Coyote Blog

John Hinderaker at Powerline writes about the House committee hearing on reparations the other day.  Just as a review, there is a proposal on the table by many Democrats that a large group of Americans who have never owned slaves or even condoned slavery pay reparations for slavery to a large group of Americans who have never been slaves (nor likely have their parents or their grand parents).

Forgetting the moral bankruptcy of the underlying arguments for reparations, I would have thought that if modern American blacks were somehow owed reparations for past damages, the very fact of being held in bondage was damage enough.  That crime is so bad it's hard to imagine anything else really adding more than incrementally to the damage calculation.  But apparently Ta-Nehisi Coates tetified, using a recent academic paper, that cotton grown and harvested by black labor amounted to nearly half the US economic activity at the time, and thus was somehow worse.  I am not really sure I understand this argument, but if we focus narrowly on the statement at hand it is obviously absurd, if for no other reason than the fact that the South was economically overwhelmed in the war by the North.

Apparently the "trick" in the study was to essentially double count economic activity and claim any activity that only marginally touched on cotton to be part of the tally for the size of the cotton economy.

Coates’s numbers come from Cornell University historian Ed Baptist’s 2014 book The Half Has Never Been Told. In a key passage in the book, Baptist purports to add up the total value of economic activity that derived from cotton production, which at $77 million made up about 5 percent of the estimated gross domestic product (GDP) of the United States in 1836. Baptist then committed a fundamental accounting error. He proceeded to double and even triple count intermediate transactions involved in cotton production — things like land purchases for plantations, tools used for cotton production, transportation, insurance, and credit instruments used in each. Eventually that $77 million became $600 million in Baptist’s accounting, or almost half of the entire antebellum economy of the United States.

My point is not to quibble with Coates's numbers per se -- as I said up top, a) I don't think reparations are owed for our great great grandparents actions b) I think the economic contribution of cotton is a rounding error on any damages that would be owed and c) I feel like the United States government and its people already paid this bill in blood and treasure during the Civil War.

The point I want to make is that this same error is made ALL THE TIME.  Every study you see quoted about economic impacts of .. whatever ... likely makes this same mistake, either accidentally or on purpose.  When sports teams try to get tax subsidies so their billionaire owners can build new stadiums, the economic impact "studies" they produce do this same triple counting.  When the sugar industry tries to justify the absurd tariffs that protect it, their studies use this same trick.  When climate alarmists cite economic impacts of a degree of warming, they use this technique.

By the way, I have made my own proposal on slavery reparations that targets the cost of reparations at the wealthy institution in the antebellum south, an institution that still exists today, which did the most to extend and preserve and defend slavery.

I know I have not been blogging serious topics much of late.  In part this is due to just being busy -- holidays, end of year accounting closeouts for the business, and some geeky projects (a few raspberry pi things I will share soon).  In part this is due to the fact that whenever I engage with social media too long I become a worse person and back away again.   In part this is because my daughter said I needed to lighten up on my blog for a while.  And in part this is to my not wanting my obsessive fascination with the trainwreck that is Tesla to dominate my blogging (though there are a couple of updates coming).

As I close in on my 15th(!) year on this blog, this sort of ebb and flow happens from time to time.  I will be back in force soon.

This New York Times article here could have been a perfectly reasonable thought piece on the (perhaps unintended) effects of several provisions in the tax code.  But in an institutional desire to land a few more blows on Trump, they tried to morph it into a hit piece on Jared Kushner --"Jared Kushner Paid No Federal Income Tax for Years" screams the headline.

Look NYT:  I find Trump distasteful as well.  But you only embarrass yourself presenting as some kind of investigative bombshell that Jared Kushner used perfectly legal deductions to minimize his tax bill.

I recommend this ZeroHedge summary to you as a quick way to get to the meat of the Times article.  As they summarize it, the Kushner tax "maneuver" consists of:

tep 1: The Purchase

Kushner Companies buys a property. The majority of the money for the purchase comes in the form of mortgages and personal loans from banks.

Step 2: The Write-Off

Under the federal tax code, real estate investors can write off the purchase price of the building — excluding the cost of the land — over a period of decades. Although Kushner Companies has spent little or no cash of its own, the firm takes large annual deductions based on the theoretical depreciation of the building.

