Political Calculations
Unexpectedly Intriguing!
31 October 2007

Who knew the economy was growing so well? Today's advance GDP data released by the Bureau of Economic Analysis for the third quarter of 2007 came in substantially ahead of where forecasts, which had ranged from 2.5 to 3.4% annualized growth, would have placed it! We've updated our GDP bullet charts, which put the advance estimates for 2007Q3 into historical context:

1 and 2 Quarter GDP Bullet Charts, 2007Q3 Advance Estimate

At the upper end of the green zone, which corresponds to really nice economic growth, today's 3.9% annualized growth figure (Real GDP = 11,630.7 billion USD) surprised us as we had only forecast economic growth in 2007Q3 to come in at 3.0% (Real GDP = 11,583.3 billion USD). Our method however is used to forecast where the final revision of GDP in each quarter though, so we anticipate that the BEA's figure will be revised downward from today's advance estimate when the final revision is released in two months.

Never the less, we certainly would like to be pleasantly disappointed with our forecast!

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30 October 2007

Every six weeks, the members of the Federal Open Market Committee of the Federal Reserve, the most powerful central bank in the world, gather together in a dark corner of a discreet office building in Washington D.C. with a dark purpose: to sacrifice a goat so that they might read its entrails to divine where they might next set the level of the Federal Funds Rate.

You'll have to excuse our prose - with Halloween just a day away, we find that we're really getting into the spirit of the season this year!

More seriously, the FOMC has begun meeting today and will, when the meeting concludes tomorrow afternoon, release a statement in which they'll announce whether they will raise the target for the nation's base interest rate, lower it, or keep it the same as where it is today.

In doing that bit of business, they'll consider the condition of the U.S. economy in general and the state of inflation and the rate of unemployment in the U.S. in particular. Previously, we've developed a tool based upon a 2001 paper by Greg Mankiw for predicting where the Fed will set the Federal Funds Rate, which incorporates these factors into its calculations. The following chart illustrates where the Fed might have set the FFR using Mankiw's version of a Taylor Rule compared to where they actually did from January 1996 through September 2007:

Predicted FFR vs Actual, Mankiw Factor 1.4, January 1996 to September 2007

Going by this chart, we would anticipate that the Fed would leave the Federal Funds Rate unchanged, as it appears that the FFR is pretty much in sync with where Mankiw's method would put it today (the target FFR is currently 4.75%, but the effective FFR is 4.96 which is exactly where Mankiw's method would place it - this suggests no change will be made.) However, this chart also illustrates a potential problem with using this method, particularly since 1999, as it would seem to consistently overstate where the Fed has actually set the Federal Funds Rate.

The problem with Mankiw's method is that it is based upon what the Fed did in setting the Federal Funds Rate (FFR) back in the 1990's when it maintained a much tighter monetary policy than it has in recent years. However, beginning with the 1999 run up to the perceived problems that might be encountered in the Year 2000 (anybody remember the whole Y2K thing?), the Fed has maintained a looser monetary policy.

We noticed this several weeks ago when we revisited the data. So, we started playing with the numbers built into Mankiw's model to see if we could adjust for this change. The following chart shows what we got when changing what we're calling the Mankiw factor from 1.4 to 1.6:

Predicted FFR vs Actual, Mankiw Factor 1.6, January 1996 to September 2007

Making this adjustment, we find that the method would have anticipated the Fed's previous rate cut to the current 4.75% target and that it would anticipate a further 0.25% reduction based upon inflation and unemployment rate data through September (the adjusted target rate would be 4.40%, but the Fed tends to move in quarter point increments.)

So, that's what we anticipate will happen. Of course, this modified method is of no use to anybody if they can't run the numbers themselves, so we've reworked our tool to allow you to adjust all the parameters as you see fit! As before, you'll need to find the year-over-year change in the following inflation and unemployment data, as we've listed below:

and you can also now adjust the Mankiw factor to help account for the relative tightness or looseness of the FOMC's monetary policy, as well as what we're calling the Mankiw constant, which would be the combined fixed rates of unemployment and inflation against which the FOMC would appear to be adjusting their targets.

Inflation Data
Input Data Values
Most Recent Month's Consumer Price Index, All Items, Less Food and Energy, Not Seasonally Adjusted
Same Month, Prior Year's Consumer Price Index, All Items, Less Food and Energy, Not Seasonally Adjusted
Unemployment Data
Most Recent Month's Seasonally Adjusted Unemployment Rate (%)
Monetary Policy Data
The Mankiw Factor
The Mankiw Constant
Estimated Level of Federal Funds Rate
Calculated Results Values
Federal Funds Rate to Target (%)

Looking at our tool's results, you'll now either have the positive interest rate to which the Fed's Open Market Committee will set the Federal Funds Rate, or in the case you get a negative number, an indication that the Fed is likely to set the Federal Funds Rate near zero and will be using other means of manipulating the economy.

And there you have it. Now, you too have pretty much the same absolute power over setting monetary policy as Fed Chairman Ben Bernanke!

Update: Edited for greater clarity and better grammar. We might be in getting into the spirit of the season, but that hasn't diminished our need for coffee....

And while we're at it, we've also modified the tool to take the raw CPI data as a direct input, rather than making you find the year-over-year percentage change, just in case you're not like us and don't compute things like that in your heads....

Update 25 May 2012 Added the "looking at our tool's results...." paragraph immediately below the tool.

