January 27, 2010
Where Virginia is headed, will Ontario follow?
January 21, 2010
Planning for retirement
I’m one of those bad savers you keep reading about in the financial pages: I’m not saving enough for my retirement. Of course, depending on where you get your retirement advice from, few of us can save enough to retire comfortably. Here’s what I wrote about this back in 2004:
I’ve been saving money in my registered retirement savings plan, although I’ve never been able to afford to put away the legal maximum for my income (I’ve come close, but never hit the max). This is literally the only tax dodge available to Canadians earning less than $200,000 per year: the money you save in that year is deducted from your taxable income and the interest it earns is also tax-deferred until retirement.
This means I’m saving a theoretical 14% of my pre-tax income as provision against starvation once I retire. Sounds reasonable, no?
According to the banks, no. If you go to any of the major Canadian bank websites and look at their online retirement planning tools, you’ll discover that no Canadian can ever really afford to retire. In my case, going on the (doubtful) assumption that I continue to earn the same as I do now until I retire, I need to save approximately 105% of my pre-tax income in order to barely maintain my standard of living after retirement. If I manage to stay employed for a few years after age 65, I cut that down to needing to save only 94% of my pre-tax income.
In the most hopeful scenario, where I work until age 78 and die the same year, I won’t go bankrupt.
Okay, I’m exaggerating, but not by much. I’ve always found it depressing to do this sort of planning, and the bank websites (which of course are biased to encourage you to keep more money with them) sure don’t help. For example, the CIBC retirement calculator says I need to save just over 75% of my take-home pay every month in order to be able to retire at 65. Aaaaggghhh!!!
Since those balmy, optimistic days, I’ve gone through several jobs, and had no opportunity to match my earlier savings rate. The last couple of years, I’ve even had to draw down my savings to cover periods of unemployment. So maybe I need to work to age 81 before I can retire . . .
However, perhaps the situation isn’t quite as dire as all that. David Aston has an article in MoneySense magazine which at least avoids the typical “gotta save multi-millions” line the banks tend to give you:
This is the worst-case scenario, but it’s good to know what you’ll need if you just want to scrape by, if only because it gives you a starting point to build from. For this scenario, the costing has already been done for us in a recent study, called Basic Living Expenses for the Canadian Elderly, by three University of Waterloo researchers. The study describes a no-frills retirement as one in which a couple rents (rather than owns), has no vehicles (so they take public transit), and it doesn’t include spare cash for even minor indulgences such as cable TV or alcohol. This is not the stuff of most people’s retirement dreams, but the study does budget for three nutritious home-prepared meals a day, a one-bedroom apartment plus utilities, along with typical health-care costs and other essentials like clothing and personal-care products.
How much do you need?
The study’s authors conclude that the annual cost of such a retirement in five major Canadian cities ranges from $20,200 to $27,400. Here’s the good news: to achieve this bare-bones scenario you don’t have to save a penny. The combination of full Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) program for low-income seniors pretty much covers all your basic needs, at least outside the highest-rent cities. If you and your spouse are at least 65, those government programs would provide you with a combined $22,750 a year if you have no other income. “We’ve kind of made sure the Canadian elderly don’t live in poverty but we’ve given them, like, 50 cents more than the poverty line,” says study co-author Robert Brown.
The scenario does, however, require the Canadian government to make some pretty fast changes to how it’s funding the OAS, GIS, and CPP programs. CPP is, in theory, fully self-funded but the coming “bulge” in retirement rates from aging Baby Boomers will almost certainly require both increased premiums and top-up from other government revenue streams. Oh, and increased claw-backs from other income retired seniors may have.
January 18, 2010
How much are the Vikings worth?
An interesting Wall Street Journal article tries to put a dollar value on the “intangible” value of a professional sports team to the fans . . . in this case, the Minnesota Vikings:
Christopher Slinde, a lifetime Minnesota Vikings fan who has endured decades of heartbreak and lots of overpriced beer in supporting his team, believes Vikings fandom is priceless. According to economists, it’s worth $530.65.
“This is deep,” said Mr. Slinde, a 33-year-old X-ray technician, outside the Park Tavern near Minneapolis on Sunday. He had been handed a recent economics paper that is tattooed with equations and attempts to value, in dollars, the joy and pain Minnesotans get from the Vikings.
“Don’t economists spend their time on more serious stuff?” he asked, after thumbing through the paper in the cold.
As fans pack stadiums and couches to watch the National Football League’s divisional playoffs this weekend, they care about victory. Economists are tackling a more abstract challenge: putting a price on the emotional benefits of having a pro sports team in town.
