The Word No One is Talking About

Six weeks into lockdown mode, the U.S. economy is a mess. States are just now starting to open back up, but the damage has been done — some of it permanently. The current unemployment rate in the United States is 14.7% and by some calculations (likely the bureau of labor statistic’s U6 measurement), as high as 23.6%, not far from the peak of the Great Depression.

Bankruptcies are beginning to pile up too. In the month of May alone, Neiman Marcus, Gold’s Gym, and J. Crew have filed for bankruptcy and J.C. Penny is considering it (AMC Theaters possibly too). Wall Street believes the vast majority of the 20 plus million Americans jobs lost will only be temporary — but maybe not so with bankruptcies piling on. Even companies that avoided bankruptcy are slashing jobs at a historic rate: Boeing cut 16,000 jobs in April and, according to a coronavirus layoffs calculator site, 375 startup companies have laid off more than 42,000 employees.

Ok, the point is made. Unemployment is breaking out as a bad as the virus. People are losing their sources of income. Jobs are vanishing — temporary or not.

But there’s something else going on that’s headed straight for the unemployment quagmire.

In the six weeks of shutdown due to COVID-19, the Federal Government has spent over $6 trillion. Trillion with a ‘T’. That’s $6,000,000,000,000 — or one trillion dollars per week. $2.4 trillion of that amount comprises four coronavirus relief bills; this includes the CARES Act, SBA Payroll Protection Programs. The remaining money has come directly from the Federal Reserve, who has acted aggressively to stave off economic collapse through numerous programs, including purchasing securities directly. On top of all this, the Fed also reduced bank reserve requirements to zero. This means if you deposit $100 in a bank, they can lend out all $100 of it, keeping none in reserve. This has massive implications — too much to explain here, but watch this to see the impact of reserve requirements in bank lending.

Furthermore, the Fed has also lowered the federal funds rate (the rate banks use to borrow from one another) down near 0%. This rate is used as a benchmark for various other loan rates, reducing the cost of borrowing for mortgages, auto loans, etc. This is the equivalent of turning on the spigot and the handle coming off.

Make no mistake — this is a massive amount of liquidity suddenly appearing out of thin air. The national debt just crossed $25 trillion, and the juice is running. And at the time of this writing, this whole thing is not over. Congress is discussing more stimulus packages. Just today Congress unveiled another coronavirus relief bill (the fifth so far), costing another $3 trillion. No problem — the Fed’s Neel Kashkari says the Fed is going to do “whatever we need to do to make sure the financial system continues to run.”

Sure, what’s another $3 trillion on top of the 6 just minted?

In short, there’s more money coming but not necessarily jobs. So what’s the word no one is talking about?

Stagflation.

An odd little portmanteau of “stagnation” and “inflation.” It is a period of high inflation coupled with economic depression. It’s odd too that no one in the media or government is mentioning it, because it looks exactly where we’re heading: $6 trillion and counting in six weeks coupled with job losses and bankruptcies.

Stagnation is a nasty beast because it’s difficult to resolve. In an inflationary environment, rates can be raised to cut off the spigot of currency expansion and reel in spending — a by product is reductions in borrowing and ‘tightening of the belt’ so to speak. Value returns to the currency. In a stagnation — or deflation — prices are falling and money is hard to come by. Loosening the belt allows money to flow a little easier, lending to be encouraged, which leads to businesses expanding via credit (and hiring).

So what do you do when you have falling employment and rising inflation?

If you ‘tighten the belt’ to choke inflation, it worsens the unemployment and makes it even more difficult for businesses to access credit. The currency may level off, but higher interest rates deepen the deflationary hole. If you ‘loosen the belt’ to make credit easier to obtain (e.g., federal funds rate) to save jobs, inflation gets worse prices go up and you risk a total collapse of the currency a la hyperinflation.

The choice is no win, but the effect felt by the average American is even worse. Job loss or cutbacks result in less income. People are left rubbing nickels together and deciding to pay bills or put food on the table. But in a stagflation, prices are rising due to inflation of the currency and suddenly you can’t afford bills OR to put food on the table. You can’t afford anything and there’s no way to bring in more money with the drag on employment.

The last time stagflation hit the United States was in the 1970s. Core inflation (CPI) was over 5% annually during the back half of the 70s, with unemployment high and an official recession running from November 1973 to March 1975. (As a point of reference, the Fed’s federal funds rate during the 70s was mostly between 5% and 10% — it currently is 0.25% to 0%) To choke off the inflation, Federal Reserve Chairman Paul Volcker raised federal funds rate to near 20%, throwing the U.S. into another recession but alleviating the increasing inflation.

I believe Volcker was a rare breed and no one today would pull the trigger on such a hefty interest rate increase. But there was no COVID-19 lockdown in 1979. With unemployment so high, companies going bankrupt or drawing heavily on available credit, jacking interest rates up would shatter all remaining functional pieces of the economy. To wit, another word has surfaced that people are talking about — NIRP.

NIRP stands for Negative Interest Rate Policy. NIRP is the theoretical physics of economics. A negative interest rate works in theory, but suddenly everything goes to plaid. It goes something like this: If an interest rate is 10%, that is the amount it ‘costs’ to borrow money. A loan of $10,000 would cost you a total of $11,000: the original $10,000 principal plus $1,000 (10%) interest. An interest rate of -10% would (in theory) pay you to borrow money. You would borrow $10,000 and get $1,000 for doing so. An $11,000 loan costs you $10,000.

Up is down. Black is white.

This would greatly increase the velocity of money, as banks essentially got paid to take out loans. The problem is, this cuts both ways. Cash deposited at a bank that previously paid interest now costs money. Your $20,000 life savings earning 1% annually now costs you 1% to leave in the bank. Last year your $20,000 became $20,200. This year under negative interest rates it goes from $20,000 to $19,800. You lost $200 by having it in savings.

The concept behind NIRP becomes searingly obvious — borrow and spend. Who in their right mind would save money with negative interest rates? Who wouldn’t borrow when you get paid to do so. In theory, since mortgage rates are tied to the 10-year Treasury yield, but in theory you would pay back less than you borrowed to take out the mortgage.

NIRP would cause everyone to borrow and spend away savings (why keep it in cash losing money when you can invest it or buy something with it?) But how would this impact things like bank profitability when you’re paying people to take out loans? In a NIRP world, home-owners would refinance to try and take advantage of negative rates which would disrupt interest and mortgage-backed bonds. The whole thing is bizarre.

But in any case, the result would certainly be increased borrowing and spending. Would the Fed actually consider doing NIRP? It’s already being floated in financial circles…

So if the Fed doesn’t crank up interest rates in positive territory, then the only end game here is inflation and prices going up while people struggle to hold or regain jobs. The government can hand out cash in relief packages all it wants to offset jobless and loss of income, but this just further fuels the fire. If this keeps going, a $1,200 stimulus check from the government won’t buy much or things just won’t be affordable at all.

But cutting stimulus checks gives the pretense of ‘doing something’ for the people on the street. Granted, they’re walking a fine line with the COVID lockdown, but spending into infinity is going to be a losing proposition for all. Giving someone a check is simpler than explaining how velocity of money or banking interest rates work.

Especially in an election year.

On Coronavirus

These germs of disease have taken toll of humanity since the beginning of things–taken toll of our prehuman ancestors since life began here. But by virtue of this natural selection of our kind we have developed resisting power; to no germs do we succumb without a struggle…

H.G. Wells “War of the Worlds”

Updated Edit: I started this post when COVID-19 was first hitting U.S. shores. So much has changed in four weeks and there’s been so much news it’s been a struggle to keep up. However, with each passing day I was increasingly sure the below is true. I intended this to be a much larger article as well, but the deluge of information is going to cause me to break some of the segments out into their own blog posts.

Our world has changed. Not from terrorism. Not from the results of this election year. But from one of the smallest creatures in nature. At less than 50 nanometers in size, COVID-19 proves that even the smallest thing can make the greatest impact. In a few weeks, its presence was felt already on a global scale; here in the U.S., it’s only been the matter of a week and much has changed.

This blog post is important because I feel like we’re at a watershed moment. Just a few weeks ago, the stock market was at its all-time high. Everything felt business-as-normal. We were deep into an election cycle, with non-stop new and critique about the Democratic candidate for President of the United States. There were also still sports.

Now, we’re looking at entirely different country (or even world). It’s starting to feel like a science fiction movie: closed borders and travel bans, closed tourist locations, churches, restaurants, and schools. People have to stay away from each other. The way we work has been forced to change (more on this below). There are also plenty of unintended consequences, mainly economic ones. The U.S. stock market has been decimated; fear runs amok with heavy selling, with days of heavy buying dispersed in between. It’s an economic whipsaw, panic expressed in red and green numbers day in and day out — no one knows whether to buy or sell. Officially, the U.S. stock market has entered a bear market, suffering the fastest 25% drop in history. To many, this feels like the end of the world.

But there’s something interesting here.

This feels like a watershed moment. Things are going to change, regardless of how this plays out. We are living through history at this very moment. Much will be reevaluated in the coming weeks and months and below is just a sample.

Economic Damage

The economic ramifications cannot be downplayed. The U.S. market has suffered heavy selling as people bail out of stocks. Initially, it began as a result of downgrading the outlooks of large companies due to the shutdown of Chinese manufacturing. Factories in China and South Korea have been shuttered for over a month, and are struggling to restart. The length of closing is or will lead to shortages are less product are being manufactured — and many, many global companies rely on them. The disruption of supply chains has led to lower sales, which began pushing stock prices down. Selling begat selling, and then it turned into a rout.

Worse than a battered 401k or fund balance sheet is how the Federal Reserve has reacted. A few weeks ago, the Fed tried to get in front of the selling by cutting the benchmark federal funds lending rate by 50 basis points (bpts). Simply put, lowering the funds rate makes it “cheaper” for banks to borrow money from the Fed (the lending rate is the interest rate banks pay back to the Fed for borrowing; so if the funds rate is 1%, a bank could borrow money from the Fed at 1% and lend it out at 3% and make 2% profit). Last night, on March 15, the Fed lowered the lending rate to the 0% range. This means banks can borrow from the Fed essentially for free. If that weren’t enough, the Fed also fired up a $700 billion quantitative easing program — which it will use to buy up U.S. Treasuries and mortgage-backed securities (remember those?)