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29 October 2007

As Deer in the Headlights, So Are the Congressional Leaders of Our Lives.... You would think that with one political party in control of both houses of Congress and with a collective public approval rating of 11% (out of a possible 100%), that the people who run the U.S. Congress would eventually take action to get their collective House and Senate in order. Instead, after a continuing series of failures dating all the way back to when the current session began on 4 January 2007, the leaders of the U.S. Congress seem intent on pursuing a course that will not produce the one thing that could restore their reputations: positive results.

At this point of the 110th Congress, the failure of its leaders to produce anything resembling the results they desparately need are so great that we don't even have to identify any particular instance where they've failed. It pretty much applies across the board for everything they've done and the list is so long that we're not even going to bother producing one.

In fact, we can sum up the 110th Congress' problems in just four words: lack of quality leadership.

With that in mind, we're going to set all politics aside altogether. Let's talk quality. Better yet, let's quote quality so you can determine what quality principal applies to our current quality-lacking Congressional leadership. Here are our nine favorite insights from the Quality Gurus that ought to at least cross the minds of the Congress' current leadership, or would, if they were effective leaders:

  • If you talk about change but don't change the reward and recognition system, nothing changes.

  • There can not be improvement without new ideas, and there can not be new ideas without the participation of all.

  • Waste is like a fog all around us - concealing the truth!

  • What we want is the 5 Why's, not the 5 Who's (to blame.)

  • The worst thing a person can do is to ignore or cover up a problem.

  • What is the use of running when we are on the wrong side? Direction is more important than speed.

  • If you don't have time to solve problems, how come you always have time to do it wrong again?

  • Fix the process, not just the product.

  • Results come from doing the right things, not from doing things right.

Did you notice that while none of these things were written with the 110th Congress' leadership in mind, you can never-the-less apply each and every one of these insights to a specific failing or failure of the 110th Congress' leadership?

And what does the failure to deal with the poor quality leadership of the 110th U.S. Congress say about the true leadership ability of the members of the House and Senate who are both members of the majority party and running for U.S. President in 2008? We only ask as our tenth favorite quality insight is: "The time to repair the roof is when the sun is shining." What will it say about these individuals if they fail to stand up and take charge now when quality leadership in the U.S. Congress is so badly needed?

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26 October 2007

Carnival Midway from The Jerk Welcome to October 26, 2007 edition of On the Moneyed Midways, the blogosphere's only weekly review of the best of business and money-related posts collected from the week's major business and money-related blog carnivals!

What can you learn about negotiating from the contract offer the Yankees' made to their highly successful manager Joe Torre? How can you use Halloween candy to teach your kids about saving and investing, while also getting them to eat less of it? What really makes a house less of an investment and more of a place you want to call home?

The answers to these questions and the rest of the best posts of the week that was are awaiting you below....

On the Moneyed Midways for October 26, 2007
Carnival Post Blog Comments
Blogging About ERISA Simply Put, Drunk Driving Doesn't Happen by Accident Boston ERISA & Insurance Litigation Blog A recent U.S. Court ruling has found that the accidental death and dismemberment insurance you receive from your employer doesn't extend to injuries received while driving drunk, fatal or not. Stephen D. Rosenberg discusses the cases setting the precedent.
Carnival of Debt Reduction What Happens When the Tooth Fairy Is in Debt? Blogging Away Debt Tricia has a neat idea - instead of having the tooth fairy leave $1 per tooth under her son's pillow, why not have her insert a $25 savings bond there instead?
Carnival of Personal Finance Use Halloween to Teach Kids Money Lessons Grad Money Matters How can you use your child's Halloween candy stash to teach them about saving while also getting them to eat less of it? Ispf inspires the latest version of "trick or treat!"
Carnival of Real Estate Home… What's in a Name? SanDiegOh What makes a house from a home? Denny Oh looks at what the real estate market of recent years has done to people's perceptions in Absolutely essential reading!
Carnival of Real Estate How Your Business Can Benefit from Social Media Right Now agentgenius.com What's the right way and wrong way to use your blog, Facebook, Linkedin and Twitter to build your business through networking? Daniel Rothamel describes the in's and out's of all these applications.
Carnival of the Capitalists Joe Torre and Contract Incentives Conglomerate Blog Gordon Smith provides The Best Post of the Week, Anywhere! in describing the 'symbolic aspect of contracting' involved in the post-season negotiation between Yankees' skipper Joe Torre and team owner George Steinbrenner. Yes, it sounds dry, but believe it or not, it's something that anybody who might ever be involved in any kind of contract negotiation can appreciate.
Cavalcade of Risk Six Strategies for Risky Innovations SOX First Leon Gettler presents Christopher C. Geczy's list of things for investors to consider when putting their money into a new type of investment vehicle.
Economics and Social Policy Ivy League Universities Now Offer Online Degrees and Certificates Online College Blog Joy Miller describes the newest in online education options from those long standing and highly regarded Ivy League diploma mills.
Festival of Frugality Can Cheaper Goods and Lower Prices Put Us at Risk? A Photo Essay The Digerati Life The Silicon Valley Blogger frames the issue of being cheap and foolish versus being frugal and wise quite nicely!
Odysseus Medal (Real Estate) Wither False Blame? RealCentralVA Jim Duncan takes a scholarly article from the Wharton School of Business to task for its many disappointing claims, which would seem to include, in the words of Greg Swann, "a particularly lame lamentation about imaginary offenses by the sub-agents who no longer exist in many states."

Previous Editions


25 October 2007

Russell Shaw is a real estate institution, a very successful broker in the metro-Phoenix area who also happens to participate as a contributor to BloodhoundBlog, which is, in our view, one of the top two real estate-related blogs in the U.S.