Step 3: The Loss

The property generates cash for the Kushners. But any earnings, which would be subject to the federal income tax, are swamped by the amount that the company is taking in write-offs for depreciation. The result is that Kushner Companies records a net loss for tax purposes.

Step 4: The Investors

The company passes on that loss to its owners, including Mr. Kushner and his father, Charles.

Step 5: The Offset

The loss can be used to offset the Kushners’ income in the year it is recorded, and it can be carried forward to cancel out future income or to get refunds for taxes they paid in previous years.

Step 6: The Deferral

When Kushner Companies sells a property, it can use the proceeds to finance a new acquisition. If done within the right time frame, the company can indefinitely defer any capital-gains taxes it might owe on the sale of the original property.

So here is my confession.  I did the exact same thing just last year on my taxes.  Take one example:  One of my businesses bought and installed $350,000 of equipment.  I financed 100% of this purchase.  The article says that Kushner depreciated his real estate purchases over decades but the tax code's accelerated depreciation provisions allowed me to depreciate this purchase 100% in the first year.  So I had an immediately $350,000 loss that I netted against other income, grealy reducing my taxes on that income.  In fact, I don't think I was able to use it all due to various tax rules and I carried over a part of it to cover 2018 taxes or beyond.

One could argue about whether the accelerated depreciation provision I took advantage of is too generous, but the tax code is always going to allow depreciation against some formula (or else every business would be substituting crazy rental schemes for capital investment).

Let's take each step from above

1. The Times wants to make a big deal that somehow the fact that he is using borrowed money to buy assets is a factor in this, but why?  They imply a couple of times that all the debt reduces his ownership, but that is not true.  He still owns 100% of the asset (with the proviso the bank has a lien that is only meaningful in case of default.  His equity is only a fraction of the purchase price, but that is a different thing and says nothing about his ownership
2. The depreciation provisions are pretty standards as described across all businesses, except to say that they are less generous than the ones I get buying equipment.  Again they seem to think that somehow the fact that he borrowed most of the money is relevant to this -"Mr. Kushner is getting tax-reducing losses for spending someone else’s money" -- but his financing strategy is not the least relevant.  He took on a costly and risky long-term obligation when he borrowed the money.  Is the NYT arguing for requiring cash accounting for taxes??  This is just embarrassingly ignorant.
3. This is entirely normal
4. This is entirely normal for s-corporations and LLC's.  These were promoted for small business, and they are fabulous tools for entrepreneurs, but you have to provide these legal tools to all people, even to rich people in families you don't like.
5. This is entirely normal.  Any other rule would be grossly unfair and a kick in the nuts for entrepreneurs.  I often spend money this year that generates revenues next year.  The tax code recognizes this and agrees that the losses I took this year can be netted against the revenues next year that they helped to facilitate.
6. This is the only thing that is mildly unique to real estate and his business.  I don't really get the same rights with any of my assets, though my assets mostly depreciate rather than increase in value.  I won't pass judgement on this one, but I suspect that it has a lot of support (homeowners get it, for example, as do owners of second homes).

Nowhere is there even a suggestion of how the tax code might be altered to fix those things the NYT does not like about it.  I would suggest that any step that would alter any of the 6 steps above would be opposed even in a Democratic Congress.  This all reminds me of a piece a few years ago arguing that oil companies got a lot more subsidies than renewables like wind and solar.  Checking it out, the vast, vast majority of the subsidies were ... LIFO inventory accounting and depreciation, both tax rules that are 1) merely about timing of taxes and not total paid and 2) apply to all manufacturing businesses in all industries.

For some reason my small business now has to fill out three incredibly time-consuming census reports every year.  I don't know what we did to be punished in this way, but each of these (if one were truly diligent) can take more time than a tax return to fill out.

Several of the reports ask for accounting data in ways no private company keeps accounting data, such that really giving them the number they want would take hours or days of recasting thousands of accounting transactions. I try to give them something reasonable but let's just say they get exactly the quality they pay for here.

There does not seem to be any filter or limit on the amount of time government bureaucrats can demand for this cr*p.  Every bureaucrat seems to have some piece of data they think is desperately needed, so every year each of these reports gets longer and every few years another report is added.  It is particularly frustrating because the government is just going to use this data to justify regulating or taxing me more.  My forced unpaid labor is providing ammunition for the government to make my life harder.