In a nutshell, the Federal Reserve is flooding the economy with fresh money to try and stave off recession. Its primary weapon is the federal funds lending rate — which dictates how “expensive” it is to borrow money. This new rate and QE program have effectively made the dollar “cheap,” and could have severe impacts on the value of our currency. In a black hole of selling, deflation sets in — prices drop, cash is in high demand, and businesses penny-pinch. What would could ultimately have is inflation — or hyperinflation — and severely damage our currency’s purchasing power. The U.S. Dollar is the de facto global reserve, with all other currencies pegged to it (there’s not enough time to go into all this now) and ramifications would be global if it suffers in value.

The economic effects of coronavirus are certainly being felt on a local level as well. In Ohio and Pittsburgh, bars and restaurants are forced to stop accepting patrons, and offer takeout or delivery only. This devastates waitresses and servers who live on tips. Venues and conventions are cancelled:

Pittsburgh Mayor Bill Peduto said the city will adhere to advice from the Centers of Disease Control and will lower the maximum occupancy levels of all events from 250 to 50 individuals. Today, Allegheny County Executive Rich Fitzgerald also urged non-essential businesses, like bars, gyms, theaters, child-care centers, golf clubs, and hair salons, should close or implement alternative work strategies for the next two weeks starting March 16, to help stop the spread of coronavirus.

Even if these places stay open, they may see very little or no patronage. Sales will go down. The service industry is going to suffer. In Portland, my brother-in-law drives for Uber. The amount of rides request for him has fallen off a cliff — no one wants to ride share for fear of contamination. The lack of Uber rides has him looking for Amazon Flex deliveries, but there are way too many Amazon drivers now because they also drive for Uber and have no rides.

Even Hollywood has felt the pain. Tentpole films have been delayed, new films have had their productions frozen or shelved, and no one’s going to the movies right now. Early estimates by The Hollywood Reporter indicate losses by the movie biz to be as high as $20 billion. Travel bans and Tom Hanks’ getting sick have completely upended tinseltown and there’s a scramble to maintain business; in TV broadcast schedules are disrupted by delayed productions and production halts on new pilots. Shows may not be ready or finished in time. And then there’s the question of insurance for the industry (from the same HR article):

Meanwhile, it is unclear any of the losses will be covered by insurance. “If we are talking in terms of protecting lost revenue due to enforced shutdown or scale-down of operations, some property policies may offer limited amounts of coverage, although many have specific communicable diseases exclusions,” said attorney John Tomlinson, who specializes in insurance and risk management law.

Movie theaters across the U.S. have closed down, with the chain AMC Theaters now possibly never re-opening. There’s also talk of bankruptcy for the theater chain. To attempt to draw some sort of revenue, studios have begun putting new releases online. According to CBS News:

Temporary theater closures could lead to permanent change in the industry. Wedbush securities analyst Daniel Ives, who covers the technology sector, said coronavirus could usher in a new era of consumer behavior that puts some theaters out of business for good. “For the first time since we launched coverage of the exhibition industry, we think the industry is genuinely at risk. There is valid concern that COVID-19 will limit theatrical attendance globally, whether driven by theater closures, capacity limitations, or fear of contamination,” he said in a research note. 

With schools and numerous businesses closed, parents and children are all relying on streaming services for entertainment. If it goes on long enough and Hollywood is willing to put new releases online to rent, there could be a large shakeout of theater chains. Will theaters reopen only to have some eventually close permanently if audiences don’t return? A discussion I saw among filmmakers on Twitter were theorizing the return of the drive-in theater, as it would allow moviegoers the ability to maintain ‘social distancing’ between cars. As a filmmaker myself, I plan to dive further into the future of the entertainment industry in a future post.

The most brutal consequences come from the stock market, where the Dow Jones has lost 30% of its value in only 3 weeks, out-doing the carnage from the 2008 crash. Retirement plans and pension funds have been decimated as the market has turned into “sell everything as quick as possible.” The market can’t determine valuations with manufacturing in China shut down, supply lines strained or cut, and businesses reducing hours or shutting their doors.

What this amounts to is the great tree of the economy is being shaken much like it did in 2008. Healthy or resourceful businesses will survive. Those at risk financially or have been teetering will be wiped out.

Globalization

The decades-long grand experiment of Globalization may end with the COVID-19 pandemic. The active concept of free-trade, open borders, and centralized manufacturing has been put to the ultimate test. There has always been great risk in China owning much of the world’s manufacturing, given their geopolitical and cultural standing. And I’m not even talking about Communism.

In 2018, China owned more than a quarter of all manufacturing in the world, far ahead of the U.S. in second place. If something were to happen there, the world would be severely disrupted. There have been ‘head fakes’ in the past 20 years — SARS, avian flu, swine flu (H1N1) — diseases originating in China, where pollution is heavy, sanitation can be lacking, and population is dense. I can speak for this first hand — I’ve been to Southern China provinces on business trips to factories. On several trips, coworkers came down with illnesses and/or food poisoning (I don’t eat seafood, and wonder if that’s why I didn’t get sick). These past illnesses should have been cause for concern that the world’s manufacturing hub was at constant risk.

Now, with coronavirus, much (if not all) of these factories are shuttered in the fight with the virus. There are shortages and other countries economies are impacted. Tech companies like Apple (or Samsung, with factories in South Korea) have had their supply lines severely disrupted. Apple is the poster child for Globalization: materials are sourced from around Asia; iPhone components (like the display) are built in Japan before being shipped to China for iPhone assembly. With manufacturing spread across borders, coronavirus is the ultimate perfect storm to cause chaos. In an article titled “Coronavirus: Globalists May Soon Become an Extinct Species,” author A. Gary Shilling writes:

The coronavirus’s disruption of supply chains not only unhinges U.S. imports but also raises national security concerns. China is the world’s biggest supplier of active pharmaceutical ingredients and the Indian generic drug industry, which the Food and Drug Administration says supplies 40% of U.S. generic drugs, relies on China for most of its active ingredients. Even after the virus scare subsides, look for more pressure from Washington for more reliable sources of goods, among other protectionist measures. Domestic producers will benefit but so too will those in Mexico. The results will be lower global efficiency and slower economic growth.

To wit, Japan has already begun urging the migration of their companies out of China altogether. From Bloomberg news:

That has renewed talk of Japanese firms reducing their reliance on China as a manufacturing base. The government’s panel on future investment last month discussed the need for manufacturing of high-added value products to be shifted back to Japan, and for production of other goods to be diversified across Southeast Asia.

Another component vastly disrupted by the disease is open borders. “The impact is especially palpable within the 27 countries of the European Union, which has long been governed by a central belief that economies and societies are most dynamic when people and goods are able to move freely across borders,” writes Peter Goodman in a March 5 article in the NY Times titled “A Global Outbreak is Fueling the Backlash to Globalization.” After long refusing the close their borders — maintaining their allegiance to open borders and mass migration — the EU finally caved on March 17 to close the exterior border of the EU. Before that even happened, Europe was already in the middle of a migration crisis. There were concerns over open borders, with mass immigration coming from the Middle East and Africa, many were refugees from war torn Syria. Countries in the EU like Hungary had already closed up access while others continue to absorb scores of foreigners.

What happens to the flood of refugees and immigrants headed to the EU and find the borders closed? At the beginning of the month, Turkey said it was opening the flood gates for migrants into the European continent, with Greece countering that it was suspending asylum and stationing troops. According to the New York Times, both moves are illegal under EU law and “International protocols on the protection of refugees, of which Greece is a signatory, also prohibit such policies.”

The EU could possibly collapse as well, as the virus puts serious strains on inter-member trade relations regarding protective medical gear. France and Germany essentially hoarded their protective gear, denying other member states. France, in particular, “requisitioned all current and future stocks of protective masks.”

It’s not just Europe, either. The U.S. has announced an international travel ban — no one comes in or out. Borders with Canada have been closed. “Non-essential travel” between U.S. and Mexico has also been shut down.

So how does Globalization survive with restricted borders, international blame for the virus spreading, and crippled cross-border supply chains? At the very least, Globalization will be rethought when this is over. Some countries may use it as an excuse to break free of the EU or bring more manufacturing home to their countries. Reliance on unfettered, open trade may change. It’s impossible for there to not be geopolitical ramifications — China may suffer the most from this as corporations look to take their manufacturing base elsewhere to a country with less risk. Without widespread manufacturing and employment to grow their middle class, Communist China could slip back into the economic Third World. Will that happen? Who knows.

Regardless, world politics will never be the same.

The New Great Depression

There’s no doubt four weeks in to lockdown the people on the street are hurting the most. In the past 4 weeks, 22 million Americans have filed unemployment claims — by far a record. Now, this comes with an asterisk. For the first time, states are allowing self-employed (aka contractors) to apply for unemployment, and you can file for unemployment benefits if your hours have been reduced due to COVID-19.

While that may bump the numbers a bit, it certainly does not offset the amount of people who haven’t been able to file yet due to state unemployment offices being overwhelmed. States are forcing people to go online to file, but the state sites are crashing from the traffic. Because people have been unable to file yet, the official government U3 unemployment numbers are likely inaccurate at best, heavily underreporting at worst.

I think it’s naive to think that all these people will suddenly return to their old jobs when the lockdown is lifted. Many of these jobs won’t be there — and what about independent contractors and freelancers? These will be the hardest to return to work. Many employees of recognizable brands won’t have locations to return to either as companies close up shop and/or file bankruptcy — namely restaurants and discount stores.

Other industries that may be shrinking include shale, cruise lines, and airlines.

Does Anyone Really Know Anything?

I’ll end it with this bit: does anyone really know what’s going on? It sounds scary to even pose a question on such a scale, but after four weeks I cant help but openly wonder. The symptoms to COVID-19 keep changing or expanding — it was originally a respiratory illness with signs that included fever and cough. Then it expanded to bodily pain. More recently, loss of sense of smell (or taste) and foot sores as byproducts of the disease.

A NYC doctor even went so far as to post that the wrong disease is being treated.

There’s no vaccine. There’s no simple way to test. There’s even questions as to if ventilators are even the right tool to be using.

Where did it come from? Is it natural or a bio-weapon? The U.S. intelligence apparatus is investigating whether or not COVID-19 came from a Chinese bio-lab (that just so happened to be right near the wet market where its origin was originally tied to.

Without answers how can we have a plan? How long with the economic malaise go on? How long CAN it go on? Countries and states are devising plans to reopen for business, perhaps hoping warmer weather will deal with the disease.

There’s always the fear of a second wave coming in the fall.