He has a beef with the National Association of Realtors, which is seeking to increase what it charges its members to enhance their real estate listings on their web site:

Last year I paid Realtor.com about $3,300 to enhance my listings. Now they want to charge me $14,000 for the same thing. Dean Selvey's rate went from $3,800 to $30,000. Those numbers are not typos. Dean no longer does business with them. I told my sales rep that I would not pay it and that I did not want "a special deal for me". I wanted their rates put back where they were for everyone. They were supposed to call me. They didn't call and I don’t believe they are going to call.

Satire: Realtor.com for Dummies Running the numbers, the NAR's proposed increase would represent a 309% increase for Russell Shaw and a 689% increase for Dean Selvey, all for the purpose of being able to include additional pictures of the properties the agents are seeking to sell for their clients. (These increases go a long way to understanding the context behind the photo Russell included with his post!)

More than anything else, these price increases represent the near-absolute monopoly the NAR has established over the listing of properties for sale in the United States. In essence, the Multiple Listing Service (MLS) owned and operated by the National Association of Realtors *is* the real estate market in the U.S. By and large, if a property for sale isn't listed in the MLS, its prospects for gaining wide exposure in the market and consequently, for being sold at a fair market price, are sharply diminished.

The National Association of Realtor's near-absolute monopoly over real estate listings is so extensive that the Department of Justice initiated antitrust proceedings against the NAR in 2005, which a court upheld late last year. At present, the case is still pending.

But, as part of the antitrust case revolves around the high commissions paid to real estate agents, it also helps explain why the NAR is now seeking such extreme increases in the prices it charges agents for listing their properties on the MLS. Russell Shaw has reviewed the DOJ's web site for the matter and uncovered what may well be driving the NAR's pricing strategy:

This is my favorite page on the site. I liked it a lot because the page it linked from had this quote:

"Brokers typically charge a commission based on a percentage of the home’s sale price. Over the past decade the average commission rate has remained relatively steady between 5.0 and 5.5 percent. As a result, the actual median commission paid by consumers rose sharply along with the run-up in home prices.

Unless broker costs were also rising sharply during this period of time, competition among brokers should have held commissions in check even as home prices were rising."

The word, "costs" was bold on their site, as well. Unless broker costs also went up (where the brokers could actually prove they had to spend more) competition SHOULD have held commissions in check. My costs have gone up in the past nine years. Way up. My acquisition cost per listing and my costs to service each listing has gone up, as well.

In a nutshell, the increases in the prices the National Association of Realtors is charging for "enhancing" listings on its Multiple Listing System are taking place solely for the purpose of hiking costs, so that the commissions paid to real estate agents and brokers will not lowered. That way, if the "cost" for real estate transactions goes up, the government's anti-trust case against the NAR becomes less compelling.

Of course, the only way this pricing strategy can work is if the NAR has a near-absolute monopoly over real estate listings, but we suspect that their attorneys might have a creative argument to dispute that's the case with the DOJ's antitrust division. For those of us in the real world, let's just appreciate the chutzpah involved as being one of the perks of having a near-absolute monopoly!

HT to Russell Shaw (again) regarding the satirical image featured in the upper right corner of this post (click here for a larger image!)

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24 October 2007

Following the release of the largest study of cancer ever for Europe, we previously compared the U.S. and Europe with regard to five-year cancer survival rates for all types of cancer, but that left open two big questions:

  1. What about Canada?
  2. What about different kinds of cancer?

To find out where Canada ranks among the U.S. and the various nations of Europe, we turned to the National Cancer Institute of Canada's recently released report Canadian Cancer Statistics 2007, which provides the five-year cancer survival rates for all types of cancer for all the provinces of Canada but Quebec. We've incorporated this data into the following chart, which now shows where the U.S., Canada and the nations of Europe rank with respect to each other in this measure of health care effectiveness:

Five Year Cancer Survival Rates (All Types of Cancer), US, Canada, Europe

The chart above shows the breakdown of five year cancer survival rates between men and women for patients diagnosed with the condition between 2000 and 2002. The data for the European nations and the U.S. comes from the Eurocare-4 study, and is ranked according to the percentage of women who, after being initially diagnosed with cancer, have survived for at least five years.

The chart reveals that the U.S. ranks at the top when it comes to surviving cancer, but with Canada closely behind, generally ranking ahead of all the nations of Europe. The exception is for Swedish men, who come in second for overall survival rates.

We should also note that the Canadian data is not presented with the same accuracy as the European and U.S. data, which may affect the nation's position in the scale due to errors in rounding the underlying numbers.

We next turned our attention to how the U.S. and Europe compared with respect to different kinds of cancer. For that, we turned to Jody of the PolySciFi Blog, who shelled out good money for the Eurocare-4 report presented in the August 2007 edition of The Lancet Oncology. We've presented the data she originally posted in an easier-to-read dynamic table format, which you may sort by clicking the various column headings:

US, Europe Five Year Survival Rates by Type of Cancer
Type of Cancer Europe US Better 5-Year Survival Rate
Stomach 24.9 (23.7-26.2) 25.0 (23.8-26.2) Par
Colorectal 56.2 (55.3-57.2) 65.5 (64.9-66.1) US
Lung 10.9 (10.5-11.4) 15.7 (15.3-16.1) US
Soft-tissue 61.2 (58.3-64.2) 65.1 (62.8-67.5) US
Skin 86.1 (84.3-88.0) 92.3 (91.5-93.1) US
Breast 79.0 (78.1-80.0) 90.1 (89.6-90.5) US
Cervix 60.4 (57.7-63.2) 65.8 (64.1-67.6) US
Uterine 78.0 (76.2-79.9) 82.3 (81.2-83.4) US
Prostate 77.5 (76.5-78.6) 99.3 (98.9-99.8) US
Testicular 97.3 (96.4-98.2) 95.4 (94.0-96.8) Europe
Kidney 55.7 (53.6-58.0) 62.6 (61.3-63.9) US
Thyroid 83.2 (80.9-85.6) 93.5 (92.2-94.8) US
Hodgkin's 81.4 (78.9-84.1) 80.6 (78.8-82.4) Par
Non-Hodgkin's Lymphoma 54.6 (52.7-56.6) 62.0 (61.0-63.0) US
Acute Myeloid Leukemia 14.8 (13.4-16.4) 13.9 (12.6-15.2) Par
Chronic Myeloid Leukemia 32.2 (29.0-35.7) 36.0 (33.1-39.1) US
All Men 47.3 (46.8-47.8) 66.3 (66.0-66.6) US
All Women 55.8 (55.3-56.2) 62.9 (62.6-63.2) US

In the table above, the first value given for the European and U.S. data is the average five-year survival rate and the range given in parentheses provides the 95% confidence interval for the data. The final column reveals which region between the U.S. and Europe provides better outcomes, with a ranking of par indicating that cancer survival rates between the two regions are roughly equivalent for the indicated type of cancer.

We've omitted including Canadian statistics for this portion of analysis given that not all types of cancer survival rates included in the Eurocare-4 study were available in our available data and also due to the lower accuracy to which the numbers that have been reported have been presented.

We find in the table's data that the U.S. generally ranks well ahead of the nations of Europe for surviving nearly all types of cancer.


22 October 2007

Blame Craig Newmark. No, not the Craigslist guy, we're talking about the *real* Craig Newmark. This morning, he linked to a Washington Post article featuring a mathematical formula and tool that's designed to measure the degree to which a music artist is 'selling out' by licensing their artistic products to be used in the commercial advertising for ordinary, everyday products, such as cars, soft drinks and underwear.

Update: We edited the previous paragraph after receiving an e-mail from Craiglist's Craig Newmark who confirms that he's real as well. The world will simply have to continue to be confused, as the statistics behind this site indicate that there can be only one....

The Moby Quotient (Source: Washington Post) The Washington Post's tool is a mixed affair. It offers an excellent graphic created by Todd Lindeman detailing the formula and providing entertaining suggestions for how to measure the degree of an artist's "integrity." But then, as you scroll down to where the tool's data input fields may be found, it gets pretty clunky.

You, as the user, are expected to remember all the things that go along with each of the different input factors that were presented in the excellent graphic. However, if you, as the user, are anything like us, you quickly forgot just about everything presented in the formula's graphic. That means you're going to be doing some serious up and down scrolling as you're using the Washington Post's tool. That process makes for a very clunky way of doing business.

Then, it gets stupid. Instead of providing your output right then, right there, the Washington Post takes the data you entered and sucks it back into the newspaper's servers, where we suspect it's probably pretty likely that they store it along with information about your computer and your location in a database, where it may well be used to target specific advertising your way.

So, if you are one of those people who get really upset by the idea of artists who sell out, well, guess what you just did. For free!

We know all this because of what the tool did when we clicked the "Calculate" button. Instead of quickly running the numbers and outputting the data directly, the entire page refreshed to include the results. That's a pretty wasteful way to do the programming for such a simple calculation.

We can do better. Here's our tool that's designed to do exactly the same math but that incorporates all the lessons we've learned, both tangible and intangible, in becoming the blogosphere's premier source for online tools.

Your role, should you choose to accept it, is to think about that artist you've always admired, their song that's always been one of your favorites, and which has perhaps now become irrevocably linked to dishwashing detergent, and enter the indicated data in the tool below to find out just how far the artist has gone down the sellout route:

Artist Sellout Data
Input Data Values
The disconnect between the client and time-honored rock-and-roll ideals.
(Halliburton, 10; Wal-Mart, 7; Apple, 4; Amnesty International, 1)
The sacredness of the song involved in the shilling.
("Imagine", 10; "Get Yr Freak On", 5; "Disco Duck", 1)
The artist's underground, nonconformist or punk origins.
(Rolling Stones, 10; KC & the Sunshine Band, 5; Clay Aiken, 1)
The artist's artistic reputation.
(Bob Dylan, 10; Justin Timberlake, 5; Bachman-Turner Overdrive, 3)
The artist's wealth.
(Paul McCartney, 10; Pearl Jam, 7; Aimee Mann, 4; Sufjan Stevens, 1)
Time since artist's heyday.
(Current, 1; Five years ago, 5; 1990's, 6; 1980's, 7; 1970's, 8; 1960's, 9; 1950's or earlier, 10)

The Moby Quotient
Calculated Results Values
Moby Sellout Score

The higher an artist's Moby quotient, the greater the degree to which the artist has sold out. The default data for the tool above is taken from the Washington Post's assessment of Led Zeppelin and their song "Rock and Roll" which is now used to hawk Cadillacs. Your artist's Moby Quotient may differ.

To be honest, this was a fun project for us! Then again, the combination of entertaining math and poor tool design is for us what offering crack to a junkie is like - a pretty irresistible combination. You can thank Craig Newmark for serving as our dealer....

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Depressed Worker Do you hate your job? Does what you do not inspire you? Do the people you work with drive you nuts? Are you ready to walk out the door?

Or is something holding you back? Do you have to keep putting food on the table? Paying the mortgage? Are other jobs not available? Or maybe they are, but do they pay enough?

Our latest Geek Logik-inspired tool can help you work through whether it makes more sense to fish or cut bait when it comes to what you do for a living. Just answer the questions below, and the tool will do the rest....