And speaking of unpaid labor:  Last time I wrote something like this about how much I hated this data gathering (at that time I only had to fill out one of these) I had economists write me that this is really important data and without it they could not do their job.  You know what?  I don't demand economists perform unpaid labor to support my job, why do I have to provide unpaid labor to support theirs?  If this is such vitally important data, pay me for it.

I asked this question to an accountant friend you runs a web site on accounting technical issues:

Tesla gets Zero Emission Vehicle (ZEV) credits from about 10 states for selling EV's.  These have a LOT of value and can be sold to other car makers who need them to compete in these states.  In the past Tesla has sold batches of them for upwards of a billion dollars, so they are material.  Tesla tends to horde them for several quarters and then sell them in a big batch to juice a particular quarter.  However, they do not appear on the balance sheet.  Anywhere.  It is a public company but no one in the outside world knows how many of the ZEV credits Tesla has until they show up on the income statement as having been sold and having generated a huge profit.

How is it possible that Tesla is gaining these valuable assets with each sale of a car in certain states but they are not getting put on the balance sheet in any way?

UPDATE:  I had the wrong link.  The call is Wednesday but at 2:30 Pacific after the market closes, which makes more sense.  Like many companies, Tesla likes to dump the quarterly financials, dozens of pages in 8 point font, just seconds before the conference call.

If you are sitting in your office this week and need to be entertained in a way that looks like you are working, consider the Tesla investor conference call Wednesday at 2:30 PDT.  I can't guarantee anything but past conference calls have been a circus.  Normally I would expect the Tesla Board or the corporate counsel (who is Musk's divorce lawyer, lol) to bring adult supervision to the party, but so far that has not happened in any Tesla communications to date.  Expect potential discussion around:

• Tesla's immediate external capital needs, given that they are burning cash faster than you could actually physically burn it (Musk claims zero is needed but everyone else in the free world thinks its >$2 billion, with a huge part of Tesla's existing debt also expiring and needing to be rolled over soon)
• Model 3 order blacklog (this was the question in the last call that caused Musk to tell the experienced Wall Street analyst to shut up and then he switched to taking questions from a Youtube fanboy
• Model 3 production rates and quality issues
• Gross margins.  They HAVE to get higher for survival.  Particularly since Telsa has chosen to eschew traditional dealer networks so corporate bears all the cost of service and support.  This demands Tesla not only get its gross margins as high as other auto makers, they need to be higher.
• Expiration of tax subsidies -- the $6500 government tax credit for Tesla customers slowly disappears once their 200,000th EV has been sold in the US, which has happened.
• The disappearance of the $35,000 Model 3 from the web site (this is the promised car that generated a lot of the Telsa hype in the first place)
• Disappearance of all those other teased products (coupe, semi) that were released to great fanfare and have not ever been mentioned again
• ZEV credits (these are credits it gets from states like CA that other car makers have to buy to do business in those states with gasoline vehicles).  These are odd ducks as they have a lot of value but for some reasons do not show up anywhere on the balance sheet, so one doesn't know they even exist until Tesla chooses to sell them for a LOT of money.   They can flip a single quarter positive by saving these and exercising them at the same time.  Most folks see this happening in a bid to make Q3 profitable.  (By the way, anyone out there that understands by what accounting rules these valuable assets don't get put on the balance sheet are encouraged to email me the answer).
• Introduction of competitive products (Jaguar, Volvo, and pretty much everyone else soon)
• Pending lawsuits from both shareholders and whistle-blowing employees
• Implosion of SolarCity (now part of Telsa) such that new installations are on a trend line towards zero
• (unlikely but someone should really ask) Musk's silencing of critics
• (unlikely but someone should really ask) Musk's social media demeanor, including calling the Thai rescue hero a pedophile because he did not use Musk's goofy submarine

Tesla is a train wreck I cannot take my eyes off.  Unlike Theranos, which combined a product that didn't work with a screwed up management, and which operated in the dark, Tesla combines what has been a really good product with a screwed-up management, and operates in an absolute blaze of publicity.  I have never seen any stock where sentiment was so polarized between bears and fan-boy bulls (Herbalife, maybe?)

