The Absurdity of the Estate Tax

John Oliver rather brilliantly explains American wealth and how it is compounded by the estate tax here. He misses one little point though, when refuting a Fox commentator who says that while she doesn't have $5 million she would really like to someday and why should she then have to pay tax on it?

First, let's assume that she is married and she and her husband don't just accumulate $5 million each but accumulate $6 million. Each. A total of $12 million. And further, let's assume she makes it before year end and then dies this year. (The exemption is going up every year. By the time she's 80 it's hard to know what it would be.)

So her heirs are going to get $12 million. She's worried about the tax they'll pay.

Well, first of all, the first $5.34 million of her inheritance will be exempt from taxes. And the first $5.34 million of her husband's wealth as well. So, there is $10.68 million with marginal tax rate of 0. Nothing.

Now, after that, the tax rate is 40%. (And actually, 40% is the top rate. It might be lower for the first few million but I couldn't find that information. So this is worst case.) So, the remaining $1.34 million of the $12 million will be taxed $528,000.

For the whole $12 million, that  works out to an average tax rate of 4.9%.

To put that in perspective, a person who actually worked to earn only a tenth of that  - say $1.2 million - would pay about 34%. If they made 1/10th as much money, they'd pay 10X the tax rate. And of course if this TV commentator leaves behind ONLY $5.34 million, the heir's average tax rate is 0, considerably lower than the rate paid by working stiffs.

Hard Numbers Up and Soft Numbers Down - Americans Don't Feel So Good About Their Improving Economy

There has been some good economic news of late. And yet, Americans still don't have much confidence in the economy.

Yesterday we learned that GDP grew more than expected in the 2nd Quarter, hitting 4% for only the third time in more than 7 years.

New unemployment claims have dropped to their lowest point since 2008. As demand for employees begins to rise, so are wages. The "employment cost index" in the last quarter rose by the most since 2008.

 Based on performance through the first half of the year, the American economy is on track to create the most jobs since 1999. 

And yet, since yesterday's GDP announcement, the Dow has been down. Gallup's gauge of economic confidence dropped the most since last October's government shutdown. 35% of Americans said the economy is getting better but 60% said it is getting worse. 

If you look at this weekly table for Gallup, you see that all the "hard" data, folks who report being underemployed, or layoffs vs. hiring at their place of work, and how much they've spent - is going up. It's in the green. All the "soft" data, folks reporting on their optimism or how they feel about conditions, is going down. It's in the red. Just in the last week, there's been a rise of 4% in the number of Americans who think the economy is doing worse. This in spite of the data suggesting otherwise.

I'm not sure if the country has a psychologist able to explain this. So far, Gallup's confidence index has been a terrible predictor but it's probably a pretty good gauge of how people feel about what's going on. In the last week, with Russian backed separatists shooting down a commercial airline, Israelis and Palestinians lobbing missiles into each other's neighborhoods, an Ebola breakout in Africa, and the House - again intent on proving their commitment to irrelevant topics - voting to sue Obama, there has been an abundance of "make you feel bad news." Maybe the confidence index could be replaced with a more aptly named, "How ya' feelin'?" index.

US Economy Grows a Quarter of a Trillion - Now as Big as Europe's

You've likely heard by now that GDP grew by 4% in the 2nd Quarter. Here are some other intriguing things about the Commerce Department's 2nd Quarter Report that you may have missed.

GDP was up a quarter of a trillion, to $17.3 trillion*. To put that in perspective, the whole of the European Union - 28 countries that include Germany, the UK, and France - had GDP of $17.3 trillion in 2013. Our economy is roughly the size of Europe even though their population of 500 million is about two-thirds again our 300 million.

GDP grew even while the federal government shrunk. Nondefense spending dropped by 3.7%. This suggests that deficit estimates will be revised downwards again, as they have been throughout this recovery.

Exports grew 9.5%, indicating that the rest of the world is recovering as well. As the developed world expands, more consumers are "coming online," which is great news for American companies.