Regardless of how this turns out, we are undoubtably living through history. Our personal lives and the course of humanity may be steered by this. It sounds overdramatic but how could it be any other way? Over half the population of this planet are in lockdown, forming new habits and getting used to the ‘new normal.’

Things will never be the same.

Does Taxing the Rich Work?

I know what you’re thinking. Why does a blog centered on quitting your job post about minimum wage and taxing the rich? While they’re mostly though experiments, to be financially free and entrepreneurial you must know your economic and political environment. Having a business or investments is highly impacted by what goes on in the political Thunderdome.

As with the thought experiment on Fight for $15, I want to walk through whether or not “taxing the rich” is a viable solution economically. “Tax the rich” has become a battlecry of several 2020 Democrat Presidential Candidates, as well as political policy in a bevy of states such as Oregon, where Senator Ron Wynden proposes taxes on ‘unrealized gains’ of assets of wealth people, or the governor of Illinois wanting to revamp the state tax code to make the wealthy pay more in state tax. Targeting the rich has become en vogue.

But does it work? It has been tried before and abandoned, so why would it work this time? Is it moral or fair? Does “tax the rich” merely promote classism? Is it biting the hand that feeds? Or is there social stability to be gained from it? It’s time to dig into it.

What is Rich?

When a politician says they want to “tax the rich,” what defines rich? In many cases it’s left intentionally vague — the “rich” being a boogeyman of sorts, the anachronistic caricature of a monocle and top hat wearing Rich Uncle Moneybags from the game of Monopoly. It’s Mr. Scrooge or the bourgeois of The Purge films. So who are The Rich?

According to Charles Schwab’s 2019 Modern Wealth survey, “Americans believe it takes an average $2.3 million in personal net worth to be considered “wealthy.” Another survey by seniorliving.org landed on the same number: $2.3 million as the amount to be considered wealthy.

Elizabeth Warren’s “Ultra-Millionaire tax” targets the rich as any household with a net worth of $50 million or more. Bernie Sanders’ proposal starts the taxing on net wealth over $32 million, a level which fellow 2020 Democratic candidate Tom Steyer agrees with. However, it appears “rich” is a relative term: according to Forbes, the net worth of these three candidates is $12 million, $2.5 million, and $1.6 billion, respectively. So, although Warren and Sanders are millionaires, they don’t consider themselves rich. And as for Steyer, I get suspicious whenever someone who is rich promotes taxing the rich.

So we have a starting point (somewhere between $32 and $50 million) for what qualifies for a “wealth tax.” Federal and state income tax brackets vary wildly (some states have a flat tax while others have no income tax), so we’ll stick with the proposed Federal “wealth tax” as a guideline for what is considered rich.

Do Higher Taxes Equal Higher Revenue?

“Nothing is more calculated to make a demagogue popular than a constantly reiterated demand for heavy taxes on the rich. Capital levies and high income taxes on the larger incomes are extraordinarily popular with the masses, who do not have to pay them.”

Lugwig von Mises

The purpose of raising taxes on the wealthy — or instituting “wealth tax” — is to raise the amount of funds taken in by the state or federal government. But does it always go as planned?

The fallacy of taxing the rich to me is the assumption that those being heavily taxed will just sit there and take it. Take the case of actor Gerard Depardieu after France instituted a 75% “supertax” on their wealthy citizens. The actor famously renounced his French citizenship and moved to Russia, later threatening to sell all his French assets left behind. Depardieu wasn’t alone: an estimated 2.5 million French citizens left their home country to live elsewhere and the loss of labor, combined with “discouraged investment”, crushed French tax revenues by a 14 billion euro shortfall of the 30 billion euro estimated intake. The French wealth tax, called the “solidarity tax on wealth,” was eventually repealed in 2017.

Other European countries tried a wealth tax and eventually repealed it: Austria, Denmark, Finland, Germany, Iceland, Italy, the Netherlands, Luxembourg, and Sweden. (Sweden in particular become notorious for its wealth tax after Swedish children’s book author Astrid Lindgren paid 102% in income tax in 1976. Because she was self-employed, she was subject to both regular income tax and employer’s fees, resulting in being taxed over 100% for that year. The Pippi Longstocking author later wrote satirical children’s book about the incident called Pomperipossa in Monismania)

Due to capital flight, it was estimated that the French wealth tax actually reduced France’s GDP (gross domestic product) by 0.2% or 3.5 billion euros.

But back to the wealthy just “taking it” when higher taxes are instituted. It seems asinine to think that a wealthy person wouldn’t act according when faced with the prospect of the government taking more. University of Toronto economist David Seim found that “an increase in tax is likely to stimulate evasion” in his paper Behavioral Responses to an Annual Wealth Tax: Evidence From Sweden. He found that when a wealth tax went into effect, those targeted would shift taxable assets to tax-exempt assets, thereby legally lowering their taxable net worth below the threshold. In addition, wealth taxes — including Warren and Sanders’ proposed American taxes — is a tax on net worth. This means debt is deductible. So borrowing money would thereby reduce overall taxable net worth — and if you’re borrowing to invest in tax-exempt assets, you’re reducing your taxable net worth even further.

The problem is trying to hit a moving target. Those the wealth tax focuses on are affluent, mobile, and have the ability to fight back (more on that in a moment). It’s human nature to respond to someone (or something) that’s coming to take what you have. The rich business owner defends the assets he’s acquired as a caveman defends the prey he killed. The London Times wrote in 1894 in regards to Britains first progressive tax rates that “even the half starved crow will not wait to be continuously shot at.”

The current income tax structure also allows a bevy of deductions for real estate depreciation or cost of improvements; ‘tax loss harvesting’ allows for losses to be written off against gains, creating a net zero effect. A ‘rabbi trust‘ allows companies to give additional compensation that doesn’t count towards taxable compensation. Or take Senator John Kerry, who simply docked his $7 million yacht in Rhode Island instead of Massachusetts, saving him nearly $500,000 in taxes.

Ronald Reagan’s tax planning is just one simple example of how the rich can easily avoid the upper tax brackets. Someone noticed what a fine golf swing Reagan had, and the answer was that when he reached the top tax bracket, he stopped working and played golf for the rest of the year. Many wealthy doctors (and others) do the same thing, closing down their medical practice around August and then taking a vacation from earning money for the rest of the year. A government cannot force a wealthy taxpayer to work if the taxpayer finds the tax rates personally intolerable, especially if they are targeted for attack.

Charles Adams

Or you just leave altogether like Depardieu or Facebook co-founder Eduardo Saverin, who left the U.S. for Singapore and saved hundreds of millions of dollars in taxes.

Magnus Henrekson and Gunnar Du Rietz studied the history of the Swedish wealth tax. They found that “people could with impunity evade the tax by taking appropriate measures,” including taking on excessive debt to buy exempted assets. The Swedish wealth tax also prompted large outflows of capital and the expatriation of well-known business people, such as the founder of Ikea, Ingvar Kamprad. Henrekson and Du Rietz conclude, “The magnitude of these outflows was a major motivation for the repeal of the wealth tax in 2007.”

Why Europe Axed its Wealth Taxes” by Chris Edwards

The point is, politicians expect to collect x amount in tax revenue assuming that those taxed do not respond or act in any way. Charles Adams wrote an article in 2004 called “The Rich Wont be Soaked” (source also for the quote above) showing that it’s always been this way:

History is full of amazing examples, like the first income tax in the United States, in 1916, when the top bracket was 7 percent; a few years later the top bracket was raised to 77 percent, or 11 times higher. Yet the 77 percent rate did not produce 11 times as much revenue; in fact it shocked the Treasury by producing almost the same revenue as the 7 percent rate did. At the 7 percent top bracket, about 1,300 returns were filed; with the 77 percent top bracket, only about 250 returns were filed. Where did all the top bracket taxpayers go? The rich simply rearranged their affairs to avoid the 77 percent tax rate.

Which brings us to the Laffer curve. Arthur Laffer believed people would adjust their behavior “in the face of incentives created by higher income tax rates.” The result was the Laffer curve, a graph showing more dwindling returns the higher the tax percentage. It essentially is a visual representation of the points mentioned above.

Courtesy of Investopedia

As the tax rate becomes more burdensome, the behavior to avoid increases. This could be through changing investments to tax friendlier ones or not investing at all. The end result either way is less tax revenue.

Enforcement

There is also the matter of enforcing the new laws and costs associated with them.

Recently, the IRS admitted to congress that the poor are far more likely to get audited than a rich person, because it’s easier and cheaper; the IRS told Congress it could be solved by an increase to the IRS budget. Elizabeth Warren’s plan specifically mentions “a significant increase in IRS spending” to help ensure no eligible wealthy person evades audit. After all, Warren, Sanders, and other wealth tax plans are a tax on all worldwide assets. The IRS is going to need to assess assets and wealth held overseas as well.

An even larger problem lies not in logistics but valuation. “All household assets” will be including in a wealth evaluation for the wealth tax. Cash, stocks, and property are somewhat easy to assess. But what about art? Family heirlooms? Will the IRS hire jewelers to assess the value of the family pearls or diamond rings? Maybe the Pawn Stars guys can evaluate what’s in the basement and attics of rich Americans. There seems to be no guidelines on estimating the worth of fringe assets. How about a privately-held businesses owned by the taxed wealthy? With no quarterly earnings report, an auditor will have to assess the full value of the private company — down to desks, equipment, and credit card bills. The valuation of a company can change even daily given the flow of business. And how do you value a multi-national company when taking into account currency exchange rates and overseas assets?

And this would have to be done every year.

Elizabeth Warren address this in her plan:

  • Valuing assets for the purposes of the Ultra-Millionaire Tax will provide an opportunity to tighten and expand upon existing valuation rules for the estate tax:The IRS already has rules to assess the value of many assets for estate tax purposes. The Ultra-Millionaire Tax is a chance for the IRS to tighten these existing rules to close loopholes and to develop new valuation rules as needed. For example, the IRS would be authorized to use cutting-edge retrospective and prospective formulaic valuation methods for certain harder-to-value assets like closely held business and non-owner-occupied real estate.

Bernie Sanders takes it a step further, requiring a “wealth registry,” something not defined on his website but presumably a government record of assets held by an individual.