I have a personal metric of sentiment and volatility I invented but I am pretty sure has been used since before I was born.  Anyway, I look at the sum of the price of an at-the-market put and at-the-market call for the stock about 6 months out.  I then divide this combined price by the share price.  For Tesla January options, this comes to 31%.    This is really a huge number.  Take ExxonMobil, which has a lot of split sentiment right now (a historically fabulous company that keeps screwing up its quarters recently) this metric sits at 9%.

Disclosure:  I am in and out of short positions on TSLA, typically selling around 350+ (usually after Musk has honeytrapped the fan boys) and covering in the 290-300 range (usually after real news or a Musk meltdown).  This strategy has been profitable for 2 years but I think that is coming to an end.  TSLA is either going to fall more or stay high based on what it does in the 3rd quarter.

A while back I asked progressives:

Taking the government's current size and tax base as a given, is there a segment of the progressive community that gets uncomfortable with the proportion of these resources that are channeled into government employee hands rather than into actual services for the public?

No response to date.  This is not a rhetorical question.  I am honestly curious if progressives worry about the percentage of government budgets that go to government workers, or if there is a progressive argument for this (despite the fact that it seems to be starving the actual programs progressives support).

I was reminded of this when I read this article from Steven Greenhut:  (hat tip maggies farm and their links roundup)

Municipal governments exist to provide essential services, such as law enforcement, firefighting, parks and recreation, street repairs and programs for the poor and homeless. But as pension, health-care and other compensation costs soar for workers and retirees alike, local governments are struggling to fulfill these basic functions.

There's even a term to describe that situation. "Service insolvency" is when localities have enough money to pay their bills, but not enough left over to provide adequate public service. These governments are not insolvent per se, but there's little they can afford beyond paying the salaries and benefits of their workers.

As a city manager quoted in a newspaper article once quipped, California cities have become pension providers that offer a few public services on the side. It's a sad state of affairs when local governments exist to do little more than pay the people who work for them.

Not surprisingly, the union-dominated California state legislature has been of little help to local officials dealing with such fiscal troubles. The state pension systems have run up unfunded liabilities, or debts, ranging from $374 billion to $1 trillion (depending on the financial assumptions one makes). But legislators have ignored meaningful pension reform. This has forced local governments to cut back services or raise taxes to meet their ever-increasing payments to California's pension funds.

It's one thing to ignore the plight of hard-pressed cities and counties, but now legislators are trying to make the problem a lot worse. Assembly Bill 1250 would essentially stop county governments from outsourcing personal services (financial, economic, accounting, engineering, legal, etc.), which is a prime way counties make ends meet these days.

 

(Note:  This is an update of this post based on a new set of economically illiterate people in the White House).

Repeat after me:  Y=C+I+G+X-M is an accounting rule.  It does not explain anything about the economy.  It is as useful to telling us anything interesting about the economy as the equation biomass=plants+animals+bacteria tells us anything about the ecosystem.

Apparently our new commerce secretary is totally ignorant of this fact:

[New Commerce Secretary Wilbur Ross] has a simple but misguided view of global trade. He believes that good trade policy yields a national trade surplus, while bad deals produce trade deficits—as if every country in the world could run a trade surplus. In an August letter to this newspaper, Mr. Ross wrote, “It’s Econ 101 that GDP equals the sum of domestic economic activity plus ‘net exports,’ i.e., exports minus imports. Therefore, when we run massive and chronic trade deficits, it weakens our economy.”

Who taught him that? Imports are subtracted in GDP calculations to avoid overstating domestic production, not because they make us poorer. Many domestic products wouldn’t exist without foreign components.

Here is his faulty logic.  The GDP (Y) is calculated by adding Consumer spending + Investment by Business + Government spending + eXports and then subtracting iMports.  Because imports are subtracted in the GDP equation, they look to the layman like they shrink the economy.  How do we grow the economy?  Why, let's reduce that number that is subtracted!  But this is wrong.  Totally wrong.   Anything that reduces imports (e.g. a tariff) will likely reduce C+I+G by the same amount.   The M term is there simply to avoid double counting.  It has no economic meaning in this context whatsoever.  I have tried many times to explain this, but let me see if I can work by analogy.

Let's say we wanted an equation to count the amount of clothing we owned.  To make things simple, let's say we are only concerned with the total of Shirts, Pants, and Underwear.   Most of our clothes are in the closet, so we say our clothes are equal to the S+P+U we count in our closet.  But wait, we may have Loaned clothes to other people.  Those are not in our closet but should count in our total of our owned clothing.  So now clothes = S+P+U+L.  But we may also have Borrowed clothes.  Some of those clothes we counted in the closet may be Borrowed and thus not actually ours, so we need to back these out.  Our final equation is clothes owned = S+P+U+L-B.  Look familiar?

