Author: sgstofka

A Moving Story

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In response to my blog on rising office vacancies, Lydia, a veteran property manager, writes: “The only way to get a tenant these days is to steal him from someone else, and even that’s tough because a) moving costs money and b) landlords are willing to give concessions to keep existing tenants.”

Business people are moving – back home. “It’s back to the basement,” one office tenant told me. As the volume of work decreases for small businesses of one, two or three people, the owner can no longer justify paying the extra monthly expense for an office.

In the residential market, Conor Dougherty reports in a 4/23/09 WSJ article, that the Census Bureau recently reported a “national mover rate” of 11.9% in 2008, the lowest since the Bureau started keeping track in 1948. “About 35 million people moved” in 2008, compared to 39 million in 2007.

“Renters are five times more likely to move than homeowners are.” The number of people who relocate in the same area has been slowing for several years but this past year saw a steep decline. The western and southern areas of the U.S. have the most mobility.

State Taxes

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According to a Census Bureau report (follow link to Excel spreadsheet), the states collected $782B in taxes in 2008. That is about 70% of what the federal government collected in federal income taxes. This doesn’t include local taxes.

The Census Bureau breaks them down into major categories: Property, Sales and Gross Receipts, Licenses, Income and Other.

Alaska, Florida, South Dakota, Texas, Washington and Wyoming do not have a personal income tax. Texas, Washington and Wyoming do not have a corporate income tax.

13 states do not charge a property tax. Alaska, Delaware, Montana, New Hampshire, and Oregon do not charge a general sales tax. Alabama, Alaska and Arkansas do not charge an estate and gift tax. 16 states do not charge a severance tax, a tax on extracted resources like coal, oil and gas.

While Texas and Alaska do not charge on income tax, they don’t need to. Texas collects $4B in severance taxes, Alaska $7B. Together the two states collect almost 2/3 of all the severance tax collected by the states.

What did they spend all this money on? In 2008, Medicaid spending was estimated at $164B, a whopping 20% of state revenues. As unemployment continues to rise, Medicaid spending will also rise.

What steps are states taking to control these costs? As this Kaiser Family Foundation table shows, there is a lot of room for improvement.

Almost 2/3 of states have some pharmacy cost controls including approved manufacturers, use of generics where possible – routine controls that patients with health insurance encounter. Only 3 states have co-pays. The Federally mandated maximum copay for a Medicaid patient is $3, less than a Big Mac. As long as Health and Human Services designates such a low copay, most states probably will not bother to try and collect.

Only 8 states have any cost containment programs for long term care, which is 44% of Medicaid spending. As the population ages, this cost will increase dramatically. Only 3 states have any restrictions or reductions on benefits.

All of the states complain about the growing Medicaid expense and its impact on their budget. But what are they doing about it? Maybe we should ask our state representatives.

State Budget Shortfalls

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The Center on Budget and Policy Priorities (CBPP) reports that 47 states will probably face budget shortfalls in 2009 and 2010. The article contains a listing of all the states and their projected shortfalls. California’s budget gap is projected at over $13B this year and going to $25B in 2010.

Included in the recently enacted “American Recovery and Reinvestment Act”, the Federal Government will provide $135 – $140B in aid which will close about 40% of the total gap in state budgets. Bloomberg.com calculates that almost $13T has been pledged by the federal government to the financial industry.

Moody’s, the credit ratings firm, has recently issued a negative outlook on the creditworthiness of every local government in the U.S.

The CBPP article notes that “the vast majority of states cannot run a deficit or borrow to cover their operating expenditures. As a result, states have three primary actions they can take during a fiscal crisis: they can draw down available reserves, they can cut expenditures, or they can raise taxes.”

Small Business Stimulus

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In the 3/10/09 WSJ Small Business section, Kelly Spors notes that the federal stimulus bill mandates that the government “aims to award 23% of all contract dollars across all agencies to small businesses every year.”

There are several examples of new contracts recently awarded but the author notes the difficulties that small businesses have to secure government contracts. A company may have to invest a lot of employee hours to cope with the many regulations and abundant paperwork in order to bid a job. A former president of the Entrepreneur’s Organization says that it may be better for a small business to subcontract on a few projects to get some idea of what is required.

The government has a website where you can register and survey the various business contracts available.

Executive Pay

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On April 7th, the Chairman and CEO of the giant investment firm Goldman Sachs said that banks and securities firms should pay their top executives mostly in stock awards that should be held for at least three years to tie the performance of those executives to the long term health of the company. He further suggested that lawmakers and regulators might have to force these changes on the industry.

Top executives at these companies have long resisted stockholder proposals to change their pay structure. Long overdue is a restructuring of corporate bylaws in this country that enable top management to effectively freeze out the owners of the company.

Another long fought over issue is direct nomination of board directors by shareholders. Here is a brief summary of SEC proposals in the past several years.

Bailout Timeline

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The NY Times maintains an updated summary of the bailout since last September. You might want to print this out and keep it in your pocket or purse for those summer barbeque discussions with friends and family about who did what and when.