Both of these creates a dark precedent: the government will come into homes to assess “assets”, taking record of what you own, and assign value to it. While there are guidelines to valuation, they’re ultimately left up to the IRS. Does this mean the IRS would also begin to operate internationally? The Foreign Account Tax Compliance Act already requires U.S. nationals with foreign assets or holdings to claim such holdings and for banks to report the individual’s funds to the U.S. government. But what about art or cars at foreign homes?

Enforcement at home and abroad comes with a cost. More tax officials and inspectors, more paperwork, more travel and expenses just to enforce the wealth tax. These costs go against any revenue raised by the taxes themselves. But do they effectively offset? There’s an issue of scale here: to fully realize maximum tax receipts, expenses associated with enforcement must also be maximized. Costs of enforcement could also rise over time while tax receipts could go down; in theory, the entire intake of tax revenues could be spent on enforcement.

Unintended Consequences

Because this is a thought experiment, we can assume the above headache of multi-national asset holding valuation gets done on Amazon CEO Jeff Bezos (a favorite target for Warren and Sanders). His numerous holdings and assets are assessed and valued. It comes in close to Forbes’ October 2019 valuation of $103 billion. Under Elizabeth Warren’s plan, Bezos would be subject to 6% wealth tax (2% tax since it’s over $50 million and additional 4% billionaire surtax since the number is over $1 billion). 2% tax on $1 billion is $20,000,000. The 4% surtax on $102,999,999,999 is $4.2 billion (rounded up). Combined, that’s $4.22 billion owed in wealth tax (which does not include Federal, state, and local income tax or capital gains taxes). And this amount is conservative compared to CNBC’s estimate of $9 billion Bezos would pay under Sanders’ 8% wealth tax.

Here’s where it gets interesting. The likelihood Bezos has that amount in pure cash is highly unlikely. His personal wealth comes from his ownership in Amazon, specifically his shareholdings. To cover the $4.22 billion owed, Bezos would have to sell 2.5 million shares of Amazon stock (based on its current valuation of $1,745 per share). But even then that wouldn’t be enough because Bezos would owe capital gains tax on selling the stock. He would have to sell additional shares just to cover capital gains on the 2.5 million shares AND the shares he was selling to cover the tax (as of this writing, long term capital gains tax on Bezos’ tax bracket is 20%)

The result is that Bezos is forced to reduce ownership in his own company to pay wealth tax; the selling of 2.5 million shares by the CEO would also likely cause panic in stock (including knowing he’d have to sell more the following year), driving it down in price as investors get spooked. Since Amazon is a commonly held stock in 401ks, IRAs, and pension portfolios, all are hit by the selling. Bezos is not alone in the tax. Other billionaires will be forced to sell company stock to pay wealth tax bills, thus retirement funds will bear the brunt of reduced stock value from each of these companies.

The other choice Bezos and other owners have is to liquid company assets to pay the tax bill. This is money taken out of the company — money that could be reinvested for growth or was originally earmarked for new projects and initiatives. The loss for the company translates into higher costs passed on to customers or cutbacks in jobs or pay. This would also likely result in a stock price decrease.

In either case, by the time the next tax season rolled around, the overall valuation would be less — either by selling off $4.22 billion (plus capital gains tax) in stock or by reduced stock price in the company due to devaluation. Maybe the following year, Bezos is worth less than $100 billion. Yes, he’d still be subject to the wealth tax at 6% (or Sanders’ 8%) but the tax receipts would be less than the previous year. So the amount of tax receipts would drop, offsetting less of the enforcement costs and costs to social programs instituted by the president candidates.

Think of it this way: Social program (SP) plus additional wealth tax enforcement costs (EC) equal the projected tax receipts from the eligible billionaires in the United States.

SP + EC = Billionaire Tax Revenues

The balanced equation gives the presidential candidates what they want – their taxes pay for their new spending. But if Bezos and other billionaires suffer a reduction in net asset value, the tax revenues will go down over time. Now the social program and enforcement costs are not being covered by tax revenues and there’s a shortfall. Now you have to either reduce the SP spending (which would be unpopular), or reduce EC spending, which makes it more difficult to enforce the tax which would likely result in even less tax revenues. The only other choice is more government debt to make up the shortfall.

What happens if Bezos pulls a Depardieu and leaves? Now he isn’t contributing any tax revenue (except for his one-time exit tax) and the shortfall is that much larger. He may decide to do just that: at some point, Bezos will have sold enough Amazon stock to threaten his voting ownership and control of his company. The value of Amazon stock could plunge if he lost control due to lack of ownership — further reducing the value of American pension plans and retirement portfolios.

This also raises the moral question of is it right to take away ownership of someone’s company just because it was successful to a high enough degree? Wouldn’t this de-incentivize future entrepreneurs and business people? After all, why build a company beyond a certain point if a wealth tax will cost you ownership? It’s Ronald Reagan hitting the green all over again.

So there you have it. While the wealth tax attracts populist attention, the reality behind it is murky at best. It has been tried in the past and ultimately withdrawn due to failure to meet results. If anything, the shift in behaviors will create disruptions in the economy — and worse the possible flight of capital to foreign shores. With less to wealth to tax, the shortfall needs to be made up somewhere, either in increased government debt or taxes on lower classes who can’t leave.

Based on this thought experiment, do you think a wealth tax is still viable? Comment below!

The Sky is Falling! Quitting Your Job During a Recession

Coming to a street corner near you!

“Plan for the future, that’s where you’re going to be spending the rest of your life.”

Mark Twain

A recession is coming. Depending on who you listen to, it’ll be here by election day or sometime in 2020. It was also supposed to be here already this year. Or was it 2017? Wait, maybe it was 2015. Remember when they were calling for recession in 2012, just 4 years after the Great Recession? Every year economists or newspapers warn of the ‘coming recession’ that lies just over the horizon.

After seven years of calling it wrong you’d think they’d give it a break. But they won’t — sells too many newspapers.

The point is, recessions do come around every so often. They’re a side effect of the business cycle. Borrowing and lending go too far and there’s a snap back. Economic repercussions usually include decreased spending, higher unemployment, tight credit or banks not lending.

So what to do if you’re looking to Quit Your Job or have already broken free?

The average person might fear recessions. They are, after all, times of great uncertainty. As someone in control of their finances, you should be excited at the opportunity that has presented itself. Prices fall in times of recession. Credit dries up, which leads to people spending less money (either because they don’t have it or would rather save or pay down debt), which leads to less sales and more inventory. The law of Supply and Demand tips the other way: demand drops and supply is more available, which brings down the price. In other words, things get cheaper because no one is buying anything.

The stock market becomes a super market sweep. When credit dries up, loans get called. This includes margin calls, where people and institutions that have borrowed money from brokerages to buy stocks and bonds are required to pay back the brokerage. Imagine you went ‘on margin’ in your E-Trade account, borrowing $10,000 and bought a bunch of Apple stock — the economy just dipped and AAPL stock is falling. E-Trade knows you borrowed money to buy a stock that’s losing value; they call the margin loan and you owe them $10,000 immediately. You have to sell your AAPL stock (likely other shares as well to make up the difference in value lost as AAPL stock fell). It’s not just you — hundreds of thousands of other people are being margin called by their brokerages and forced to sell.

If you’ve got cash, now is the time to buy. Over-leveraged (i.e., “bought with borrowed money”) investors have to dump. The stock market falls. Institutions like pension funds and hedge funds panic at the accelerating drop in prices so they sell stocks and buy bonds (generally regarded as safe havens during economic downturns). Them selling accelerates the stock market drop further. If you’ve got a rainy day fund of cash, you can swoop in and buy stocks cheap. When the recession ends and pensions and hedge funds move back into stocks, the prices go back up because they’re being bought. Something else to remember: a lot of stocks (particularly REITs) still pay dividends during recession. You can bolster your dividend ladder pretty well in a recession, adding to your portfolio of cash-paying stocks. Yes, your own stocks you were holding prior to the recession will likely take a hit, but will also likely keep paying dividends. REIT (Real Estate Investment Trusts) absolutely will.

Speaking of real estate, that also becomes another buying opportunity. The 2008 crash is a great example of this. Historically, real estate has always been regarded as a ‘safe investment,’ meaning value holds even during recession. However, recessions usually result in more inventory available in real estate. People who have unaffordable mortgages, suffer job loss, or end up moving due to economic downturn will either sell off their home or allow the bank to foreclose. Commercial property becomes widely available as sales dry up and force business to close or relocate. The more property that’s available, the lower the price goes. Again, law of supply and demand.

Recently, I read an amazing book called The Great Depression: A Diary (which I’m going to do a Required Reading post on), which is a published diary kept by a lawyer during the Great Depression of the 1930s. Throughout the entries over the years, the author bemoaned the fact that if he only had some cash he could buy up swaths of stocks, land, or businesses as they were going for pennies on the dollar.

Having cash when recession hits can set you up for massive future gains. As the old contrarian maxim goes, “buy when there’s blood in the streets.” It may be a bit melodramatic for this post, but the point is to buy when things look the worst.

So who is really at risk when recession time comes?

Employees, for one, at put at risk. If a company is forced to downsize or cut costs, labor is usually one of the first things to go (as it is usually the greatest expense). If you’re working a job and living paycheck to paycheck, you are the greatest at-risk. Loss of even a single paycheck will disrupt everything. Remember how hard employment spiked over the course of 2008?

Indebted people are another group at risk. Debt servicing becomes difficult if income drops or vanishes altogether. In some cases, banks can call a loan (like a mortgage) in the event of non-payment for a previously specified amount of time. Credit cards and personal loans will pile on interest and service fees for non-payment or late payments. Worse, if your income has dropped or you’re living on savings, huge chunks of your monthly income must redirect to debt, leaving you with less for other things. You might even be forced to sell things you don’t want to sell to satisfy debt payments.

Lastly, your business might be at risk. If you’ve read my blog in the past, you know I’m a fan of MJ DeMarco’s The Millionaire Fastlane and DeMarco’s advice of not starting a business based on what you love. You’re setting yourself up to fail if businesses aren’t founded on need. Businesses based on love — yoga studios or frozen yogurt shops — will be obliterated with the next recession. Thousands of etsy shops will close down. Endless side hustles will dry up. Why? Because as credit freezes and people lose their jobs and/or panic, spending vanishes. Subscriptions and memberships are cancelled. Penny pinching goes into overdrive — and these businesses will wither and die.

If, however, you founded your business based on market need, if you’re providing a valuable or even critical service or product, your business can survive. For some businesses, recession brings a boost. Bars and thrift stores thrive. The movie theater had its golden age during the Great Depression as people went to movies looking for escape and during the economic downturn of the 1970s, the Hollywood blockbuster was born. If your business is essential, it can weather the storm.