Let's go further.  Let's say that we want to increase our number of clothes owned.  We want wardrobe growth!  Well, it looks like those borrowed clothes are a "drag" on our wardrobe size.  If we get rid of the borrowed clothes, that negative B term will get smaller and our wardrobe has to get larger, right?

Wrong.  Remember, like the GDP equation, our wardrobe size equation is just an accounting identity.  The negative B term was put in to account for the fact that some of the clothes we counted in S+P+U in the closet were not actually ours.  If we decrease B, say by returning our friend's shirt, the S term will go down by the exact same amount.  Sure, B goes down, but so do the number of shirts we count in the closet.  So focusing on the B term gets us nowhere.

But it is actually worse than that, because focusing on reducing B makes us worse off.  If negative term B rises, our wardrobe is no larger, but we get the use of all of those other pieces of clothing.  Our owned wardrobe may not be any larger but we get access to more choices and clothing possibilities.  When we drive the negative term B down to zero, our wardrobe is no larger and we are worse off with fewer choices.  Similarly, in the the economy, focusing on reducing imports does not grow the economy, it just serves to make us poorer by reducing our buying choices and increasing the cost of consumer goods as well as manufacturing inputs.

I don't want to say that it's impossible for increases in imports to drag the economy.  For example, if oil prices rise, the imports number measured in dollars will likely rise, and the economy could be worse off as we have to give up buying other things to continue to buy the oil we need.  But, absent major price changes, drops in exports more likely just mirror drops in C+I+G.  If consumers are hurting, they spend less on everything, including imported goods.   At the end of the day, none of these numbers (Mr. Keynes, are you listening?) are independent variables.

Postscript:  Here is another example.  Imagine a company with three divisions, D1, D2, and D3.  How do we compute the company's total revenue?  Well, typically we would add the revenue from the three divisions, so Total Corporate Revenue R = RD1 + RD2 + RD3.  Oh, but there is a problem.  Some of the sales from each of our divisions are to each other.  We only want to measure our true revenue from external sales, so we need to subtract intra-company sales from the total (this is a very typical step in conglomerate accounting).  So total company revenue R = RD1+RD2+RD3-IC, where IC are the total of intra-company sales within the company between divisions.  If you had a new CEO who looked at this accounting, and the CEO's first thought was "if we got rid of all these intra-company sales, surely we would have more revenue, because they are subtracting from total revenue in the revenue equation."  What would you do with this CEO?  If you knew the first thing about corporate accounting, you would fire him or her immediately for being a moron.  Just because the IC term is negative in the accounting equation does not mean that intra-company sales are a drag on revenues.  Eliminating intra-comapny sales would likely reduce revenues and profits as company insiders are forced to find new, less trusted, and more expensive sources for their purchases than buying internally.

1.  There is absolutely no guarantee that spending more money increases service quality, especially when (as is the case with public schools) there is no competition to discipline spending and ensure that it is funneled to those aspects of the service that are actually important to customers
2. Over the last 20-30 years, administrative staffing in public schools has grown from a small percentage of the total to about half the headcount in many public school districts, and thus likely more than half the salary budget (since administrators frequently make more than teachers)
3. Much of the increased funding is going to retired teachers who aren't actually teaching anyone

Per-student spending on K-12 education has risen steadily over the last two decades, but student test scores, and teacher salaries, are stagnant. Why hasn’t this massive increase in investment produced better teachers and better opportunity for students? The short-answer, according to a new Manhattan Institute report by Josh McGee: State and local governments have catastrophically mismanaged their teacher pension systems. The cash infusion to K-12 has been used largely to pay for irresponsible pension promises politicians made to teachers’ unions and justified to the public with shoddy accounting. . . .

In other words, to cover benefits for retirees, states need to dig into education funds that might otherwise be used to attract and retain good teachers or buy better textbooks and build new facilities. So long as state governments are unwilling to reform the blue model pension-for-life civil service system, and so long as teachers unions continue to wield outsized influence in so many state legislatures, this pattern seems likely to continue indefinitely.