Job and Personal Factors
Input Data Values
Hours per day the song Take This Job and Shove It plays in your head
Your Age
How good is your current job?
(1-10 with 10 being "ambassador to Italy")
How many kids do you have?
Your chances of quickly finding another job
(1-10 with 10 being "already signed a new contract")
Your level of financial commitment
(1-10 with 1 being "mortgaged into next millennium")
Monthly salary you could expect to receive at a new job
Monthly salary at current job

Should You Quit Your Job?
Calculated Results Values
Quitting Index Score
What You Should Do

The threshold at which the tool's results will tip in favor of quitting your job occurs at a Quitting Index Score just greater than 1. As always, we point this out so you can play with the various factors to see just what combinations it might take to finally drive you out the door from your work!

Garth Sundem has this to say about the math formula behind this tool in his book (and by the way - don't you think you should stop putting off buying a copy?)

This equation, like a few others in this book, follows the model of desire versus practicality. If you really hate your job and you have a good chance of finding another just as good, why not quit? However, if the practicalities of your life leave you with little financial flexibility and you can get by now without outspending your salary on therapy, you might consider sticking around.

But then, if you're actually thinking about leaving your current job, and came to this tool to help you make your decision, you probably are already well acquainted with all these considerations. If anything, the one thing holding you back is likely not having that next job lined up and not really being able to pursue your search while working in your current position.

To that end, we'll point you to this helpful article from online job search site CareerBuilder, which describes how you might go about hiding your search for a new job from your current boss.

And while we're at it, here's a brief listing of our previous posts on the world of jobs and careers:

Getting a Job

On the Job

Money, Money, Money

Education and Jobs

Really, Really Bad Jobs

Trends in Good Jobs

Out of a Job?

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19 October 2007

Carnival Midway from The Jerk Welcome to the Friday, October 19, 2007 edition of On the Moneyed Midways, the only place you'll find the best of the blogosphere's business and bucks-related blog carnivals!

It was a slower week for the blog carnivals we cover, being off weeks for many of the biweekly and monthly editions, but the blog carnivals we've featured more than made up for it in quality. First, the Carnival of the Capitalists, the oldest of the business blog carnivals, is celebrating its fourth anniversary (actually Part 2 of its fourth anniversary!)

Then there are two carnivals where the hosts made an exceptional effort in putting together their featured posts. The Mighty Bargain Hunter led the way with a Dr. Seuss inspired edition of the Carnival of Personal Finance. This kind of effort is a good example of the kind of thing that can fail miserably in less capable hands, but MBH really pulled it off.

The other carnival of note is the HR Capitalist's edition of the Carnival of HR. Now that major league baseball is finally in playoffs, the hosts tie-in of baseball staffing positions with the week's contributed posts played really, really well. It also doesn't hurt to also feature The Best Post of the Week, Anywhere! either!

If nothing else, we're satisfied that we've provided the best overview of the best posts from the best blog carnivals of the week that was - and it's all waiting for you below....

On the Moneyed Midways for October 19, 2007
Carnival Post Blog Comments
Carnival of Debt Reduction The Speakers A Penny Closer Eric is taking advantage of a unique sub-account at online bank ING to build up enough cash to pay for new speakers in the first time he's ever saved to buy a big ticket item instead of charging it.
Carnival of HR Great Workplace Programs Aren't Enough Three Star Leadership Blog Wally Bock has the best quote of the week in The Best Post of the Week, Anywhere!: "people join companies, but they leave managers."
Carnival of Money Stories Quality of Life Is More Important than Dollars Cash Money Life Could your family take a $20,000 pay cut and improve the quality of your lives? Patrick shares how he and his wife made it work.
Carnival of Personal Finance Fat Tax Thrifty Penny Want to lose weight? Then try out Thrifty Penny's new system for penalizing yourself when you display unhealthy habits that promote obesity - a fat tax! Best of all, no government needed!
Carnival of Real Estate Gold Jacket? Ummmm … Maybe Phoenix Arizona Real Estate Why should a new real estate agent sign up with Century 21? Why should an established real estate agent stay signed up with Century 21? Jonathan Dalton considers the power of reputation in choosing an outfit (and not just a gold-colored jacket!)
Carnival of the Capitalists Kitchen Nightmares Blogblivion Jay Solo has been watching celebrity chef and restaurant turnaround expert Gordon Ramsey's Kitchen Nightmares, which recently featured a family restaurant where the family's dysfunctional dynamics pretty much doomed any chance to truly turn the business around.
Festival of Frugality 40 Acres and a Mule - Free Land Still Available in the United States The Happy Rock With so many people moving out of farm country in the U.S., some local economic development agencies have turned to some very unusual incentives to entice newcomers! Absolutely essential reading!
Odysseus Medal (Real Estate) Buyer Beware: You Don't Have to Use the Mortgage and Title Companies Affiliated withYour Real Estate Broker. Make Sure You Shop Around! Bigger Pockets Joshua M. Marks, Esq. highlights a legal case in Minnesota revolving around how brokers steer their clients to certain title, settlement and mortgage companies in a practice that Odysseus Medal host Greg Swann calls "white shoe corruption." Absolutely essential reading!

Previous Editions


18 October 2007

Spam Alert! Spam is a fact of life for just about anybody who has an e-mail address. Like most people who are compelled to fight against the endless stream of mindless e-mail messages, we have continuously sought to strain it from our in-boxes before finally clicking it out of existence. Who could really take these messages seriously?

But then, we began to wonder if maybe we were missing something. What if the people behind the millions of messages were really just trying to reach out to us the only way they knew how, with their banks of internet-connected computers and specially programmed virus software developed specifically for the purpose of randomly propagating enough spam to maybe, just maybe get past our spam filtering software program? Who are we to say that all their efforts should be wasted?