Back to the Mark Twain quote above. How can you prepare for the next recession if you’re planning to Quit Your Job?

The first one is easy, because you should have been doing it anyway to Quit Your Job: reduce debt. Pay down credit cards, pay off your car or student loan. Reduce your liability, the number of monthly payments, and the amount you need every month to meet bills.

The next best way to prepare is to have cash. Cash is your sword and your shield. You should have an emergency fund ready to cover several months of normal expenses. This will help bridge the gap and not disrupt your life should income drop or cut off altogether. In addition, having cash allows you to pick up assets at severe discount — buying stocks or property that will eventually regain in price. Just as a fun example, take Patrick Industries (ticker: PATK) company profile:

It manufactures and fabricates decorative vinyl and paper laminated panels; fabricated aluminum products; wrapped vinyl, paper, and hardwood profile moldings; solid surface, granite, and quartz countertops; cabinet doors and components; hardwood furniture; fiberglass bath and shower surrounds and fixtures; softwoods lumber; simulated wood and stone products; and others.

After the housing crash in 2008, the stock cratered to 28 cents per share. It’s obvious to see why, given its significance to home renovation and construction. From the low in March 2009 to the end of 2017, PATK gained over 24,000% in stock value. This is an extreme example, sure, but it illustrates how buying up something so unwanted could great gains in the future.

There’s a reason they say “cash is king,” and it has its roots in the Great Depression. At a time when everyone is selling assets to get cash, having cash makes your royalty.

If you want to learn more about setting yourself up to thrive in the next recession, check out some books like Recession-Proof by Jason Schenker or Recession-Proof Living by Bill Weise.

Required Reading: Shoe Dog and the Lessons From Business

“The cowards never started and the weak died along the way. That leaves us, ladies and gentlemen.” This quote sounds brutally honest, gritty, and harsh, which is exactly what Shoe Dog: A Memoir by the Creator of Nike by Phil Knight is. I loved this book and was sad when the journey was over. (Note: I listened to the Audible version of the book, narrated excellently by Norbert Leo Butz).

Everyone knows Nike, but I can’t imagine most know about Phil Knight, it’s founder. I didn’t, but the book appeared on many of the “Best Books on Business” lists out there on the internet. As it turns out, it is an excellent book on business — but not for reasons you would think. There is no section on starting a business, no textbook-like process of following steps to start then grow your own business to success. What Shoe Dog is is the life adventure of Knight and the day by day, year by year struggles of selling (and later manufacturing) shoes. It is a tale as full of wisdom as anything in the Bible or ancient myths.

Knight’s story is an inspiration for anyone who owns their own business (or is looking to do so). I catch myself thinking of the book and Knight as my business changes and grows. When I get stuck or frustrated at how things are going in my company, I think of Knight and the hardships he had to go through. At least I’m not constantly traveling to Asia.

I’ve done this Required Reading for Shoe Dog a little different than past Required Reading posts. I read (listened to) Shoe Dog at a pivotal time in my own business, and much of what Phil Knight wrote resonated with me in a profound way. I wasn’t just hearing the words, I was living them. So instead of listing 5 major takeaways from the book, I’m going to breakdown the ways Shoe Dog mirrors what I’m currently going through — and what anyone who wants to start their own business should know.

Seek a Calling

I’d tell men and women in their midtwenties not to settle for a job or a profession or even a career. Seek a calling. Even if you don’t know what that means, seek it. If you’re following your calling, the fatigue will be easier to bear, the disappointments will be fuel, the highs will be like nothing you’ve ever felt.

Starting, building, and maintaining a business takes an unlimited amount of focus and persistence. The casual observer of a business may think it’s easy, or the owner is talented or even just lucky. It’s easy to dismiss someone as “just lucky” when they have a successful business (or product, or app) but that’s because so much of the work and hardship is usually when you’re not being observed and never shared. This is why it’s important to seek a calling. You need that fuel, that bottomless reservoir of stamina and determination.

There’s been tough times. They’re usually wrapped in uncertainty and unpredictability. You never really know when they start or when they end, but you always know when you’re in them. If you know it’s your calling — that you’re the person to do this and no one else is going to do it as well — it keeps you going. I’m fortunate enough to have two business partners, and we’ve taken turns pulling each other up when one gets run down by the business or some element of it. For Phil Knight, it was mostly him — but he had a strong support group in his coach-turned-business-partner, his father, and later his wife. But it was his calling, the desire to bring quality and life-changing shoes to athletes, that kept him going.

The most important piece of the quote above is “disappointments will be fuel.” You must look at failures as a way to get better, to improve, to adjust and regroup. Too many people suffer a failure and it derails them. They lose focus. They want to give up and crawl away to something else. My business has had failures. We consult companies and schools for technology needs and custom solutions. Not ever job or client went perfectly. One of them was a disaster; several others almost were. My partners and I regrouped: “What went wrong? If we did it over, what would we change? How could we better prepare? What didn’t we know that we didn’t know?” If we didn’t have the calling to drive this business, any one of us could have given up at any time.

Take the hit. Get back up and do better next time. If you take two steps forward for every step back, you’ll still get there. With this comes the next section:

Fail Fast

“Starting my own business was the only thing that made life’s other risks—marriage, Vegas, alligator wrestling—seem like sure things. But my hope was that when I failed, if I failed, I’d fail quickly, so I’d have enough time, enough years, to implement all the hard-won lessons. I wasn’t much for setting goals, but this goal kept flashing through my mind every day, until it became my internal chant: Fail fast.” 

Nothing has driven my company more than failure. Sounds bad, doesn’t it? Only if you look at failure as a bad thing. When we started out, we had knowledge — technical, sales, and legal (each partner bringing one to the table) — but we didn’t have much else. Failing at everything else made us realize what was needed to succeed at our business. We didn’t have paperwork; we didn’t have standard operating procedures; we didn’t have even a real Mission Statement. We knew what we could do, and we knew there were people and businesses that needed it.

Phil Knight aimed to fail fast. Shoe design doesn’t work? Find out as quick as possible and change it. Japanese shoe factory can’t meet demand or is cutting corners? Fine, but find out quickly. If you fail fast, you succeed sooner. Imagine it this way: If you spend a year working on something only to find out it’s a failure, you’ve lost a year. Sure, you learned a great bit from the failure itself, but imagine if the failure happened much sooner.

It is true what he says about business making everything else in life feel like sure things. Having your own business is a risk. The risk goes the larger the business gets. My company recently hired its first full time employees. That means we’re growing, but the risk is that much greater: it’s not just the owners anymore, we’re responsible for five people and their livelihood. The revenue must come in to maintain these employees, let alone hire more in the future.

No Finish Line

“For that matter, few ideas are as crazy as my favorite thing, running. It’s hard. It’s painful. It’s risky. The rewards are few and far from guaranteed. When you run around an oval track, or down an empty road, you have no real destination. At least, none that can fully justify the effort. The act itself becomes the destination. It’s not just that there’s no finish line; it’s that you define the finish line. Whatever pleasures or gains you derive from the act of running, you must find them within. It’s all in how you frame it, how you sell it to yourself.” 

For Knight, running and business go hand-in-hand. This, of course, works on two levels as his business was running shoes (before branching out into other sports). Both are about pushing yourself, finding your own way to measure success, and come to the conclusion there is no real destination.

Why start a business? To become rich? Does that make money the measure of success? Or is it to make life better for others. How many others? How many bettered people would be considered a success? From day one, my business partners and I never discussed what would we considered success. But that’s okay, it didn’t stop us. But looking at it now, what would I consider ‘successful?’ For awhile it was yearly gross profit. That was a way to measure (and how most businesses measure) relative success. Was this year more profitable than last? But now success is measured in other ways to us. We have employees. We couldn’t do that if we weren’t growing; if we’re not growing than we must not be successful.

For a portion of Shoe Dog, Knight measured his success (and relayed it to others) by the number of pairs of shoes he sold. First hundreds, then thousands, eventually millions of running shoes sold first out of the trunk of his car later in company stores. But eventually, that huge number became irrelevant. He used it to try and secure more loans from the bank to keep his business going — buying more inventory and paying employees. But the numbers stopped mattering to the bank to extend his credit line. I believe Knight later found his measurement of success in the athletes he provided for. He speaks proudly of seeing Nike shoes at the Olympics for the first time — worn by American athletes winning medals in running and track and field. To him, success was taking care of these athletes by providing superior shoe design and material.

We recently experienced something similar as we worked to get a payroll loan from the bank for our new employees. We have just received the largest contract ever (by far) from a new, Fortune 500 level client. The contract is used as unsecured collateral in order to receive a line of credit from the bank for our brand new employees. To us, this contract was our measurement of success. To the bank, much like Knight, it doesn’t mean much. Also like Knight’s shoe business, we were only given barely enough to cover. While we saw our new contract as success, the bank clearly didn’t think much of it.

I don’t know if I have a finish line. Maybe I haven’t defined mine yet. Maybe it’s too early to see it. With my business, I’m somewhere in the middle of the race just trying to lead the pack. I’m not worried about it, the important thing now is to keep pushing. Our interim finish line is to provide this new client the best possible service and let the chips fall where they may.

Redefining ‘Winning’

“It seems wrong to call it “business”. It seems wrong to throw all those hectic days and sleepless nights, all those magnificent triumphs and desperate struggles, under that bland, generic banner: business. What we were doing felt like so much more. Each new day brought fifty new problems, fifty tough decisions that needed to be made, right now, and we were always acutely aware that one rash move, one wrong decision could be the end. The margin for error was forever getting narrower, while the stakes were forever creeping higher–and none of us wavered in the belief that “stakes” didn’t mean “money”. For some, I realize, business is the all-out pursuit of profits, period, full stop, but for use business was no more about making money than being human is about making blood. Yes, the human body needs blood. It needs to manufacture red and white cells and platelets and redistribute them evenly, smoothly, to all the right places, on time, or else. But that day-to-day of the human body isn’t our mission as human beings. It’s a basic process that enables our higher aims, and life always strives to transcend the basic processes of living–and at some point in the late 1970s, I did, too. I redefined winning, expanded it beyond my original definition of not losing, of merely staying alive. That was no longer enough to sustain me, or my company. We wanted, as all great business do, to create, to contribute, and we dared to say so aloud. When you make something, when you improve something, when you deliver something, when you add some new thing or service to the life of strangers, making them happier, or healthier, or safer, or better, and when you do it all crisply and efficiently, smartly, the way everything should be done but so seldom is–you’re participating more fully in the whole grand human drama. More than simply alive, you’re helping other to live more fully, and if that’s business, all right, call me a businessman.” 

