Author Archives: Steve Feinstein

Not in Your Corner

© 2015 Steve Feinstein. All rights reserved.

 

This is an equal-opportunity political bash. It’s something that has bugged me for years and that politicians of all stripes are equally guilty of (although probably for different reasons, which I’ll get to at the end).

 

There are two really important economic elements that are of major concern to the average person on a moment-to-moment basis. These two elements affect many peoples’ daily lives to a larger degree than many other fiscal issues, most of which tend to be more theoretical and hypothetical than immediate and actual.

 

These two are immediate and actual:

  1. The relationship between crude oil pricing and gasoline retail pricing
  2. The interest rate that banks pay on savings/CDs vs. the interest they charge for credit card balances

 

There are two benchmarks for crude oil prices: West Texas Intermediate (WTI) and North Sea Brent. Those are the two indices that determine the price at which oil trades. Brent oil tends to be about 12-15% higher.

 

As of Friday July 17th, Brent was $57.1/bbl., WTI was 50.56.

 

The long-term historical relationship between crude oil pricing and retail gasoline price per gallon in the U.S. has been Brent x .035 and WTI x .04. (It’s actually easier to do in your head using just 3.5 and 4. You’ll know where the decimal goes.)

 

So, let’s see…$57.1 x .035 = $1.995. 50.56 x .04 = $2.02. Seen any prices at the pump like those recently?

 

Here in MA, the going price is around $2.70/gal. For Brent, that’s a 4.7 factor, not 3.5. For WTI, that’s 5.3, not 4. Holy smokes!

 

How the heck did that happen? Consumers are so happy and relieved that they’re not paying $3.75/gal like they did in the summer of 2014 that they just don’t realize how badly they’re getting gouged. In July 2014, Brent crude was $107/bbl., which was exactly $3.75/gal using the 3.5 multiplier. Just like it should have been.

 

How is gasoline $2.70/gal. now? I’m so mad every time I fill my car with gasoline I can hardly see straight. Now that you know how off-kilter the crude-retail pricing relationship is, you should be furious too.

 

WTI went down from $54 to $50 in the last week, since the Iran nuclear agreement was announced, as the oil market reacted to the knowledge that Iranian oil would soon be re-entering the market, exacerbating an already over-supplied oil market and putting further downward pressure on crude pricing. I was looking forward to filling the tank this weekend, confident that prices would be much lower.

 

They didn’t budge once cent. Not one red cent. How is that possible?

 

Now, on to issue number two: Bank payout rates.

 

Again, the historical divide between bank payout rates and bank credit card interest charges has been about 5-8%. 5% one-year CD interest rate, 11.99% credit card interest rate. That kind of thing.

 

These days, however, we find ourselves in this kind of situation—CD rates around 1.5% and credit card interest rates around 20%! Furthermore, most bankcards have instituted a policy of “two months interest,” even if you pay off an unpaid balance in its entirety the following month.

 

To wit: Lets say in Jan, you pay $700 of your $1200 balance. When Feb’s bill comes, you’ll be charged interest on the unpaid $500 from Jan, plus interest on whatever you’ve charged in Feb (that’s not fair, but that’s what they do.) Let’s say you charged $600 in Feb, so your total balance due is $1100 ($500 unpaid from Jan + 600 in Feb.)

 

You pay off the entire $1100 on time in Feb. Clean, now you’re back to zero.

 

In March, you charge $900. When that bill comes, it has an interest charge on the entire $900. How is that possible? You paid off the entire balance on time last month. This month’s $900 charges came on a zero balance. Enraged, you call the card company: “That’s just how we do it. It takes two months of on-time paying to wipe the slate clean of interest charges.” You have no recourse other than cancelling the card in protest—once you pay, of course.

 

At 20%, no less. This is loan-shark territory. This is what average people go through. This is why they never get their balance down to zero.

 

So, these two all-important everyday fees/costs have mutated far away from their historical norms and the average person is suffering as a result. It’s part of why there’s a general lack of consumer confidence and enthusiasm hanging over the economy. These are contributing factors to why the average consumer thinks we’re still in a recession.

 

Our lovely politicians have no visibility or sensitivity to these issues. None at all. Where is that populist champion of the people, Elizabeth Warren? Why isn’t she looking into the 1.5-to-20% interest rate chasm, on behalf of “real people”?

 

Why isn’t someone in DC investigating and calling for testimony from the oil companies and the gasoline retailers association to explain how the crude oil-to-retail gasoline multiplier has suddenly gone from 3.5 to 4.7 in less than a year?

 

My daughter used to work in Congress on Capitol Hill. Every day, she’d see Texas congresswoman Sheila Jackson Lee on the sidewalk in front of her apartment building, a mere two blocks from the Capitol where she worked. Every day, she’d see a tax-funded stretch limousine pull up and take Lee to the Capitol, two blocks—3 minutes—away and drop her off. Think Lee is concerned about the gasoline prices that the “small people” are paying?

 

In her own congressman’s office, every piece of outgoing mail—every piece, routine to important—that went back to his home district in CA went via Fed Ex overnight. Every piece, taxpayer-funded. I paid for it, and so did you. Think he gave two hoots about what the average peon earned in interest on their meager savings at the bank or how much monthly interest income the average retired person on a fixed income was getting from their CDs?