Interestingly, the one question that doesn’t come up is why non-fans (the rest of the taxpayers being asked to pay for a new Vikings stadium) should use their tax dollars to subsidize their sports-mad fellow citizens. The answer is, of course, that if Minnesota won’t then some other state or city will do. It seems reasonable to me to ask the billionaire owners of these sports franchises to pay for their own buildings . . . but there’s a long, inglorious history of these very well-off, well-connected folks being able to get politicians to pry the coffers open and paying public money to benefit private interests.
January 15, 2010
Why China won’t be able to corner the rare earth market
Tim Worstall looks at the importance of rare earth to the modern electronics industry, and why China’s ongoing attempt to corner the market won’t work in the long run:
The Chinese government is trying to corner the rare earths market and that isn’t good news for the tech business. Those with good memories of Chemistry O Level will know what the rare earths are: the funny little line of elements from Lanthanum to Lutetium at the bottom of the periodic table, along with Yttrium and Scandium, which we usually add to the list.
The reason we like them in the tech business is because they’re what enables us to make a lot of this tech stuff that is the business. You can’t run fibre optic cables without your Erbium repeaters, Europium, Terbium and Yttrium are all used to make the coloured dots in CRTs, the lens on your camera phone is 25 per cent Lanthanum oxide (yes, really, glass is made of metal oxides) and without Neodimium and Dysprosium we’d not have permanent magnets: no hard drives nor iPod headphones.
[. . .] it is still true that we get all of them – apart from Scandium, which is a rather different little beastie – from the same ore. In fact, we tend to get them not just from the same ore, but from the same mine: Bautou in Inner Mongolia (that’s the Chinese part, not the independent country).
And that’s where our problems really start. Over the past couple of decades China has been cracking down on small mines, usually in the name of environmental policy. That even may have been the real reason, as rare earth mines can be messy things. The outcome is that now 95 per cent of the earth’s supply comes from this one mining complex and the Chinese Government has just announced export restrictions.
So, if they have a monopoly on 95% of the world supply, why won’t it hold up? Because in spite of the name, they’re not as rare as all that . . . and there are substitutions that can be made for some or all of the current application needs. By restricting the supply and/or driving up the price, China will spur new competitors to enter the field and new sources of rare earths to be developed. In the short term, it will definitely create price increases (which, of course, will be passed on to the consumer), but in the medium-to-long term they will create a vibrant competitive marketplace which will almost inevitably drive the prices down below current levels.
Isn’t economics fascinating?
January 8, 2010
December 22, 2009
December 18, 2009
December 16, 2009
QotD: The importance of markets
America debated three strategies during the Cold War. The Right wanted “roll back” — dreams of Patton driving his tank into Red Square. The Left wanted détente — which is French for “surrender.” The country loosely followed containment, a program outlined by George Kennan in 1946, which argued that the political contradictions of the Soviet state would eventually cause its own demise. America had but to be patient.
Kennan may have been the first to realize that a society based on Communism would not survive politically, but it was Ludwig von Mises, in his 1922 work Socialism, who demonstrated that any such society could not survive economically.
When a collection of free individuals — the market — is willing to pay a price for a product that creates “excess” profits, it signals producers to provide more of that product. If the market does not support a given price, producers are forced to redeploy their assets for more pressing social needs. Similarly, if a factor of production, such as labor or capital, changes in price, producers instantly react, sending signals — through the prices of intermediate goods — down to the consumer. Prices effortlessly allocate society’s assets to reflect consumer preference and adjust to accommodate the ever-changing availability of scarce resources.
Mises argued that governmental interference in prices, through taxation, subsidies, and regulation, complicates this process — affecting not only the consumption of final goods, but also the economic calculations that are necessary to provide intermediate goods and services. Higher-order division of labor fails. Poverty results. For example, while Chinese and Russian central planners were busy setting quotas for steel mills, there was no method for consumers to signal that they preferred food — and millions starved to death.
Dan Oliver Jr., “Socialism in Stages: Even soft, incremental expansions of government produce poverty”, National Review, 2009-12-15
December 14, 2009
This is interesting . . .
Charles Stross links to this story:
Drug money saved banks in global crisis, claims UN advisor
Drugs and crime chief says $352bn in criminal proceeds was effectively laundered by financial institutionsAntonio Maria Costa, head of the UN Office on Drugs and Crime, said he has seen evidence that the proceeds of organised crime were “the only liquid investment capital” available to some banks on the brink of collapse last year. He said that a majority of the $352bn (£216bn) of drugs profits was absorbed into the economic system as a result.
This will raise questions about crime’s influence on the economic system at times of crisis. It will also prompt further examination of the banking sector as world leaders, including Barack Obama and Gordon Brown, call for new International Monetary Fund regulations. Speaking from his office in Vienna, Costa said evidence that illegal money was being absorbed into the financial system was first drawn to his attention by intelligence agencies and prosecutors around 18 months ago. “In many instances, the money from drugs was the only liquid investment capital. In the second half of 2008, liquidity was the banking system’s main problem and hence liquid capital became an important factor,” he said.