As a measure of how sustainable this economic recovery is, the savings rate rose to 5.3% even as consumption rose 2.5%. This expansion is not being fueled by easy credit and households taking on more debt in order to spend. (Or, as previously mentioned, a growth in government deficit.) Wealth is rising along with consumption.

The bad news is that the rise in personal income was mostly driven by increases in dividends. The growth in wages and salaries decelerated, suggesting that the labor market recovery still isn't putting upwards pressure on salaries. Not yet.

I predict that confidence in the economy will continue to go up but I don't think it will go up sharply until wages start to rise at the levels they were in the late 90s. The good news? That could happen within the next year.

* (Technically, its a little misleading to say GDP topped $17.3 trillion. In fact, the quarterly numbers mean that if GDP remained flat at this new level for three more quarters, GDP would equal $17,294.7 billion. For the first time it topped an annual rate of $17 trillion.)

Jung: My Patients All Seek Their Own Existence. Man Cannot Stand a Meaningless Life

Fascinating interview of Jung posted here at Maria Popova's brilliant site. Here are a few excerpts that stood out to me.

JUNG:  "I soon learned that when [Freud] thought something, it was settled. Whereas I was doubting all along." "[Freud’s] approach was different from mine because his personality was different from mine."

FREEMAN:  Where did you differ?

JUNG:  "[Freud’s] disregard for the historical conditions of man. You see, we depend a lot on our history. ... We are not of today or yesterday. We are of an immense age."

JUNG:  "I was often at variance with reality."

JUNG:  "We need more psychology. Because the only real danger that remains is man himself. He is the real danger. And we are pitifully unaware of it. We know nothing of man. His psyche should be studied. Because we are the origin of coming evil." 

FREEMAN:  As the world becomes more technically efficient, it seems increasingly necessary for people to behave communally and collectively, now do you think it’s possible that the highest development of man may be to submerge his own individuality in a kind of collective consciousness?

JUNG:  That’s hardly possible. I think there will be a reaction — a reaction will set in against this communal dissociation. You know, man doesn’t stand [put up with] forever, his nullification. Once, there will be a reaction, and I see it setting in, you know, when I think of my patients, they all seek their own existence and to assure their existence against that complete atomization into nothingness or into meaninglessness. Man cannot stand a meaningless life.

Data Shows that CEOs are Definitely Better at Becoming CEOs

Correlation between CEO pay and company performance is weak.

This chart from Eric Chemi and Ariana Giorgi plots CEO pay ranked from low to high along with company performance, ranked low to high. If CEOs made more money as their company performed better, the dots would neatly line up into an upward slope. They don't. The dots are all over the place. Per this data set, company performance explains about 1% of CEO's pay.

CEOs inevitably make more money than anyone else in a company. There are a lot of good reasons for this but there is only one thing we can definitely say about the folks who become CEOs: they are better than other people at rising to the position of CEO.

It's not easy to become CEO. It takes a lot of talent, persistence, people skills, diligence, patience, hard work and intelligence. It's worth it though. The rewards are huge. The average pay for a Fortune 500 CEO is $12 million, about 380X what the average worker makes.

But as you can see, the talent it takes to become CEO is randomly correlated with the talent it takes to actually boost company performance. That may seem like a subtle distinction but it should matter to stockholders.

When The Education System is Unaware That It Is a System: Transforming Learning

There is still not much evidence of systems thinking in education.

Systems thinking lends itself to some fancy talk but really is just an attempt to describe reality. It shifts the focus from parts to the whole, from actions to interactions. A systems thinking cliche is that the whole is greater than the sum of the parts. For instance, the example that the wonderful systems thinking pioneer Russell Ackoff loved to use was a car. An engine can't move you from place to place. Wheels can't do that. Not can a steering wheel or a car seat. The car's ability to move you from one place to the next results from the interaction of its parts, not the action of any one part.

Another way to put it is that the whole is different from the sum of its parts. Put two gases together, combine hydrogen and oxygen at the right ratio and you get a fluid. You could study the properties of these gases in isolation for decades and not predict water. Put two people together with lots of lonely between them, add them together and the result might be that all the lonely disappears.