Campaigns to increase spending on schools are always popular, and understandably so: Education ought to be a great equalizing force in our society and, in theory, an efficient way to invest in the future. The problem is that in many states, new “K-12 spending” isn’t really an investment so much as a transfer payment to retired employees of the public schools who have been promised untenable lifetime pension benefits.

I am on the road this week in Alabama and Tennessee, but I felt the need to comment on one issue of the day.  These thoughts will be a bit rushed:

Well, it looks like the awesome team of Trump and Clinton may manage to take yet another shot at reducing entrepreneurship.  It's all a result of the report that the Donald had a nearly billion dollar tax loss decades ago, and that - gasp - this tax loss might have shielded his income from taxes for years.  Hillary's supporters are already demanding changes to the tax code and Trump, as usual, cannot muster an intelligent defense on even a moderately technical topic.

As someone who built a business over 10 years, I can't think of anything that would do more to screw up the already languishing rate of new business formation than to somehow limit the deductability of business losses on future years' taxes.

I lost money for years in my business -- trying to get it going, trying to grow it, engaging in more than a few failed experiments of new services.   I would have been much less likely to do so had I known that I couldn't offset future profits on my taxes with current losses.

I will add that making changes to the deductability of losses will only lead to some screwed up accounting behavior.  For example, had I known that the losses would not have been deductible, I probably would have found excuses to capitalize a lot of my expenses, reducing paper losses early and getting tax deductions later in the form of depreciation.  I probably could have saved some of the deductions but only with a lot of extra bookkeeping and accounting effort.  Is this really the way we want to revive the economy, by shifting sucking up more of entrepreneurs' time on useless paperwork games with the IRS/

Strong supporters of both political parties maintain a delusion that all government problems are the result of the incompetence of the other political team, rather than the inherent incentive and information problems facing all government efforts.

Republicans, for example, made fun of Obama's competence with the horrendously bad rollout of the Federal Obamacare exchange.  But now, Doug Ducey's Arizona Department of Revenue is having the same problem.

As of this month, the agency is requiring that all multisite businesses (like mine) must file online rather than with pen and paper.  So we logged in today to file our report.  What a disaster!  The only thing I can even compare it to is stories of the early days of the Obamacare exchange.  First, the site is set up so that even a relatively simple return must have data entered across scores of pages.  In basic layout, it  is probably the worst site of any of the ten states we do business in.

But what has really made today a nightmare is that it is taking 5-10 minutes to load each page.  The agency clearly was not ready for the load.  Combined with a site design that requires many many page loads to complete simple tasks, and it makes filing (a 10 minute or so job on paper) a multi-day nightmare.  Four hours into it and I have not completed one location out of 15 or so I need to enter.

When I called the DOR, they basically said I had to suck it up.  I begged them for some sort of simple accommodation -- I have filed by paper for 13 years, why not allow me to file by paper for one more month until they get their act together?  No dice.  They instead suggested that my accounting staff come in at midnight tonight to do the work when the load on their servers would be lower.

If anything, the response from Republican Doug Ducey's office was even more insulting.  They said to me that this change had been announced for months, as if it was my failing to enter the system in a timely manner that was the problem.  According to Ducey's staff, I could have avoided the whole problem by filing my June revenue numbers a few months back, lol.  I patiently explained that June numbers could not be reported until the bank statements had arrived and were reconciled, such that most all returns had to be filed between the 15th and the 20th of the month.  And what is more, if this had been in the works so long, why hadn't the Administration seen fit to do an adequate job of testing the site and preparing for adequate capacity?

The answers from the governor's office were just as absurd and arrogant as any coming out of the Obama Administration about the failures of the exchange.  Which again proves to this libertarian that there is no much real difference between the Coke and Pepsi parties.  The problem is the government -- without the accountability brought by market competition -- trying to do these sorts of things.

This is honestly one of the weirdest acquisition proposals I have seen in a long time:  Elon Musk's Tesla offers to buy Elon Musk's Solar City.

This makes zero business sense to me.    This is from the press release:

We would be the world’s only vertically integrated energy company offering end-to-end clean energy products to our customers. This would start with the car that you drive and the energy that you use to charge it, and would extend to how everything else in your home or business is powered. With your Model S, Model X, or Model 3, your solar panel system, and your Powerwall all in place, you would be able to deploy and consume energy in the most efficient and sustainable way possible, lowering your costs and minimizing your dependence on fossil fuels and the grid.

