Capital Stock and Retiree Income

Social Security and pensions are a growing concern for many people these days.  Retired people and those nearing retirement are especially concerned about these issues as they affect such people directly.

Most people look upon this crisis as a financial or money issue and it is true that a growing lack of money available in retirement funds is the main indicator that a problem is at hand.

However, money itself is merely the means by which we measure the ability of the government or private employer to pay the promised retirement benefits.

No one can survive without access to the food, clothing and shelter needed to sustain life.  And, most want more than the basic necessities of life.

There are only two ways to obtain necessities and desired extras and that is to either work and produce these things or rely on the labor of others.   However, relaying on the labor of others assumes that the others in question are both able to produce more than they need and are willing to share the surplus they produce.

The ability of working people to support themselves plus those who are unable to work is dependent upon the availability of capital, developed land, knowledge and organization accumulated through past savings and investment. 

These tools make workers more productive and better able to produce sufficient quantities of goods and services to meet both their own needs and desires as well as the needs and desires of those not working.

Investment requires that some production be diverted from production of consumption goods and devoted to producing the capital goods needed to both replace capital stock that is wearing out due to use as well as creating the additional capital goods needed to keep the economy growing and expanding.

Savings requires sacrifice.  Sacrifice in the form of choosing to forgo consuming a portion of one’s income now by either setting that portion aside for a future emergency or investing it in tools that will enable them to produce more in the future.

In times past a farmer could increase his wealth by a combination of working extra hours clearing new fields for planting and then he and his family tightening their belts and saving and extra portion of the current year’s crop as seed to plant in the new fields next year.

Then, instead of enjoying all of the new, larger crop, some could be sold or bartered in exchange for better equipment and/or draft animals to enable him to produce more in the same amount of time.

Modern urban workers do the same by setting aside money out of current income for emergencies and as savings for retirement.  

This savings takes the form of investments in income producing assets such as bank accounts, stocks, bonds, real estate, a business, etc.  Unless the worker owns a business in which he is investing in and growing, the savings is usually assigned to organizations or professionals who do the actual investing on behalf of the worker.

It doesn’t matter whether the worker is a famer or small business person investing in their farm or business or simply one who places their savings with professional investors.  The result is the same, namely resources going into the production of tools to enable workers as a whole to produce more in the same amount of time.

Continuing investment is needed for two reasons.

First, a certain level of current investment is continually needed to replace equipment that wears out and is no longer operational.

Second as the population increases or, as is happening in many nations, ages and the aging workers retire, existing workers have to produce more simply to provide for themselves and the young, old and infirm who cannot work and produce. 

While older retired workers are still consuming but no longer working and producing the legacy of productive capital produced from their savings leaves the new generation of workers with the ability to produce and support both themselves and the retirees.

Next:  Why Social Security and Pensions are in Trouble

Allowing Bush Tax Cuts to Expire Now Makes no Eonomic Sense

 As we approach the December 31st Fiscal Cliff one of the major points of debate is taxes.  Specifically increasing taxes on the rich.

President Obama and other left-leaning Democrats are targeting three types of income the taxes on which were reduced during the administration of former President Bush and which are slated to automatically increase at the start of 2013.

The first is the tax on dividend and capital gains income.  Capital gains refer to the difference between what a person paid for and asset (with stock being the most common asset affected) and what that person received when the asset was sold.  If the sales price is higher than the purchase price the difference or profit is referred to as a capital gain.

Dividends,of course, refer to the periodic dividends or portion of a company's profit that corporations pay to their stockholders.  Profits are already taxed once in the form of the  tax that the Federal Government levies on a corporation's  profit (i.e., revenue minus expenses).  Any dividends paid come out of the corporation's after tax profits.  Stockholders then have to turn around and pay additional tax on the dividends they receive.

The Bush Tax Cuts eliminated the tax on capital gains and dividends for those in the two lowest income tax brackets which are currently the 10% and 15% brackets and set the maximum tax on these for people in the brackets above these two bottom brackets at 15%.

These two taxes will go up unless the current rates are extended by Congress

The second area of income affected will be income from sources other than capital gains and dividends.  This is basically wages, salaries, bonuses and other income earned as compensation for work performed.  

Here the President is claiming to want to keep current rates for those with this type of income below $250,000 and raise the rates on those earning more than $250,000.

Since our income tax system is progressive this means that the government will accomplish this increase by increasing the tax rate on upper brackets of income as well as creating some new brackets at the top end of the bracket scale.