An economy is a system. If people living alone were to specialize like they do as part of a big community, they'd quickly starve. It is the interaction of people that creates value. As our world becomes more interdependent, we become more affluent. As we interact and trade goods and services, and ideas and inventions, we create more value.

Even more importantly, we live in an ecosystem. Some things we do make the ecosystems we live in more vibrant. For instance, putting animals with hooves into a wilderness area can actually work the soil in ways that make it easier to retain water and grow more plants. Curiously, as plants gain a foothold on this soil, it actually changes the weather; moisture evaporates from these plants and is more likely to attract cloud systems, creating a virtuous cycle. And of course the reverse can happen as well as places become deserts. Sometimes ripple effects within a (financial, environmental, or any other kind of) system quickly die out and other times they amplify, like feedback.

Systems are also defined by context. What lives under water dies on land, and vice versa. The plant that produces oranges in Orange County is merely a decorative tree in British Columbia and can't even grow in Alaska. One of the most important interactions of a system is its interaction with its environment.

Systems dynamics define all the really important things, from personal relationship and society to ecosystems and economies. And the good news is that we're gaining more ability to model systems. Computers are one reason for this. Even computer games can help kids to gain an intuition about systems.

Systems thinking might be the most important dimension of a good education. Imagine children who assume that the environment or the economy are fixed and unchanged by whatever actions we take. Imagine children expecting them to be static rather than evolving. Imagine children whose education shows little appreciation for systems thinking.

An educational system that showed little appreciation for systems would probably, from the start, ignore a child's environment. Dismissing consideration for the fact that a child is growing up in poverty as the "soft bigotry of low expectations," education that ignores systems won't allow for the myriad challenges facing a child growing up in poverty. The level of expectation will be the same for these children and nothing will be done about their condition. One of the fascinating things about systems is that problem and solution are often separated in time and space. If you want the child prepared to learn you might be able to do very little about their learning by changing variables within the classroom and instead be able to do quite a lot by changing variables within the job market for their parents.

An educational system that showed little appreciation for systems would probably keep children in the classroom, ignoring the world around them. It would close them off from work, from the way the economy, companies, and government agencies actually work. It wouldn't continually get kids to think about how they might actually earn an income once they'd completed education but would, instead, just focus them on pre-defined subjects within a curriculum that imagines the world neatly falls into slices like orange segments, slices with neat labels like "history" and "math" and "business," never imagining that all of those topics are largely meaningless in isolation.

An educational system that showed little appreciation for systems would assume that it could prepare students for a role in stable systems, teach them how to become a politician, engineer, or accountant and make a career in such a role for 30 to 50 years. It wouldn't assume that students will have to create their own roles - perhaps even create their own businesses and organizations - forced to actually update or create systems rather than just take a role within them.

And an educational system that showed little regard for systems would be unaware that it was itself a system with all the odd and contradictory characteristics of a system. It would grade students on their performance within that system rather than adapt that system for the evolving realities of its students and the world it is presumably preparing them for. It would imagine itself more like a factory of education turning out a product measured by standards and GPA rather than a system into which unique people would enter and from which unique people would leave, each heading into some unique corner of an evolving economy and world.

If indeed our world is defined by systems dynamics, it is worth asking why our education systems largely behave as if it is not. Or for that matter, behave as if it is not, itself, a system.

Phone Call from LA to San Francisco for Only $22 a minute

In 1899, a carpenter made about 50 cents an hour, so this payphone would have cost the equivalent of $22 a minute today.

Bad News for People Who Like Bad News, Part 2

The Congressional Budget Office is now projecting the 2014 fiscal deficit to be 2.8% of GDP this year, sharply down from original estimates of 3.7%, and even below the 3.2% we have averaged since 1980.

As an aside, the unemployment rate has averaged 6.5% so far this year. That is the annual average since 1980. And of course the rate is still dropping.

That's right. The deficit is now lower than average, as is unemployment.

I've previously reported that we are closing in on the longest streak in job gains (including public and private sector) since 1939. But if we exclude government layoffs and focus just on the private sector, we've already created the longest streak with the latest jobs report.