I founded my business out of the needs of others. The kernel of my business idea was planted by my former job at Apple — hours, days behind the Genius Bar working with customers who weren’t able to get their needs addressed by the company. Particularly professions and businesses who were unable to bring their problems into the store. From there I convinced others that there was a need in this market, and I had the ability to fill it.

I’m proud my company was founded on solving the needs of others. Nobility aside, it proves of our right to exist. We meet a need that wasn’t being solved by others. Regardless of the size of the business, the need remains the same.

There’s something else above Knight’s quote above and Shoe Dog itself. Business is not glorious. Glory can be a component, an aspect of achievements earned by the business. But it’s mostly inglorious work. It’s bookkeeping, taking notes and making lists. Paying bills and contractors and employees. Knight’s allegory is correct: a business is very much like the inner workers of the human body, it never stops. Cash is merely part of that system; money goes in, money goes out. It’s these processes that keep the business moving to fill a need.

They say entrepreneurs learn to love the process. I think you have to or else you’ll never make it. If it’s all about the money, and you’re just waiting for the next payday, you’ll begin to lapse on the inglorious work. Things won’t get done or will slip. The business will break down.

There’s a tremendous more to Knight’s book than just his philosophy of business. The book itself is an experience from Knight’s adventures around the world (such as climbing Japan’s mount Fuji or seeing the Temple of Athena Nike in Greece), how a business goes from idea to full fledged movement, and the life of a runner in search of the perfect shoe. The book contains philosophies of life, quasi-mysticism of the business world, and just what never giving up can truly bring.

I miss this book. I loved listening to it and following Knight’s adventure. I was sad when it was over and it’s one of the few books I’ve read or listened to that gave a sense of true fulfillment. I cannot recommend it enough, especially if you’re thinking of going into business or even just looking for some guidance.

I think I’ll start it over again today.

Click this link to check out the book on Amazon. If you purchase it, it doesn’t cost any extra but I get a few cents from Amazon! You can also click on the image of the book all the way back at the top of this post to do the same.

California and the Death of the Gig Economy

A lot of people I know drive for Uber or Lyft (or sometimes both). They use it as a side hustle, a supplementary source of income. They like it because they choose when to work and for how long; it doesn’t interfere with their work or life schedule. A former coworker of mine has used Uber to pay down debt, driving forty or more hours a week on top of his full time retail job. I also know another coworker who quit his retail job to drive for Uber and Lyft full time. It didn’t last very long until he gave up.

I always chat with Uber drivers when I use the service as it’s always interesting to see how people are using the driving app to conform it to their lives. Sometimes the drivers are retirees. Some are in school. Occasionally there will be the full-time driver who drives daily all day. They all like the flexibility of making their own schedule, they can take breaks whenever they want, they earn as much as they want, and they collect their fares every week. (Under Uber’s new Uber Instant Pay program, some areas can even withdraw instantly when a threshold is met.) These ridesharing businesses are the quintessential ‘gig economy’ jobs — you perform a service (gig) for a company as a contractor and you’re paid for your service. No strings attached, everything’s temporary and it’s essentially on the contractor’s terms: when you want, as much as you want, and you accept what the company is offering for compensation. This is the new normal.

So is it any wonder labor activists are against it? This past week a bill was passed in California’s senate to “end rampant misclassification” of workers as independent contractors according to The Sacramento Bee in an article entitled “California sees to make Uber, Lyft drivers employees with passage of new California labor rules.” From the same article:

“It makes sure that the one million independent contractors in California get the wages and benefits they deserve,” said Assemblywoman Lorena Gonzalez, the San Diego Democrat who authored the bill.
But the loudest voices raising concerns about the bill have been gig economy companies. Ride-share companies Uber and Lyft and delivery service DoorDash have pledged to spend a combined $90 million to take the issue to voters in 2020 if they don’t secure some relief from the new employee classification test.

If you’re unfamiliar with it, a contractor is not the same as an employee. A contractor is someone a company pays for a service, who is not employed by the company, and is paid 100% of their compensation — the employer does not do any withholding and it is up to the contractor to claim his compensation on his own taxes (You may have heard of the 1099 form that companies send to their contractors at the end of the year totaling everything they were paid that year for services). An employee is someone who is contractually bound to work for the company, and is bound to various state and federal labor laws. A contractor receives no benefits, insurance, pension, etc from the company because the don’t actually work for them.

In the first five years of my company, I relied solely on contractors to grow my business. Why? Because my company had very few contracts with clients. We were hired on a per-need basis, not on an extended contract. This meant there was no guarantee of work and we could only sub-contract help when it was needed. Employees would have been a huge drain — we would have had to make payroll (including payroll taxes, benefits, etc) twice a month even if no jobs or new clients were coming in; we’d be out of business in months. Contracting allowed us to hire when we needed to and not be beholden to paying someone when there wasn’t work.

So back to this California bill to give “one million independent contractors the wages and benefits they deserve.” The problem is in the fact they’re independent contractors to begin with; they agreed to Uber (and Lyft) terms of service when they started driving for them. Like my former coworker who quit to drive Uber full time, these contractors are attempting to make a career in ridesharing. It’s not designed to be such. It is, after all, a ‘gig economy.’ It’s a chance to make money on the side, on the schedule you set, and in turn you’re helping Uber and all the people who need a quick ride somewhere. By making these independent contractors employees, California is going to upend this free market system.

Let’s think it through, shall we? California forces Uber and Lyft drivers (as well as various others such as port drivers, musicians, translators and even freelance journalists) to be classified as employees. The drivers sign contracts with these companies and are now entitled to health benefits, unemployment insurance, workers compensation, etc. Big win for Ms. Gonzalez and the labor activists. Drivers will now get more than they bargained for, and so will riders.

Right off the bat costs go up because employees are expensive. In addition to the compensation (which shifts from a per ride basis to an hourly wage, given labor laws and must be $12 an hour per current California law, and even higher in other California towns), employers must pay towards medical benefits, unemployment insurance and employer payroll taxes, workers compensation, and the HR expansion to meet the new 1 million employees added to the company. That’s a lot to ask from a company that just posted a $5.2 BILLION loss in one quarter this past April. The company suffered billions in losses for the years 2017 and 2018 as well. So who pays for these employee benefits?

You, the rider, do of course. Uber and Lyft fares in California will have to increase to compensate for the increase cost of the driver — remember, the driver was only making money per ride, now they must be paid for every hour on the clock. At some point it might be just cheaper to have your own car if you Uber regularly.

The other thing that will immediately change for the drivers is schedule. As employees, they become beholden to when Uber or Lyft schedules them to work. No longer can an Uber or Lyft driver pick up a fare on the way to somewhere the driver is already headed. You can’t drive for an hour and then take the rest of the day off. Or take a whole week off and come back and start picking up fares again. You’re an employee now, and the company will tell you when you need to be driving and for how long.

Drivers would also no longer be able to reject a fare, take breaks whenever they wanted, and would be forced to drive during slow times when there may be no fares at all. This last one is essentially waste — an employee is driving a car, using gas, with no fares because it’s slow time. It costs the driver and the company.

As an independent contractor, federal law allows you to write off expenses related to your work. Uber and Lyft drivers write off their gas, mileage, car repairs and maintenance. These expenses can be deducted from federal taxes. You lose these deductions when you’re an employee. Uber and Lyft can technically offer to reimburse you for them, but they’re not required to do so. You definitely cannot claim mileage and gas as an employee on your federal taxes. (I know this because I once tried to argue claiming miles and gas for having to drive to work with my tax accountant, who laughed at me.)

A lot of drivers will also use both Uber and Lyft apps to maximize fares. Since drivers are paid only when they take fares, using both apps ensures minimum downtime and the maximum amount of fares. If you’re employed by Lyft, you can’t use the Uber app while you’re on the clock. This means lost fares and also means less of a supply of drivers for people who need to get somewhere. An employee of Lyft driving around will drive right past an Uber rider looking for a ride.

There is also the issue of automation. Uber (along with other companies) has been spending heavily in research of self-driving cars and automated driving. Right here in Pittsburgh, Uber has their ATG (Advanced Technologies Group) developing self-driving car systems. If Uber was forced to take on the additional costs of labor under California law, the first thing they’ll want to do with automation is relieve those costs. Guess which state Uber will start piloting their fleet of automated vehicles when they become road-approved. If McDonald’s can do it with kiosks, Uber will do it with self-driving cars.

Given the shift drivers will undergo, I have to wonder if people will just quit driving for Uber and Lyft after becoming employees. On the flip side, both companies could also lay off drivers to save costs. Those that drove on the side in their off hours would likely have to quit driving for Uber or Lyft or risk it impacting their other employment. My coworker who drove in the free time of his retail job would have to choose one or the other since Uber would be providing a set schedule. Regardless of his choice, his income drops because he loses a source of revenue.

From the first glance here it appears Assembly Bill 5 could have disastrous effects on personal income in the state of California. People working as contractors on their terms will be forced to conform as am employee or lose out on their former gig. Jobs could be lost to automation. Some companies may up and move, taking their jobs with them or choose to cut back because they can’t afford to take on these contractors as employees. So why would California’s legislative body and Governor Gavin Newsom pass AB 5?

Very much like the Fight for 15 movement, it gives the perception of looking out for the ‘little guy.’ As Newsom himself said, AB 5 “will help reduce worker misclassification — workers being wrongly classified as ‘independent contractors’ rather than employees, which erodes basic worker protections like the minimum wage, paid sick days and health insurance benefits.” But there’s another big shift not being mentioned here — payroll taxes.

As an independent contractor, any compensation does not have taxes withheld. If a company hires you for $100/hr and you work 5 hours, you receive $500 from the company and are responsible for filing your own taxes. After making $600, the company is legally required to send you a IRS 1099 form, showing how much you made. Under AB 5, this goes away. You’re now an employee, and beholden to tax withholding. Your taxes are taken out of your paycheck immediately…including California state tax and all applicable local and federal taxes.