Bernanke is the Fed chief who took over from Alan Greenspan.
Bernie is Bernie Madoff who ripped off people for what may be over $50B. They sound alike so don’t get them confused or you might lose face in front of your brother-in-law.

Paulson is the former Treasury Secretary. He looks like the guy on WWF’s Smack Down in 2002 but that isn’t him although Hank Paulson was an All-American football player. Casually inform your brother-in-law that Paulson was an assistant to Ehrlichman during the Watergate scandal. That will shut him up.

Production Doldrums

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On April 15th, the Federal Reserve released its March data on industrial production. “The capacity utilization rate for total industry fell further to 69.3 percent, a historical low”

In a 4/15/09 WSJ “Ahead of the Tape” column, Mark Gongloff notes a Congressional Budget Office estimate that “GDP growth could be 7% below potential for the next two years” and that it is “the deepest underperformance since the 1981-82 recession.” The investment firm Goldman Sachs estimates that “getting GDP back to trend will require unusually fast catch-up growth – 4.75% per year in order to close the output gap by 2015, or 3.75% per year to close it in a decade.”

Gongloff concluded with a comment from Goldman Sachs that “such speedy growth closed the wide output gap of the early 1980s … and it didn’t create inflation.”

Big Pharma

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1993 was a good year for the American consumer. We thought we were OK. The drug industry spent only $104M in direct-to-consumer advertising for prescription medicines. By 1996, spending had increased to $585M. In Aug. 1997, the FDA relaxed advertising restrictions and we ain’t been healthy since. By 2007, drug advertising to consumers had climbed to $4.4B as the American public became sicker and sicker and the pharmaceutical industry showered us with solutions.

Men could take a pill and find their inner stallion. Another pill would help them go to the bathroom less frequently while golfing or boating or just driving around with their buddies.

Depression and monthly mood swings, cramps and bloating, sleeping problems, heartburn, high blood pressure, cholestorol and diabetes – we were encouraged to talk to our doctors.

“In the U.S., ads aimed at consumers typically account for only about 40% fo the total marketing budget for prescription drugs” a 4/16/09 WSJ article noted. “The majority of manufacturers’ promotional efforts are directed at doctors.” Those poor doctors. “Pharmaceuticals had become one of the largest ad-spending categories, ahead of ..the insurance industry, beverage companies and film studios.” Good for magazines and TV stations, bad for us.

Last year, print advertising for pharmaceuticals fell 18% while TV ads fell 4%. Given the economy, that’s understandable. So what about prices? In a 4/15/09 WSJ article, Barbara Martinez and Avery Johnson report that “prices of a dozen top-selling drugs increased by double digits in the first quarter [of 2009] from a year earlier.” Viagra is up over 20%, Cialis up 14%, an attention deficit disorder drug up 15%.

A pharmaceutical industry analyst said that drug companies are raising prices to use the higher prices as a starting point in future discussions with the government about discounted prices. Coming patent expirations on many drugs are also a factor as drug companies try to get what they can while they have exclusive rights on the drugs.

American Sisyphus

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Push rock up hill. Rock rolls back. Keep pushing rock.

In the 4/16/09 WSJ “Currents” column, Gary Fields notes that data shows that “over the last 10 years, education costs have risen 5.91% annually, and health-care expenses have gone up 4.16% annually, while wages and income have risen only 3.7%.” The CPI has risen 2.4% annually during that period.

This is the big rock of assets that Americans have been pushing up the hill. That rock really rolled back last year. The Federal Reserve “found that U.S. households’ net worth dropped by $11T, a decline of nearly 18%, during 2008. The decline equaled the combined output of Germany, Japan and the U.K.”

Tired Taxpayers

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On 4/10/09, I blogged about recommendations for tax reform from Nina Olson, an IRS advocate. On 4/20/09, a CPA wrote a letter to the editor in which he suggested that “each senator and representative [should] prepare his or her federal income tax return personally and .. the IRS [should] audit 100% of those returns each year.”

We must have some reform. Alternatives include 1) a tax on spending, or VAT; 2) a flat tax on income; 3) a tax on savings through fees charged on all stock and bond trades.

Here is a review of flat tax proposals. Here is a proposal for an optional flat tax by Kansas senator Sam Brownback.

A fair tax is a modified VAT tax (value added tax as it is called in Europe) with no tax for those below a certain income level. The home page is here, and a page explaining the rates are here.

We all agree that the current system is broken. Where we disagree is the solution. Perhaps the best thing would be to put a version of the three alternatives and the current system on a ballot for this November and have all of us vote on it. Lawmakers have been disagreeing on reform since the last tax reform of 1986 and it is doubtful that they could ever agree on a radical change to the code.

The disadvantage of the current system is that it invites Congress to “tweak” the code to reach certain admirable goals, but this constant tweaking is confusing and treats taxpayers like we are donkeys responding to carrots dangled in front of our eyes.

Tell your Congressperson that you don’t want to treated like an ass anymore.