I am sure there are probably some hippy-dippy green types that nod their head and say that this is an amazing idea, but any business person is going to say this is madness.  It makes no more sense than to say GM should buy an oil production company.  These companies reach customers through different channels, they have completely different sales models, and people buy their products at completely different times and have no need to integrate these two purchases.  It is possible there may be some overlap in customers (virtue-signalling rich people) but you could get at this by having some joint marketing agreements, you don't need an acquisition.  Besides, probably the last thing that people's solar panels will ever be used for is charging cars, since cars tend to charge in the garage at night when solar isn't producing.

One might argue that some of the technologies are the same, and I suppose some of the battery and electricity management tech overlaps.  But again, a simple sourcing agreement or a battery JV would likely be sufficient.

So what do these companies share?  I can think of three things.

The first is Elon Musk.   When one sees a deal like this, one is immediately suspicious that there is some kind of game going on where the owner combines holding A with holding B and somehow in the combination ends up with more wealth.  This is a game conglomerates played in the 1960's -- you could create a lot of (paper) value if you had a high PE (stock price to earnings ratio) company and went around buying low PE companies, instantly creating paper wealth if you could buy their earnings cheap and then have them suddenly valued at your higher PE.   Its hard to guess if this sort of game is going on here, as neither company has earnings (or rather both lose a lot of money).   Further, I have no read on Mr. Musk's personal ethics.  If this were Donald Trump, we would all immediately be suspicious such a game was at play.

The second thing these two companies share is that they have business models based on consuming massive amounts of government subsidies.  They get subsidies directly (each by selling various sorts of tax credits or fuel economy credits to power companies and auto makers), they have both gotten sweetheart deals from governments for production facilities, and their customers get subsidized as well in the purchase.  However, while there certainly are economies of scale for cronyism (large companies have the pull to get the loot), I shudder to think that there might be even more for these two companies to grab if they were larger.

The third thing these two companies share is that they both have huge financing needs, are losing lots of money, and are burning through tons of cash.   And here I think is the real heart of this deal, and if I am right, we may be able to answer the question on Elon Musk's ethics.  While both companies are burning through cash and are constantly going out to the market for more money, Tesla still has a (not totally justified in my mind) fabulous reputation with investors** and people seem to be falling over themselves to throw money at it.  With Apple languishing and Google old news, there is no hipper, trendier company out there.   On the other hand, SolarCity is starting to suck wind.  A few months back JP Morgan downgraded the stock:

SolarCity is having trouble attracting new investors, as the company has launched and canceled programs and altered its accounting methods, JPMorgan wrote in a note, according to MarketWatch.

Additionally, some of SolarCity's lower-income customers could be at risk of "slow-pay or default in the event of an economic downturn," the firm continued.

...SolarCity's weaknesses include its generally high debt management risk, weak operating cash flow, generally disappointing historical performance in the stock itself and poor profit margins.

They are also seeing more competition from local contractors and, perhaps most worrisome for their business model, various government subsidies are being scaled back and many states are changing their power metering rules to pay customers only the wholesale rate, rather than the retail rate, for power they put back in the grid.  They have said in most of their annual reports as a risk that their business model likely would not be viable (if it could be called that even today) without current or higher levels of government subsidies.

I have no inside information here, but this is the best hypothesis I can put together for this deal.  SolarCity has huge cash needs to continue to grow at the same time its operating margins are shrinking (or getting more negative).  They are having trouble finding investors to provide the cash.  But hey!  Our Chairman Elon Musk is also Chairman of this other company called Tesla whom investors line up to invest in.  Maybe Tesla can be our investor!

The reason I call this two drunks propping each other up is that Tesla also is also burning cash like crazy.  It is OK for now as long as it has access to the capital markets, but if it suddenly lost that, Tesla would survive less than 6 months on what it has on hand.  Remember, SolarCity was a golden child just 3 years ago, just like Tesla is today.  Or if you really don't believe that high-flying companies that depend on access to the capital markets can go belly up in the snap of a finger when they lose their luster with investors, I have one word for you:  Enron.