 

The cynical among us may say that Dem politicians are so insulated from reality, so dismissive and condescending towards the hoi polloi (hence the origination of that famous phrase “limousine liberal”) that they simply don’t know these situations exist. Does Elizabeth Warren—teaching her one course per semester at Hah-vahd for $360 large per year, living in her $1M mansion, actually know or care about gasoline prices? What are the chances you’ve ever seen her at the next self-serve pump at the local Sunoco?

 

And perhaps certain Republicans are hesitant about aggressively prodding their big donors in the banking and energy industries (although TBT, just as many fat-cat Repubs take limos and don’t pump their own gas and just as many Dems get big donations from Wall Street and Energy.)

 

Yeah, our politicians get a lot of big things wrong, like arms-control treaties and tax policy and national defense and border security and civil rights and on and on.

 

But they get the small thing wrong as well and on a day-in/day-out basis that may be even worse.

The Lightbulb Economy

© 2004 Steve Feinstein. All Rights Reserved.

There are certainly many points of contention between Democrats and Republicans, but perhaps none as stark—and misunderstood—as the issue of taxes. Both sides have bombarded the public with their arguments, but the Democrats, aided by their liberal mainstream media allies, have crafted by far the most memorable, neatly-capsulized soundbite: “Tax breaks for the rich.”

Despite all the studies of how each income group benefits from the lowered tax burden, the overriding message from the Democrats remains the same—Republicans only care about their fat-cat Corporate cronies, and by lowering their taxes, the Administration assures that big dollar political donations will continue to come flowing into their campaign coffers. Therefore, rather than rehashing the bracket by bracket financial analysis that demonstrates the actual positive economic impact of lowered taxes, it’s probably more useful to cast the entire subject in a more relevant, analogous framework.

In engineering parlance, there is a phrase called “Energy under the curve.” This refers to the total energy output of a device—be it a light bulb, an acoustic transducer, etc.—as measured on a graph across a range of frequencies. While every effort is made to maximize the amount of energy output from that device, in the end it’s still a finite amount. The key to best performance is getting the device to deliver energy that is usable. A light bulb, for example, may produce x lumens of energy, but it won’t do much good if its output is predominately at ultraviolet frequencies that are invisible to the human eye. An acoustic transducer (a “speaker”) can be modified to produce more or less energy at different frequencies, but the total acoustic energy produced by that specific speaker is finite. The engineers can move the energy output from one frequency region to another, but the “total energy under the curve” remains the same. The key to a speaker’s useful performance, of course, is for it to produce its energy at frequencies that are audible and useful to humans, not frequencies only audible to bats and dogs.

The concept of energy under the curve is directly analogous to an economy’s money supply at a given time. Both the energy and the money supply are known amounts. The money is going to be spent by someone (the device is going to output its energy); the key is for the money to be spent where it has the most benefit (the light bulb must produce visible light).

Engineers love efficiency. The ultimate goal is for a device to return the maximum output for the minimum input, all at manageable cost. Energy-efficient appliances, fuel-efficient cars, energy-efficient buildings—these are examples of intelligent designs, properly executed. How can an economy achieve comparable efficiency? By putting the money into the hands of economic “engineers”—the taxpayer.

Here’s another analogy regarding economic efficiency. If a person goes to a high-stakes gambling casino in Las Vegas and wins $3000 at the blackjack table, that person would probably think nothing of taking a stroll down to the gift shops and buying some overpriced designer suit or handbag they ordinarily would never purchase. After all, they’re spending house money, not their own. But tell that same person they’ve got to support their family for a month on the same $3000, and there will be a BIG change in how that money is spent. The competition for that $3000 is intense, with every potential recipient of those funds striving to offer the best product at the best value. Rent for $625. Phone for $102.33. Clothes for $79.63. Groceries for $245.67. Suddenly, in the hands of a skilled economic engineer, the same $3000 produces far better results.

The point is clear: When the Government spends house money, the effect is economic inefficiency. Right now, we are taxed when we receive work income, the companies that employ us are taxed on their earnings, our savings and investments are taxed on their interest and dividends, we’re taxed when we sell securities or real estate (capital gains) and we’re taxed when we inherit money—money that itself has already been taxed as many as four times.

Heavily-taxed societies traditionally exhibit far lower economic growth than those with lower tax burdens. There’s less active capital in the private economy of a high-tax society being spent to buy houses, food, cars, TVs, clothes, and paying for all the people needed to manufacture, sell, deliver, and service those items. According to a recent article in the Wall Street Journal, tax revenues in the EU represent more than 40% of GDP, with some of the most socialistic countries above 50%. By contrast, in the U.S., tax revenues are only around 30%. The WSJ article continues, “Higher per capita GDP in the U.S. allows the average American to spend about $9,700 more on consumption every year than the average European. So Yanks have by far more cars, TVs, computers and other modern goods. Most Americans have a standard of living which the majority of Europeans will never come anywhere near.”

So why would we want to move away from that model towards higher taxation and more entitlement programs, a position espoused by today’s Democrats and bolstered by the liberal media? Instead, if we put that same tax money into the private sector’s hands (move the energy from one part of the curve to another), the positive economic impact is far greater. The private sector will spend the same amount of money as the Government much more efficiently, spreading it around for best return, creating more jobs and business activity along the way. It’s such a simple economic truth it’s really amazing that more people don’t (or aren’t allowed to) understand it: Acting in your own self-interest, you’ll make your own money go farther, to much better effect, than if a disinterested third party spends your money on your behalf (often on things with which you vehemently disagree). That’s the end result of lower taxes—a more productive, more efficient, higher-employment economy, controlled by the individual wage-earning engineers who created it. What a bright idea.