And so, instead of automatically deleting the contents of our spam filter, we decided to go through the assortment of 167 pieces of spam that have accumulated since we deleted the filter's contents earlier today and pick five that we'll reward by acknowledging the needs of the spammer behind the spam here on our blog. As we type this, we sense that 168 spammers might feel their world is, suddenly and somehow, a statistically better place. Make that 169....

Spammer Our Note to You
Sales We very much appreciated your spam on the subject of interdeal goff. Being huge interdeal goff fans, we were very excited to hear from you. Alas, we have no need at this time to purchase Authentic  Viagra directly from  Pfizer, although the opportunity to do so at  tax/vat free prices and same-day worldwide  shipping as a bonus was certainly attractive. Be sure to think of us again the next time interdeal goff comes up in your office!
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17 October 2007

The latest update of our signature tool, The S&P 500 at Your Fingertips, in which we've brought the tool up to date with all the price, dividends, earnings and inflation data for the S&P 500 through September 2007, comes just as the index has retreated below the new highs it has set in the past week.

For those just discovering Political Calculations, our S&P 500 tool can find the rate of return an investment in the S&P 500 would realize between any two months from January 1871 through September 2007, both with and without reinvesting dividends and with and without the effect of inflation! Here are the S&P 500's compound annual growth rates since January 1871, since September 2006 (Year over Year) and since January 2007 (Year to Date):

Selected S&P 500 Performance Data, January 1871 through September 2007
Annualized Rates Nominal Rate of Return (%) Rate of Inflation (%) Real Rate of Return (%)
Since January 1871 9.17 2.08 7.09
Year over Year 15.64 2.76 12.88
Year to Date 9.70 4.53 5.17

This month's bonus chart illustrates the history of the Price/Earnings Ratio (P/E Ratio) for the S&P 500 since January 1871:

S&P 500 Price Earnings Ratio, January 1871 through September 2007

For the chart above, the P/E ratio is found by taking the average monthly price per share for the S&P 500 and dividing it by the preceding 12 months of earnings per share for the index (one-year trailing earnings).

What might be surprising to most people is that the all-time peak in the S&P 500's P/E ratio was set nearly three years after the peak of the stock market in the midst (and previous all-time peak of the P/E ratio) during the bubble market of the late 1990s! This outcome is really a bit of a mathematical artifact - it occurred as stock market earnings bottomed out during the recession of 2001 while the forward-looking nature of the stock market anticipated a recovery, increasing the relative price per share with respect to the past year's earnings per share.

Since then, earnings in the S&P 500 have largely caught up to the index's price per share, which now puts the P/E ratio for September 2007 at 17.40, marginally higher than the P/E ratio's long term average of 14.87.

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16 October 2007

Does bootlegging really make sense as a business model? We asked this question after reading what Tax Foundation lead economist Patrick Fleenor said about interstate cigarette smuggling becoming more common in an opinion piece in the Wall Street Journal back on September 7 of this year (HT: Tax Foundation Policy Blog):

Something similar is going on all over the U.S., where cigarette taxes have on average tripled in the last decade, but treasuries aren't getting the revenue boost. For consumers, tax-free online cigarettes are only a mouse click away, and these purchases now cost the states more than $1 billion a year in lost tobacco taxes, according to the Campaign for Tobacco-Free Kids. Washington state, which levies a tax of $2.03 a pack, loses an estimated $200 million a year to out-of-state purchases, according to the Seattle Times. Californians smoke 300 million untaxed packs of cigarettes a year thanks to the Internet, smuggling, and out of state sales.

In New York City, where the combined city and state tax is $3 a pack, smugglers sell bootlegged cigarettes on street corners much like drug dealers. Three weeks ago a sting operation in Queens busted a black market tobacco ring of "unbelievable proportions," in the words of one official. The sting found a half-million untaxed cartons of cigarettes that were being sold out of car trunks to avoid the tax hit. The Tax Foundation estimates that half the cigarettes smoked in the Big Apple come from such illicit operations.

Open Pack of Cigarettes It would seem from this discussion that bootlegging is really a kind of arbitrage where the difference in the prices of an identical product between two markets creates the opportunity for someone to profit from that difference by buying the product in the lower cost market, transporting it to the higher cost market, then selling the product there at a higher price than what they paid. Only here, nearly all of the difference in the price of the product between two markets is solely the result of the taxes levied upon the cigarettes, which runs afoul of the laws in the places where bootleggers seek to sell their wares.

We wondered just how profitable bootlegging might actually be if we take into account the basic costs associated with the business of bootlegging. To find out, we build the following tool, which takes such factors into account as the difference in taxes per pack of cigarettes between two states, the price at which the bootlegger will be selling their product, the cost of transportation and the cost of labor.

One factor we left out entirely is any business taxes paid by the bootlegger. By definition, the bootlegger's business is all about evading taxes, which we'll assume carries over into their operations....