The average workweek in the manufacturing sector in March hit 42 hours, tied for the highest since July of  1945. 1945. (That bears repeating.) And hours worked is a nice leading indicator of growth in employment since companies usually put folks on overtime before they start to hire.

On a related note, Gallup's job creation index hit its highest level since February of 2008. In the 52nd consecutive month of job creation, the job creation index hit its highest level yet. There is no sign of a slowdown yet.

Housing starts broke a million this spring for two months in a row. New car sales hit an annual rate of 17 million in June. The last year in which the car industry sold more than 17 million "light vehicles" was in 2001. Sales are up 10% from January and up 25% from 2011.

That's good news. Which is bad news for all the pundits who prefer to start their sermons with warnings that we're all going to hell with our handbags if we don't change our ways.

Emotional Truth Has Little To Do With Actual Events

Novels and movies would not work if our emotional reality were not separate from our sense of what is real or fiction. We may know that we're looking at black marks on white paper but yet feel frightened or excited based on what we read. The reality - we are siting alone, safe at home - has nothing to do with what is vividly real based on our emotions. 

I was reminded of that this week when dealing with someone who had turned a possibility into a vivid inevitability. This person's emotional state was no different than if this event were really happening. In the world of actual events, it was a remote possibility. 

It's worth remembering when our minds latch onto certain possibilities, when we consider what might happen. We can let the pleasant feeling of a daydream substitute for the the actual event, a fantasy become a substitute for reality, fear or hope becoming proof. 

I think one of the harder things in life is sustaining emotional tension, the sort of unresolved feeling that leads you to action for sustained periods of time. It's much easier to lapse into hopelessness or daydreams than grind it out over long periods of time.

Happiness, Gaps Between the Rich and Poor, Confidence in Women Leaders and Other Comparisons Between the US and the World Cup Finalists

Perhaps the biggest difference between World Cup Finalists Argentina and Germany is in the gap between the rich and poor. Measuring it by the ratio of the top 10% to the bottom 10% of the population, Argentina's income inequality is double that of the US and Germany's is half.

This income inequality correlates with food insecurity. The US and Argentina leave  20% and  23% of their population feeling insecure about getting their next meal. By contrast, only 6% of Germans feel such insecurity.

Germany's per capita GDP is about triple Argentina's, but still less than the US.


Both Argentina and Germany report a higher percentage of their population is struggling. (49% of Argentinians and 45% of Germans, compared to 39% of Americans.)


In spite of struggling, the citizens of both World Cup finalists are more confident in their national government than are Americans. (Germans are nearly twice as confident).

Americans may have pioneered democracy but they seem to be looking in envy at the shinier, newer models in Europe and South America. Or perhaps citizens are just tired of men being in charge. The heads of state in Germany and Argentina are women.

And yet, for all that, Americans are happier than the citizens of either country, possibly suggesting that the US simply doesn't understand the importance of making it to the World Cup Finals.

[Many of these numbers were taken from Gallup.]

A Post-Apocalyptic Politics

Here's an odd relic from 1982. Mail order apocrypha. 

It plays to the worst fears of certain people, the sort of thing that would probably drive some to self-medicate. Before asking for your money, it first assures you that catastrophy! is imminent.

Of course now this sort of panic-mongering is no longer used by people selling the secrets of UFOnauts. Now it is used by politicians who convince people that Obama won't let you have your money or that Republicans won't let you have sex. (Which may be the simplest explanation for why the young disproportionately vote Democratic and the old vote disproportionately for Republicans. We all put more value on what we now have than what we aspire to.) 

Of course if the two sides didn't use a good dose of fear, turnout would be in the single-digits. In truth, policy that makes a real difference is kind of boring to most people and takes considerably longer to play out than a 0-0 World Cup tie or even a baseball game. Before you can sell them on your policies, it helps to sell them on the apocalypse. 

But who knows? Maybe in 30 years today's political debate will look as dated to folks as this does to us. ("Oh sure," say the apocalyptic political junkies. "He accuses us of apocalyptic politics. What about his pollyanna politics? He'll change his tune when catastrophy! strikes.")