has received more than $170 billion in taxpayer bailout money from the and Federal Reserve, plans to pay about $165 million in bonuses by Sunday to executives in the same business unit that brought the company to the brink of collapse last year.
Executives of the unit that made the huge derivative bets that A.I.G. could never cover if the housing market went south (but, see update 3-18 below) -- those are the people getting the big money, here. Since these were bets A.I.G. could not cover, the implicit situation from the beginning was that the U.S. taxpayer -- you and I -- would be on the hook to cover their greedy bets if things went too badly.
I seriously doubt the intelligent, knowledgeable reporters of the Times and other national media understand how explosive this is.
They reasonably report the rationales in the article -- contractual obligations made in early 2008 that "cannot" be broken.
I don't think most people in D.C. or in much of the national media really know what is going on in the middle class.
The median wage in the U.S. is about $41,000.
National reporters and members of Congress and lobbyists bring in quite a lot more than that. They simply don't have a direct experience of being in the middle class recently, and don't know what most people will think once they learn of this.
So they won't be able to fully anticipate the fallout from this is instance of corruption.
The contracts should have been broken. If necessary, the Chairman of the Board should have been immediately dismissed if he would not do so, no matter how competent and excellent a chairman he is otherwise. He should be immediately dismissed if he would not carry out the will of the majority stockholders -- you and me.
The U.S. would then have likely had to go to court, and defend this abrogation. The correct course of action would be to defend an abrogation, regardless of outcome, all the way to the U.S. Supreme Court. It would not be important to win. It's vastly important to fight for what is right.
That might have been enough to prevent most of the coming fallout.
Even now, correct action would be dramatic -- to seize the bonus money or freeze the deposits that have been transferred, pending an outcome.
The coming fallout is unpredictable, but it will happen, whether it is dramatic and soon, or more subtle and lasting like the aftermath of a neutron bomb, where little damage is readily apparent at first.
Congress and the Administration have a few days in which to do something.
Saying they are "outraged" is not enough. It is worse than nothing.
The Obama administration should consider whether they are willing to lose as much as 5 or 10 points (and possibly more) of their national approval rating in a week or two.
What could be done now?
"I am directing [The Department of Justice] to temporarily freeze these bonus funds and already deposited amounts pending further legal review as to whether we should challenge these contracts [in a court of law] due to the exceptional circumstances of contradiction here between performance and reward."
Update 3-17 (good news):
Link to CNN story here:
WASHINGTON (CNN) -- President Barack Obama said Monday he will attempt to block bonuses to executives at ailing insurance giant AIG, payments he described as an "outrage."
President Obama says AGI "finds itself in financial distress due to recklessness and greed."
1 of 3
"This is a corporation that finds itself in financial distress due to recklessness and greed," Obama told politicians and reporters in the Roosevelt Room of the White House, where he and Treasury Secretary Tim Geithner were unveiling a package to aid the nation's small businesses.
The president expressed dismay and anger over the bonuses to executives at AIG, which has received $173 billion in U.S. government bailouts over the past six months.
"Under these circumstances, it's hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay. I mean, how do they justify this outrage to the taxpayers who are keeping the company afloat?"
...
But he said the impropriety of the bonuses goes beyond economics. "It's about our fundamental values," he said.
------------------------------
Update 3-18 (Liddy finally tells us)
I heard this bit on NPR this evening:
Liddy: "The people who were primarily responsible for Credit Default Swaps (CDS) that brought us to our knees -- they're gone. The people who were responsible for regulatory capital trades that have some exposure -- they're gone. But the people who still operate a $1.6 trillion trading book of business -- we aren't loosing the kind of dollars on that that we've lost on Credit Default Swaps. They are still there, and they're the ones that are winding that book of business down." [They got the retention bonuses?] Yes, they did."
Barney Frank: "So you're telling me the only bonuses that were paid recently are the retention bonuses?"
Liddy: "Yes."
Frank: "There were no other bonuses paid?"
Liddy: "Not at AIG FP. No, I don't think so."
So....we are left to wonder why this wasn't pointed out 2 days earlier. Did Liddy simply not understand the significance of this? I think he did not actually.
Even now, this new revelation that these bonuses were not for the CDS traders that most destroyed AIG isn't making the splash it should. This is because in the bigger picture, regardless that these bonuses aren't being paid to many of the worst offenders of the AIG of 2008 (or 2006, etc.), people still are aghast that there are such large bonuses at AIG, of any kind, to anyone.
The picture is still that just moderately clever folks doing trading and "winding down trades" are supposed to be worth millions, while a teacher or a plumber earns under $100,000 or under $50,000. This is justified on the basis that these traders are needed to prevent counterparties from taking advantage of taxpayer-owned AIG now.
And this is the essence of the larger problem. That trading (gambling) caused the problem, and now we are paying other traders to help mitigate it, and paying them millions.
That traders are worth millions each year, but scientists, teachers, engineers -- people who actually produce real gains for society -- are not.
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