Cigarette Price Data
Input Data Values
Retail Price per Pack (Where Bought)
Retail Price per Pack (Where Sold)
Bootlegger's Selling Price per Pack
Cigarette Container Data
Number of Packs per Carton
Number of Cartons per Vehicle
Transportation Data
Distance to Travel One-Way (miles)
Time to Travel One-Way (hours)
Vehicle Operation Cost ($/mile)
Number of Trips per Year
Labor Data
Labor Pay Rate ($/hour)
Additional (Non-Driving) Labor Time (hours)

Bootlegging Basic Business Costs per Trip
Calculated Results Values
Estimated Revenue per Trip ($)
Estimated Cost per Trip ($)
Estimated Profit per Trip ($)
Estimated Annual Revenue, Costs and Profit
Estimated Annual Revenue ($)
Estimated Annual Costs ($)
Estimated Annual Profit ($)
Potential Savings for Bootlegger's Customers
Percentage Savings Compared to Paying Retail Price (including Local Tax)

The default numbers for the tool above are taken for Maryland (as the state in which the bootlegged cigarettes will be sold) with Virginia as the state in which the product will be purchased. The retail price per pack has been increased by $1.00 to show the effect of the tax increase the state's Democratic governor has recently proposed.

One other assumption that we have made is that the bootlegger is competing against the state's established cigarette retailers who must price their packs to include the full state excise tax, which means that the bootlegger must offer a lower price - we've opted for an even $5.00 per pack, but the beauty of our tool is that you can run whatever numbers you like. If you think you could sell at the retail price, plug it in. Or if you think you should sell at a lower price, use that instead!

Speaking of which, we've also assumed that the bootlegger is only hauling 30 cartons of cigarettes across the Maryland-Virginia border in their car once a day, on 260 days in a year - much like the regular commuters whom they would blend in with might do in the regular course of their workday. You might consider increasing the number of cartons being carried (as you might if you filled a van with cigarettes) and perhaps reduce the number of days you bootleg cigarettes across state lines.

Even with the very limited numbers we used, we find that our prospective bootlegger would clear nearly $70,000 in raw profit each year. That probably marks the high end of what a bootlegger could expect as most Maryland smokers would shift to making cross-state cigarette buying trips themselves, but in either case, that's a lot of revenue that Maryland's cigarette vendors and state government aren't going to get unless they go out of their way to target these individuals.

It turns out that state governments targeting individuals making cross state line cigarette runs is not some theoretical exercise. Presently, the state of Tennessee has already initiated a program designed to increase the penalties to individuals found carrying "surplus" cigarette products into the Volunteer State:

Smokers who cross the state line to buy cheaper cigarettes could see their cars searched or seized as Tennessee tax agents start cracking down on the practice, revenue officials announced Friday.

Stores in border towns have seen business dip since July 1, when the state more than tripled its tax on cigarettes to 62 cents — a bump that made per-pack taxes in Tennessee higher than any of its neighbors.

Laws already on the books prohibit people from bringing more than two cartons of smokes across the line on any one trip, and now David Remke with the state Revenue Department is warning Tennesseans that his staff plans on enforcing the often-ignored rule.

He said the state is out to protect its corner stores and tobacco shops.

"It's not fair to them that they've lost a lot of their business," said Remke, director of special investigations. "Really from this point forward, people need to be aware" of the law.

Clarksville resident Sherman Allen didn't know it was illegal to stock up on tobacco in other states, and he wasn't happy about it when he found out about the crackdown.

"They can't do that. People have a right to buy where they want to buy," he said while shopping at a convenience store in Oak Grove, Ky. He buys all his cigarettes across the state line. "They can't dictate where I buy nothing."

Not being Tennessee tax agents, we're not exactly sure how this practice doesn't trip over both the fourth amendment restrictions against unreasonable searches and seizures of private property and the commerce clause in the U.S. Constitution, but that doesn't make any such "enforcement" exercise any less of a risk for those seeking the best price for cigarettes.

At the very least though, we find that the potential money that might be made from exploiting a state's poorly considered tax policy will prove to be an irresistible lure for individuals seeking to make it big through the black market.

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15 October 2007

Calculator Via Greg Mankiw, we find that the National Bureau of Economic Research has stormed onto our turf by launching a tool based on recent economic research into when people should refinance by exchanging their old fixed-rate mortgage with a new one!

What It Does

The tool is based on an NBER paper by Sumit Agarwal, John Driscoll and David Laibson, which develops a mathematical solution for determining the optimal interest rate threshold for which a homeowner should refinance their mortgage.

In finding the fixed interest rate at which a homeowner should refinance, the tool factors in such considerations as how much money is current owed on the existing mortgage, how much time is left for the mortgage to be paid off, its interest rate, the homeowner's income tax bracket, how long the homeowner expects to remain in the house and the points and closing costs for the new mortgage.

Beyond these basic factors, an advanced section of parameters also allows users to incorporate factors such as their personal discount rate for future costs, the average rate of inflation and the annualized standard deviation for mortgage interest rates. Most tool users won't need to adjust these figures, but might consider doing so to better reflect their expectations and their mortgage market.

In return for entering all this data, the tool determines the highest interest rate for a new fixed-rate mortgage for which a homeowner would benefit by refinancing. If a new fixed-rate mortgage available to a homeowner has a lower interest rate, their decision to refinance would become even more beneficial.

The User Interface

The user interface for entering data in the tool is straightforward, but slightly clunky as the tool's designer opted to minimize the amount of vertical scrolling that a user might have to do by using a split-table design. The good news here is that most users will only use the left-half of the user input (covering the basic factors), and will simply ignore the right half (the advanced factors).

NBER Optimal Mortgage Rate Tool Interface

This raises an obvious question: since most people who would benefit from using the tool won't be changing these factors, why bother including this part of the user interface for them?

From our long experience in putting tools on the web, we find that including this advanced section is a smart thing to do. The reason why is that it allows others who might have a very different set of assumptions about their economic environment to incorporate them into the tool's calculations, making it more useful for a broader range of situations (such as might differ from those in the U.S.) Including this section also has the side benefit of increasing the credibility of the math behind the tool, which is not a small thing to take for granted, particularly in the area of what future cost discount rate might be appropriate to consider.