As the Tax Policy Center puts it:

But California’s new law goes well beyond mere tax reporting rules. It reclassifies these workers as employees, with all of the tax and labor law effects that implies. Massachusetts already has adopted similar rules for defining employment, and New York’s Labor Department has said that Uber drivers are employees who are eligible for unemployment insurance benefits. Now that California has jumped in, don’t be surprised if other states move aggressively to turn on-demand workers into employees—both to protect worker rights and collect some additional revenue.

And without being able to write-off your expenses, you — now as an employee and not a contractor — will pay more overall in taxes. It also prevents creative accounting practices, deductions, underreporting, or any other method that could potentially be shortchanging the state of California on tax revenue. As an employee, they’re just taken out of your paycheck.

Regardless of what actually happens, this California senate bill will certainly change the nature of the gig economy.

5 YouTube Channels You Should Be Subscribing To

Just a quick disclaimer: I am in no way affiliated with any of these channels. There’s no kickback or monetization for mentioning them on my blog. I personally follow them and wanted to recommend them to anyone interested in personal finance, investing, or wealth.

The following are five informative YouTube channels I subscribe to for ideas, inspiration, or just taking my brain for a jog. If you have an interest in personal finance or want to become entrepreneurial, these are a great place to start.

#1. Ryan Scribner

Ryan Scribner is a great intro to personal finance. He targets beginners and those early in the investment game. His videos cover passive income and ways to earn it, the stock market, and social media growth strategies. Recent videos have shifted to more gimmicky topics like “I Bought 7 Boxes of Amazon Returns” but I recommend any of his videos on passive income or stock market investing.

The other thing I like about Scribner is he isn’t shy about sharing his end of things. He’s very open about showing his metrics and actual revenue. One of my favorite videos he did is one where he spent two hours online taking surveys for money. Online surveys are always touted on blogs or online lists as easy ways to make money from home: just fill out surveys and get paid! Scribner actually tried several sites and found them to be essentially a sham (unless you spend thousands of hours doing it, and even then you’re not assured you’ll see any real money).

#2. Valuetainment

Patrick Bet David is an eccentric fellow. He’s a physically huge, fast-talking, money-making businessman. A Persian Wolf of Wall Street, minus the criminal element. Valuetainment is an interesting mix of financial philosophy, motivation, and an interview series. Videos include things like “How to Start a Business for Under $500“, “Hiring Your First Employee as an Entrepreneur“, and one of my favorites, “The 20 Rules of Money”, which is embedded above.

The interviews have a variety of guests, from financial gurus to comedians and athletes. I find myself unable to binge watch this channel, probably because it is so eclectic and wide ranging. I like to pick and choose from time to time for what I’m in the mood for and I can usually find something to fit the mood. Bet David is also a prolific poster, constantly generating new content.

#3. Practical Psychology

This channels covers a lot of ground. The topics are many and cover habits, mindsets, and general human psychology. There is also the occasional book reviews and ‘takeaway’ videos, such as one of my favorites above: “14 Big Lessons from 341 Books.” The channels is not one I watch so much for investing or money, but to learn more about how my mind works.

If you’re looking to change your habits up or understand more about why you do the things you do, this is a great place to start. Each video consists of a whiteboard animation with voice over, so the look of the videos can become repetitive over time.

#4. Joseph Carlson Show

This is a recent discovery for me. If you’ve read this blog before, you know I’m a fan of dividend investing, which happens to be Carlson’s focus. The channel has a very specific theme: Carlson opened an investing account for the purposes of illustrating dividend investing and he posts regular updates on how the portfolio is progressing. (Each video thumbnail gives the current value of the portfolio.) He takes the time to breakdown his portfolio, why he chose what he did, and how dividend reinvesting and adding more of his own money over time creates growth and profit.

Recently, he’s also beefed up his channel by adding economic commentary, news, and financial trends. It’s informational and interesting, while showing what dividend investing looks like in real-time. If you’re interested in investing or new to it, this is a great place to learn more from the ground level.

I have a soft spot for Mike Maloney. Born dyslexic, Maloney had a difficult time reading and writing that plagued him into adulthood. He finally discovered the dictation function on his Macintosh computer that allowed him to eventually correct and moderate his reading and writing issues. He has since gone on to author several books on investing! Maloney’s YouTube channel serves several purposes, including advertising his company GoldSilver.com, which deals in investment-grade precious metals.

I like Maloney’s presentations and level-headed economics criticism, but the real wealth (so to speak) in his channel comes from his documentary series “Hidden Secrets of Money.” Maloney goes back to the beginning — the earliest days of human history — and revisits money through the ages. More importantly, he defines what money is and its relationship to currency.

The real knockout is episode 4 of the series, entitled “The Biggest Scam In The History of Mankind” where he dissects how the Federal Reserve system and our current monetary system works. It’s a dense, cryptic topic that Maloney easily breaks down for the casual viewer. It’s well done, highly informative, and, in the end, shocking to see how things really work. It’s impossible not to walk away from without having an impact.

The Other Side of $15 Part 3

Beware of strangers bearing gifts

The following is part 3 of an on-going series. The first part dealt with the immediate impact on business costs and barrier to entry; part 2 looked into the result of $15 per hour in the New York restaurant business. This section will cover big box retailers pushing for higher minimum wage in 2019. You can read part 1 here and part 2 here.

If you recall from part 1, the sudden spike in labor cost creates an immediate burden on lower paying employers. In the case of my fictional restaurant (and later shown in real life results in part 2), hours are cut, prices increase, and in some cases layoffs occur. Considering all of this, I was (at first) surprised to see big box retailers like Walmart calling for a $15 minimum wage.

This past summer, Walmart CEO Doug McMillon called out the federal government for the minimum wage being “too low:”

“The federal minimum wage is lagging behind,” Doug McMillon said at Walmart’s annual shareholder meeting in Bentonville, Arkansas on Wednesday. 
Congress has not raised the minimum wage since 2009, but McMillon’s surprise comments may give lawmakers an incentive to act. McMillon’s call may also ease pressure on Walmart. Senator and presidential candidate Bernie Sanders, along with workers’ rights groups, have called on Walmart to raise its wages above the company’s current $11-an-hour minimum.

As of 2010, Walmart employs 1.4 million Americans – 1% of the country’s working population. Certainly not all of them are wage employees, but the number of wage earners is large enough that Walmart will absolutely feel the increase (again, these are 2010 numbers, so the number of employees could even be greater). Even if 1 million of the 1.4 million are wage earners, a few-dollar increase per hour quickly translates to millions of dollars per hour in labor costs. That’s huge! So why publicly push for $15 at such a great company expense? (It’s also worth noting here that when Walmart bumped hourly wages up to $11 per hour last year, they also closed numerous Sam’s Club stores at the same time.)

A reactionary thought is that it’s good PR. Just like politicians calling for a “living wage” of $15 per hour for the good of the people, Walmart leading the charge for $15 per hour gives a boost to public perception: Walmart cares about its employees. Walmart is listening to the people. You can make a living working at Walmart. Walmart and Amazon have become targets of the $15 per hour camp as of late. By embracing the higher minimum wage, it relieves public pressure and image tarnishing.

A second potential reason for hiking wages could be inter-company competition. Amazon and Costco have both recently upped their hourly wage to $15. Amazon claims they are not caving to pressure from Senator Bernie Sanders but doing it for the good of their employees. Their increase will impact 350,000 full-time, part-time, and seasonal workers. Costco raised their wage to $15 this past March. Perhaps it’s about staying competitive with other big box retailers. I can see how no one wants to be caught as the lesser-paying and risk losing employees to the other.

But there’s something else at work here. If it really were about public relations, saving face, and remaining competitive among large retailers, why would these companies champion a national minimum wage hike to $15? If anything, being able to pay $15 when smaller competitors cannot or aren’t willing gives Walmart and Amazon an advantage in the labor pool. In the quote above, Walmart CEO Doug McMillon is pushing for a $15 per hour federal minimum wage. Jay Carney, senior vice president of Amazon’s global corporate affairs, declares that Amazon “will be working to gain congressional support for an increase in the federal minimum wage” and to “advocate for a minimum wage increase that will have a profound impact on the lives of tens of millions of people and families across this country.” In March 2019, McDonald’s ended their lobbying against a $15 per hour national minimum wage.

These companies are free to pay their workers $15 per hour and set an example for others, so why do they want to push it on the entire country? There’s really only one reason.

To crush their competitors.

Walmart and Amazon can afford to absorb the cost of $15 per hour. They can also afford to invest in automation or to cut hours from large store rosters. If need be, they can even close a store or two — as Walmart did in 2018 when they raised their wage to $11. Small businesses cannot afford to do these things.

Imagine Bob’s Discount Bunker is a small chain of discount retail stores. Maybe their prices are competitive to Walmart, or they have stores where Walmart doesn’t. One of the ways they can price their products lower than Walmart is lower labor costs. If these costs are raised on par with Walmart’s, that means Bob’s can no longer afford to charge lower prices. Or they go out of business altogether after a death spiral, like our fictional restaurant. Either way, the higher wage is severely disruptive to smaller competitors; it saddles them with more expensive labor.

Why else would these large corporations be willing to absorb such huge labor cost increases? By flipping the script and embracing the higher minimum wage, politicians and labor advocates are doing big companies a favor.

After the field of competitors is wiped out, big box retailers can then either raise their prices, induce layoffs, or replace workers with automation to bring their labor costs back down. As a CNN article entitled “Why Big Business is Giving Up Its Fight Against a Higher Minimum Wage” puts it:

Although the wage premium for working at a large company has decreased over time, big businesses still achieve economies of scale through centralized HR and benefits departments. They also have the upfront capital needed to invest in automation, such as the purchasing kiosks now in place at McDonalds, that will make businesses less subject to labor costs in the future.

When it’s all said and done, Bob’s Discount Bunker employees will likely be looking for jobs at Walmart or Amazon.

In the case of McDonald’s, it’s not the company that feels the increase of $15 per hour, it’s the franchise owner that the employees work for. As of 2016, 85% of the company’s restaurants were franchisee-run locations. This means they’re not owned by McDonald’s, but by a private business owner who pays McDonald’s a monthly franchise fee to use the name, logo, menu, etc. and purchases their stock directly from the company. It’s up to the franchisee to hire and pay employees. This makes the argument for McDonald’s being able to afford to pay their employees more somewhat disjointed: advocates look at McDonald’s annual company profits when it’s likely not McDonald’s paying their wages. McDonald’s, after all, is really a real estate company. Their primary income and tax breaks revolve around property. So a $15 minimum wage would still impact their competitors, but the franchisees are left footing the bill for the labor.