The problem with increasing the tax rates on the top income brackets is that many wealthy people have the ability to reduce their income by working less.

It makes sense to work less when the tax rate on the higher income resulting from working longer and harder is such that most of this extra income is taxed away. 

When high income earners do this the government not only loses the projected tax revenue that the high top rate would be applied to but also stand to lose taxes from other workers in lower brackets.

Take a small business owner planning to expand by adding an additional production plant, restaurant, store etc.  The expanded business will result in more income for the owner.  However, the expansion will also require the small business owner to hire more people. 

With almost 8% of the workforce currently out of work and looking for work and an additional 6% to 8% or more of the workforce wanting to work but has given up looking for work (thereby no longer considered by the Department of Labor as being in the workforce and unemployed) the government could collect considerably more taxes if large numbers of these unemployed people were earning wages and paying taxes on those wages.

The only things that President Obama will accomplish by raising taxes in the current economic climate will be to continue the present recession and continue running large deficits.

Could Retailers Begin Declining to Participate in the Black Friday Frenzy?

Today is Cyber Monday when workers who have been off for the four day Thanksgiving Holiday return to the office and continue their post-Thanksgiving shopping online using their office computers.

This is assuming they have any money left to continue shopping following the Black Friday shopping frenzy that retailers began on Thanksgiving afternoon and have continued through the weekend.

Is it possible that Black Friday could be losing it appeal to retailers?

Black Friday, of course, is the day following Thanksgiving that, for stores and shoppers, has assumed holiday status itself.   For many shoppers Black Friday almost eclipses the real holiday, Christmas, for which it is associated.  And, for sellers, Black Friday sales can mean the difference between a profitable Christmas Season or a not so profitable Christmas Season.

Normally black is associated with things that are bad or even evil.   Blackmail, black markets, black ops, black arts, etc. all conjure up images of crime or other anti-social behavior.

However, for one profession, accounting, black is good given that accountants have traditionally recorded profits with common black ink while making losses stand out by recording them using red ink.  

As Christmas and the tradition of extensive gift giving began becoming more popular beginning in the late nineteenth century, retailers began to see profits rise during the Christmas Season as shoppers began opening their wallets wider and spending more lavishly  on gifts for family and friends.

Occurring about a month before Christmas, Thanksgiving began to be looked upon as the day before the start of the Christmas shopping season.  This image was helped by the fact that, because Thanksgiving always fell on a Thursday, it didn’t make sense for most factories to re-open for just one day, Friday, and then shut down again for the weekend. 

Thanksgiving thus became the start of a four day holiday weekend and the day after Thanksgiving, Friday, became the start of the Christmas shopping season.

Thanksgiving, of course, brought families together for a day of feasting and fun and, being close to Christmas, got their minds on that big holiday get together that was only a few weeks away.  This was just the frame of mind people needed to get started right away on Friday, the day after Thanksgiving, with their Christmas shopping.  

Retailers, of course, saw this and began fanning the flames of the Christmas shopping spirit by offering special deals to lure shoppers out – after all, the sooner people start Christmas shopping the more time retailers have to lure them in.

The competition associated with the free market meant that all stores soon entered the fray with sales and promotions and, as time went on the sales and promotions became increasingly intense and widespread.  

All of this hype, of course, succeeded in firing up the competitive spirits of shoppers causing them to come out en mass and eager to hunt for deals.

The Friday after Thanksgiving soon became such a big shopping day that, for many retailers, the sales volume was such that it tipped the scales from breaking even or even losing money for the year to profit – i.e., the accountants began writing the bottom line numbers with black rather than red, ink.

However, Black Friday may be approaching the point where the shopping frenzy associated with it reaches a tipping point where store hours, shoppers and sales all begin to decline.

Shoppers in increasing numbers may be tireing of this and begin declining to join the Black Friday frenzy and, instead, enjoy their Thanksgiving while choosing to  spend the next day relaxing with their families.

More important, many businesses will begin finding that the ever increasing price reductions needed to lure consumers on Black Friday combined with the increasing costs associated with opening earlier and staying open with extra sales personnel result in losses rather than profits.

Results from last year indicate that, rather than getting the Christmas shopping season off to a strong and sustained start that added to sales and revenues, Black Friday tended to be a buying surge followed by a significant drop off in selling the following weeks.

Overall sales were as expected and in line with previous years but rather than being spread out over the weeks between Thanksgiving and Christmas, were concentrated on Black Friday.  