Where the NBER tool falls short however is in what happens after a user clicks the "Calculate Optimal Mortgage Rate" text button. Rather than simply providing an output data field directly on the tool's interface, the tool's web page refreshes and provides the result above the input data fields.

This approach has several shortcomings. First, from the user perspective, it creates a delay as the entire page must be regenerated on their web browser. This delay may vary for several factors, such as the user's bandwidth (speed of Internet connection) and the NBER's server load (how busy the computers are where the calculations are run). As we ran the tool, we experienced a delay of several seconds while waiting for the page to refresh.

Second, from the NBER's computer administrator's perspective, it's a taxing approach for providing a relatively simple calculation. The tool's interface must be fully transmitted at least two times, not to mention the computing resources that must be consumed for just running the calculations.

This isn't a big deal if only a handful of people choose to do so at one time or if the NBER's server has ample capacity and bandwidth available to it, but this can bog down the entire server's performance if a large volume of people choose to run their numbers at one time or if the server's bandwidth and capacity are lacking.

The Bottom Line

While the presentation of its results might be substantially improved, the NBER's tool for finding the optimal interest rate at which to refinance a fixed rate mortgage is a highly useful resource. If you're thinking about refinancing, use it!

Previously on Political Calculations

We're not idle spectators when it comes to considering refinancing or the tools that you can use to find answers you might want to know! Here's our short list of our tools and the questions we've tackled in this area:

Refinancing: Time to Break Even

How many months will it take to make back the money it cost to refinance your loan?

Refinancing: How Much Will You Save in the Long Run?

How much will keeping your loan cost over its remaining life if you leave it as it is? And how much will your refinanced loan cost over its full term?

Does Home Loan Consolidation Make Sense?

If you have a mortage *and* a line-of-credit that taps the value of your home's equity, would it make sense to considate both kinds of debt into a single loan?

How Much Equity Is in Your Home?

If you're looking to tap the value of your home to refinance your debt, our tool will help you figure out how much equity you've accumulated!

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12 October 2007

Carnival Midway from The Jerk Welcome to the October 12, 2007 edition of On the Moneyed Midways, the blogosphere's only collection of the top posts from the best of this past week's business or money-related blog carnivals!

We're absolutely enchanted by a post about doing business in Thailand - and it doesn't help that the post is from an individual whose site is set up to trade artwork produced there! Beyond that, you'll find posts that take you inside your medicine cabinet, brings a doctor to your home, changes your oil and that take on the Rich Dad in this week's edition, not to mention the rest of the best posts of the week that was!

On the Moneyed Midways for October 12, 2007
Carnival Post Blog Comments
Blogging About ERISA 1875: First Private Pension Plan in the US For the First Time (or the Last Time) Michael N. Marcus recaps the history that led to the first private sector pension in the U.S. on his really neat blog, which is dedicated to changes that mark the first or last time something occurred that we might now either take for granted or have long since forgotten.
Carnival of Debt Reduction Can You Go One Day Without Spending a Dime? My Two Dollars Even though you might think you're not spending money, David reveals that you're spending your hard earned dollars continuously!
Carnival of Personal Finance The 3,000 Mile Oil Change Myth Money Blue Book Do you really need to change your oil every 3,000 miles? Raymond finds that modern engines are well equipped to go much further between oil changes.
Carnival of Real Estate The National Association of Realtors' Wacky Predictions Money Blue Book Raymond records the predictions made by the NAR's previous lead economist that were, shall we say, rather wide of the mark. And the target. And the broadside of a barn. And the ballpark….
Carnival of the Capitalists Why the Rich Get Richer: An Entirely Different Perspective The Digerati Life What is it about the rich that makes them so envious? The Silicon Valley Blogger shows how envy, while often fueling so-called class conflict, can also be a positive force if channeled to productive ends. Absolutely essential reading!
Cavalcade of Risk Physician House Calls Healthcare Economist What if your personal doctor was on call 24/7 and made up to two house calls a year for a relatively low annual fee? Jason Shafrin describes the entrepreneurial practice of Dr. Jay Parkinson in Absolutely essential reading!
Festival of Frugality Under the Weather and Over the Counter Bargain Quest Alison has been reading the labels of many over-the-counter medications and discovers that they're just about all some combination of just five different ingredients! Knowledge that might be used to switch to less expensive generic medications.
Festival of Stocks Is Rich Dad the Great Black Swan Hunter The Dough Roller The Dough Roller takes on Rich Dad, Poor Dad author Robert Kiyosaki, who scoffs at the lessons of Nassim Nicholas Taleb's Black Swan.
Festival of Stocks Dividend Stock Wednesday: Canadian National Railway (CACNR) The Dividend Guy The Dividend Guy runs through a fundamental analysis of the great Canadian railroad company - should you consider adding it to your portfolio?
Odysseus Medal (Real Estate) Financial Models for Underachievers: Two Years of the Real Numbers of a Startup How to Change the World Glenn Kelman guest blogs at Guy Kawasaki's blog on his experience in planning his new company's budget versus what they actually spent.
Small Business Issues Owning a Business in Thailand (Part One) art Thailand Adam Bryan-Brown illustrates the attractions, obstacles and lessons in establishing a business in a foreign country. The Best Post of the Week, Anywhere!

Previous Editions


About Political Calculations

Welcome to the blogosphere's toolchest! Here, unlike other blogs dedicated to analyzing current events, we create easy-to-use, simple tools to do the math related to them so you can get in on the action too! If you would like to learn more about these tools, or if you would like to contribute ideas to develop for this blog, please e-mail us at:

ironman at politicalcalculations

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