In the end, the government is just making large companies stronger by raising the wage to $15 per hour. It becomes a win-win-win scenario for Walmart, Amazon, or McDonald’s. It’s a win with the power of the federal government making the decision, coercing all employers in the country to abide by the increased national minimum wage — whether they can afford it or not. It’s a win because it’s good PR, allowing these companies to look like advocates for the common worker. And it’s a win because it wipes out competition and potential future threats.

How A Metallica Concert Changed My Life

…and my ties are severed clean
The less I have the more I gain
Off the beaten path I reign

Metallica, “Wherever I May Roam”

This title will undoubtedly cause a lot of strange looks. Bear with me here.

Metallica came through my city in October 2018. Twenty years had passed since they last visited. Twenty years I waited for a chance to see them. Metallica has a central role in my adolescence, from my older brothers listening to them in the 80s, to my friends and I in junior high listening to them, to eventually forming a garage band and covering their songs. (We were awful, but man was it fun). I listened to the ‘black album’ through my most formative years. When I heard they were coming to Pittsburgh, I splurged on tickets. I was going to finally see them, and I was going to do it right.

The seats were amazing. The stage was square and situated in the center of an oval hockey arena. The stage was rotated such that two corners almost touched the center-ice seating areas. I literally had front row seats. When the concert kicked in, Kirk Hammett and James Hetfield alternated standing directly in front of me. It was loud. It was energized. It in no way disappointed. It may have been the best concert I’ve ever been to (sorry, Iron Maiden).

At this point, I know you’re thinking: “Okay, guy loved Metallica growing up and finally got to see them. That’s sweet. Good for you.” It’s heartwarming feel-good-ery. But that’s not what it changed my life. Yes, I crossed something off my bucket list, but it changed my life in a different way.

Metallica was formed in 1981. By 2018, they had been rocking venues and traveling the world for 37 years. Lead singer James Hetfield was 55 years old when he stood before me wailing away. What hit me mid-concert was the fact that these guys had got to spend their lives doing what they loved. They made music, wrote songs, expressed themselves creatively. Because of this, they got to travel the world, rub elbows with all sorts of famous people, celebrities, world politicians. Their scrapbook of memories is endless.

And they were still going when most people were counting down to retirement.

Endless self-help books and financial guide books always ask the reader to know what they want. Tony Robbins harps on it. What do you want most in life? For most of my professional life I knew what I didn’t want: a day job working for someone else, working retail for money for bills, a path to decades of entry-level employment until I retire. But I never had an answer as to what I WANTED. Sure, I always wanted to make movies. I wanted to be a writer. I wanted to go to weird and exotic places around the world. But it was never a coherent, singular want that I could put into words. Seeing these guys rock in front of me and thinking about listening to them for 30 years finally caused it to appear. I had figured it out.

I wanted to live my life through creativity.

Geez, that still sounds vague but here’s what I mean. I want to make my way through my creativity, not through working a day job. If I travel the world, I want it to be because I’m doing something creative — like if a movie project took me to a foreign country. I want to meet people through creative projects, not because they walk into the store that I work at. I want to meet a movie star because I cast them and work with them creatively, not because they’re signing autographs for money somewhere. I want to collaborate creatively. To make things. To explore life as part of the creative process, not on my phone in the bathroom on a lunch break.

During the concert I thought back to a VHS cassette I used to have called A Year and a Half in the Life of Metallica where it was nothing but behind-the-scenes footage of the band making the black album and the album’s tour. The band got to go all sorts of places, meet other elite music acts, travel the world, and play to huge crowds — all as the result of their creative endeavors. I watched it in it’s entirety the morning after the concert.

It seems to miniscule. But life is stitched together by these infinitesimal moments. I was finally able to verbalize what is I had always wanted. A tiny thought became a huge push to finally quit my job. I felt focused. I knew that when I was 55 years old I wanted to be fully immersed in creativity and living my life through it.

Five months later I quit my job.

Why Isn’t Personal Finance Taught in School?

Internet Meme

Think back over your school days. In elementary school we had the basics: writing, grammar, English. Maybe American history. Math. Nature studies. Middle school? English literature, algebra, European history, and civics. High school? College level classes, more English literature, biology, physics, and more history. There were shop classes and home economics. And there was always gym classes.

If the purpose of education is to prepare a young person to go out into the world, find a job, make it in society, then our students are woefully unprepared. After twelve years of education, not one student is better prepared to manage their personal finances — or even understand how taxes and interest work. Over the course of our lives we, of course, use English. We use some math. History might come in to play at some point in the future. But we use financial knowledge. Every. Single. Day. So why is it not taught?

This latest post began while watching an interview with Robert Kiyosaki about the origins of Rich Dad, Poor Dad:

Kiyosaki recalls asking his fourth grade teacher why they don’t learn about money (10:30). She replied that they “don’t teach money at school” but couldn’t answer his question as to why. Kiyosaki continues, saying he eventually asked his father — who worked for the department of education — why money isn’t taught in school. His father’s reply? ‘Because the government doesn’t let us teach it. It’s not in the curriculum.’

So I began to wonder: how is education curriculum set? Why doesn’t the government allow personal finance to be part of public schools? (Note: I never attended private school, so I cannot speak to if it is taught there or not, but feel free to comment if you did. I’d love to know!) It seems not only common sensical that it would be taught, but given these horrendous metrics, Americans are in desperate need of financial literacy:

  • 41% of Americans use a budget (inversely, 59% of Americans don’t track or understand how much they spend every month)
  • The average American college graduate leaves school with $37,172 in student loans, most with no immediate plan to pay them off
  • Two-thirds of Americans would have trouble scrounging $1,000 for an emergency
  • 35% of Americans (!) have debt in collections with the average amount being $5,178
  • A National Endowment for Financial Education study found only 24% of millennials show “basic financial literacy” while 69% of the surveyed rate their own financial knowledge as ‘high.’

So what’s the deal? Before diving into a ‘Conspiracy of the Rich’ that keeps the average person money stupid, I wanted to learn the origins of our public education curriculum. I began to dig to find out just why what’s taught is taught.

It begins with the Prussian Education system.

The Prussian Education system was founded in 1763 by Frederick the Great. The system became the model for compulsory attendance (e.g., you have to go to school), national testing, and, per Wikipedia, “prescribed national curriculum for each grade, and mandatory kindergarten.” It also maintained a specialized training for teachers, essentially teaching teachers how and what to teach. This might be the most important facet, as teachers were not existing specialists or professionals, but professional teachers. The person teaching math or science would not be a mathematician or scientist.

The Prussian system was imported to the United States in the early 19th century, with early advocates including American education reformer Horace Mann (who eventually went to Germany to inspect German schools first-hand). The Prussian system was designed to serve the kingdom, training the populace to be soldiers, farmers, and eventually factory workers when the Industrial Revolution arrived. This is why you hear contemporary education referred to as “factory model” or “industrial era.” Indeed, it freaked me out a little bit when I realized that the reason for “bells” to signal start and end of classes was to train young people for the bells and whistles of the factory, denoting shift changes.

The Prussian system would later be refined in 1892 by the Committee of Ten. The committee’s recommendations became the basis of our modern education system: 12 years of education, eight of which are elementary followed by four years of high school. Curriculum was focused on English, mathematics, and sciences (such as chemistry, physics, and astronomy). The higher sciences such as psychics and chemistry were reserved for the high school level. English, mathematics, civics, and history would be taught at every level.

In the report linked above, there is no mention by the Committee of Ten of finance, money, or taxes.

So is our current system just outdated? What would it take to add personal finance to the curriculum? Why hasn’t it been? In 2013, a poll from Harris Interactive (sponsored by Bank of America) showed 99% of adults agree financial literacy should be taught in school. A 2013 Time magazine article entitled “Why We Want-But Can’t Have-Personal Finance in Schools” cites four major reasons finance has not been part of the curriculum:

  • Only one in five teachers feels qualified to lead a personal finance class, according to a University of Wisconsin study. So we don’t have enough instructors.
  • Personal finance concepts are not part of standardized tests like the SAT or ACT. As the saying goes in education circles: If it’s not tested, it’s not taught.
  • Education is run at the state level. So there is no federal authority to mandate personal finance classes, and each state has its own ideas on how to go about it.
  • There is little academic agreement as to what kind of personal finance instruction works. Many educators are waiting for clarity before they sign on.

There seems to be a catch-22 in regards to ‘feeling qualified’ to lead personal finance classes. Teachers don’t feel qualified to teach it because they never learned it themselves. In fact, these surveyed teachers may be struggling with their own financial literacy.

I’ve personally always been amazed that taxes are not taught at some level in school. These are something every American must file once per year, yet there’s no education or even explanation on how it all works. But, according to the Time magazine article above, teachers don’t really understand it either. I would say financial literacy should start at home, but parents weren’t taught in schools either. A 2011 Charles Schwab survey of 1,132 teenagers between 16 and 18 revealed 42% wanted their parents to talk to them about how money works. Only 32% of the surveyed teens knew how credit cards and interest worked. But if the parents aren’t knowledgeable (or comfortable enough) to talk about it, then the ignorance is passed on. It’s a death spiral of financial ignorance.

I couldn’t find an explicit reason why finance was left off the educational menu. One could infer that it wasn’t important in the 19th century — money still existed, bills had to paid with interest, although there was no personal income tax (except from 1861-1866 where it was enacted to pay for the Civil War) but property taxes and tariffs existed. Kiyosaki seems to insinuate that it’s more sinister, that financial education is left off the table explicitly to keep people dumb about money. His entire modus operandi for his Rich Dad series is to teach people about financial literacy because it’s not taught in schools.

He is right in that the failure to teach financial literacy in school falls on the government. Some states have taken the initiative, but it appears lacking, according to “Survey of the States“, a Council for Economic Education report. Seventeen states require high school students to take at least one course in personal finance. However, the report also shows “there has been little increase in economic education in recent years and no growth in personal financial education.” So states are aware of the problem, some have made an attempt to change it, but overall it appears to be half-assed or not a priority. I suspect it will take adding personal finance to standardized testing to get the ball rolling, coupled with education of teachers so they can teach the subject.

Until then, hopefully people like Robert Kiyosaki or Dave Ramsey will continue to get guide people. Or maybe blogs like this one can help someone find their way. Perhaps it will be those who are financially literate that will teach future generations.