December 9, 2009
The EPA wants to regulate, well, everything
The EPA’s decision that greenhouse gases fall under their regulatory control, while not surprising, should be overturned:
What Jackson has done, though, is inadvertently offer the strongest case against the EPA’s dubious decision on carbon dioxide. If the EPA’s actions really converge on as many spheres of public life as Jackson asserts, then a single crusading regulatory agency is in no position — and should have no authority — to regulate all of them.
No worries, we’re told. The EPA wouldn’t do it. It’s a bluff. It has other things in mind. In this case, it is all about hastening much-needed “action” on climate change by employing a technique universally known as blackmail.
The timing of the EPA announcement gives President Barack Obama the ammunition he needs to make a climate deal in Copenhagen, where leaders from around the world have gathered for one last chance to save mankind — until they all fly to by-then temperate Mexico next year for the last last chance to save mankind.
Obama, as we know, has no authority to enter into a binding international treaty (isn’t the Constitution irritating?), as any treaty must be ratified by the Senate — a Senate that won’t pass a cap-and-trade scheme any time soon if we’re lucky.
Now that the EPA can duplicate any suicidal emissions pact world leaders can cook up (exempt: emerging nations, poor nations, and nations that value prosperity), the president would not need to ratify a thing. And who needs treaties when the Obama administration has already threatened the Senate with unilateral regulations on greenhouse gases unless a cap-and-trade bill is passed? The administration need only mirror the agreement it can’t make.
Apple pulls entire line of apps after systematic bogus reviews
It’s certainly not the only case, but it’s good to see that Apple is willing to police their App Store:
Bogus reviews have landed Chinese iPhone app developer Molinker in deep trouble, resulting in all 1000-plus of its apps being removed and banned from the App Store. This is great news for consumers who are tired of downloading subpar apps based on inflated reviews, and bad news for companies looking to shill their products with internal misdeeds.
The App Store is simultaneously the strength and the weakness of Apple’s control of the iPhone development market: it’s the only approved channel for non-jailbroken iPhone users to access new applications, but it’s not scaling well to the demand (or the supply). It’s a victim of its own success, in many ways.
I’m sure that Apple will eventually come up with a winning revamp for the current App Store, but as it is right now, it is not serving customers or developers particularly well. The review system, which Molinker was actively gaming, is one of the weaker links, but there are lots of other issues that become more irritating as there’s more apps available, but no easy way to find them.
December 8, 2009
This is what qualifies as “toughened” standards?
An aside in this week’s Tuesday Morning Quarterback column by Gregg Easterbrook caught me completely by surprise. I had no idea that the US housing market was quite this dysfunctional:
As Part of Tough New Standards for Subsidized Mortgages, Home Buyers Will Be Required to Rub Their Heads and Pat Their Stomachs at the Same Time: The Federal Housing Administration underwrites mortgages for people having problems. Before 2008, the FHA supported about 2 percent of the nation’s mortgages, now the number is nearly at 30 percent, which shows how deep the subprime mortgage issue runs and how much taxpayers now subsidize home ownership. Last week, the FHA said it will toughen lending rules. Borrowers will now be required to put up 3.5 percent of the mortgage as cash or gifts from relatives, and there will be a cross-check against the down payment’s appearing to come as a gift from a charity but actually coming from the seller or builder through a middleman disguised as a charity. A generation ago — a decade ago! — home buyers were expected to have a 20 percent down payment; that made them unlikely to try to buy something they could not afford, and banks wouldn’t be exposed if something went wrong, since they were lending only 80 percent of the value of the property. Now requiring 3.5 percent down is viewed as “toughening” standards. Isn’t this an invitation for yet another cycle of mortgage problems?
Absolutely mind-boggling.
December 6, 2009
Farewell to the Orient Express
Economic times are hard on non-essential services, and the luxury train called the Orient Express faces cancellation:
Its name evokes images of glamour and mystery and has provided authors including Agatha Christie and Ian Fleming with perfect backgrounds for their tales of intrigue and suspense.
But now the Orient Express is to be cut from Europe’s rail timetables. Next weekend, the service — which runs only between Strasbourg and Vienna — will be scrapped, a victim of high-speed railways and cut-price flights.
“The name the Orient Express will disappear from the official timetables before the year is out, after more than 125 years,” says Mark Smith, the rail expert who runs The Man in Seat Sixty-One website.
Only travellers who can afford lavish private trains — such as the Venice Simplon-Orient-Express and the Danube Express’s Istanbul Odyssey — will be able to enjoy the service’s former glory.
Of course, it’s hard to believe that Vienna qualifed as an “oriental” destination . . .