The problem with this for retailers is that while total sales are good in terms of merchandise sold, revenue is down due to price cutting and costs up due to extra costs of added staff and hours on Black Friday. 

Our Dismal Job Statistics - Part I

Despite the miniscule improvements the President keeps pointing to, the job picture in the United States is not good.  

While the current 8.2% unemployment rate which the U.S. Bureau of Labor Statistics (BLS) cited in their June 1, 2012 news release, is an improvement compared to a couple of years ago, it is still high compared to the rate in recent decades.

However, the picture gets gloomier when the other statistics in the BLS’s June 1, 2012 news release.

Before looking at these figures it helps to understand what the names of the various BLS employment categories mean.  You can view the entire glossary of BLS terms by going to the Glossary Page of their website.

Let’s start with the term unemployment.  While the term obviously refers to people who are out of work, the BLS definition is more restrictive.  Each month the BLS conducts a telephone survey of a randomly selected group of households in which it asks about the employment status of the members of the household.

To be considered unemployed a person has to be age 16 or older, to have not been employed in any paying capacity during the reference week and had to have been actively looking for work during the previous four week period.

The unemployment rate refers to the percent of the labor force that is unemployed (with unemployed referring to the definition of unemployment above).

Labor Force basically refers to all those who are engaged in paid employed or officially unemployed.  However, there are some exceptions.  The major exceptions are those who are in prison or other institutional settings and active members of the military - people in these groups are not considered to be a part of the labor force for BLS statistical purposes.

With these definitions in mind we can dig a little deeper into the statistics where we find a much darker picture.

The first thing to consider here is the fact that the 8.2% unemployment rate is based on the total number of those defined as unemployed as a percent of the Labor Force.  

However, this 8.2% is not evenly distributed.  In some states and regions the rate is higher while in others it is lower.

Even greater is the unemployment based on demographics.  For adult males overall, unemployment is 7.8% and for adult females it is 7.4%.  However, for teenagers it is 24.6%, for Hispanics it is 11% and Blacks 13.6% to name a few.  Lumping these and other groups together gives us the current national average rate of 8.2%.

While the percent of the labor force is a high single digit number, the number of living, breathing human beings that makes up that percent is a low EIGHT digit number - 12.7 Million people to be exact!

In my next post I will discuss three more classes of people who are out of work and need work but are not classified as unemployed and therefore not included in the 8.2% figure everyone talks about when discussing the current unemployment situation.

 Links for further reading:

Job Growth Still Lags Growth in Other Sectors of Economy

A Jobless Recovery
 

National Brewers Day - Celebrating Russia's Brewing Industry

The second Saturday in June is National Brewers Day in Russia.  This is the date chosen by the Russian brewing trade group known as the Union of Russian Producers of Beer and Soft Drinks.

Today, a little over two decades after the fall of communism in Russia in 1991, the twelve year old brewer’s trade group and the brewing industry itself offer a glimpse of the massive economic change, and the prosperity that has accompanied that change, that has occurred in Russia.

While workers groups were common in the old Soviet Union, trade groups are a product of the post-Soviet era.  

Under communism, production and other economic decisions were made by  bureaucrats.  Consumers had no say in the process and were left to purchase and consume whatever was available.  Planners, managers and workers got paid regardless of whether consumers purchased the products they produced or not.  

With no market prices to guide them and no profit to motivate them, workers and managers simply sought to produce the quantity planners decided upon.  

So long as a bottle factory produced the required number of bottles and a brewery produced the target quantity of beer things were fine.  This despite the fact that the bottle factory was often located in one part of the nation and the brewery in another and no means to get the bottles to the brewery or no means to get the bottled beer to stores.  

Quality was poor while shortages and misallocations were common. However, that was life under communism.

With the switch from communism to a market economy things changed.  Now, consumers no longer have to settle for low quality goods or buy vodka instead of beer when vodka is all that is available.

Today, Russian drinkers can not only have their choice of beverage types but also have the opportunity to choose between competing brands of the same beverage.  Gone are long lines outside of stores, half empty shelves inside and having to settle for whatever is available.  

Not only are there a variety of beverages to choose from on store shelves, there are also a variety of competing brands for each type of beverage.  

A 2011 census of breweries estimated that there were between 600 and 1,000 companies operating breweries in Russia.  Other sources estimate that, of these, about 40 large companies produce the majority of beer with smaller local operations and restaurants producing for their own use, making up the remainder.

So, let us lift our glasses and toast Russian brewers and their accomplishments in the new Russia.