There is a substantial minority of the investment community that thinks that Tesla's headed for chapter 11, even before taking on the SolarCity albatross.  Here is one academic paper.  Here is another such opinion.  Non-GAAP reporting has proliferated like a cancer among public companies, with so many creative non-GAAP numbers that I am not sure the Enron folks would go to jail nowadays.  Tesla is a master of this game.    Even if Tesla is not headed for chapter 11, the absolute last thing Tesla needs to be doing is taking on a new acquisition that burns a lot of cash, while simultaneously diluting their management focus.

When I watch SpaceX launches, I so want to love Elon Musk.  But I am increasingly convinced that this is a terrible deal, an insider game he is playing to try to keep one of his investments alive.  I am seldom a fan of most minority shareholder lawsuits, but if I were a minority shareholder of Tesla I would be suing to block this acquisition.

By the way, many investors must be reading this the same way, because SolarCity stock prices are up and Tesla stock prices are down (at lot) today.

Disclosure:  I have been short Tesla for a while.  I shorted SolarCity this morning when the acquisition was announced, after its price popped up.  I consider this merger announcement as the moral equivalent of announcing that SolarCity is in financial distress.  These investments are tiny, the equivalent of a bar bet rather than any substantial investment on my part.

**Footnote:  I have to say this every time -- The Model S is a great car.  I would love to have one, if Santa put it under the tree for me.  But just because they have one great product does not mean that the company will be a success or is a great investment or that it is worth massive amounts of my tax money in subsidies.

Environmentalists often claim that people systematically under-invest in energy conservation, something they call a market failure.   This is why Obama and the Left put in a much heralded provision in the stimulus package that used Federal money to subsidize home energy conservation (new windows and insulation and such).

A new study in the NBER looks at the results.  This is the abstract:

Conventional wisdom suggests that energy efficiency (EE) policies are beneficial because they induce investments that pay for themselves and lead to emissions reductions. However, this belief is primarily based on projections from engineering models. This paper reports on the results of an experimental evaluation of the nation’s largest residential EE program conducted on a sample of more than 30,000 households. The findings suggest that the upfront investment costs are about twice the actual energy savings. Further, the model-projected savings are roughly 2.5 times the actual savings. While this might be attributed to the “rebound” effect – when demand for energy end uses increases as a result of greater efficiency – the paper fails to find evidence of significantly higher indoor temperatures at weatherized homes. Even when accounting for the broader societal benefits of energy efficiency investments, the costs still substantially outweigh the benefits; the average rate of return is approximately -9.5% annually.

The only failure here is the government diverting capital from productive uses into money-losing ventures like this one.

I am serious about this.  We saw in an earlier story that the government is trying to tighten regulations on private company cyber security practices at the same time its own network security practices have been shown to be a joke.  In finance, it can never balance a budget and uses accounting techniques that would get most companies thrown in jail.  It almost never fully funds its pensions.  Anything it does is generally done more expensively than would be the same task undertaken privately.  Its various sites are among the worst superfund environmental messes.   Almost all the current threats to water quality in rivers and oceans comes from municipal sewage plants.  The government's Philadelphia naval yard single-handedly accounts for a huge number of the worst asbestos exposure cases to date.

By what alchemy does such a failing organization suddenly become such a good regulator?

Update:  On the topic of cyber security competence or lack thereof, there is this:

In mid-May, the Federal Bureau of Investigations lost control over seized domains, including Megaupload.com, when the agency failed to renew a key domain name of its own. That domain, which hosted the name servers that redirected requests for seized sites to an FBI Web page, was purchased at auction—and then used to redirect traffic from Megaupload.com and other sites to a malicious site serving porn ads and malware. Weeks later, those sites are still in limbo because somehow, despite a law enforcement freeze on the domain name, the name servers associated with Megaupload.com and those other seized sites were changed to point at hosts associated with a domain registered in China.

Yep, that is the lead government agency tasked with investigating hacking and cyber security breaches.

Repeat after me:  Y=C+I+G+X-M is an accounting rule.  It does not explain anything about the economy.  It is as useful to telling us anything interesting about the economy as the equation biomass=plants+animals+bacteria tells us anything about the ecosystem.

Which is why this kind of article in the press makes me crazy (emphasis added)

The U.S. trade gap narrowed in April as the effects of a West Coast port slowdown faded, easing one of the biggest drags on economic growth during the opening months of the year....

This year’s volatile import and export figures worked out to an overall drag on the economy in the opening months of 2015....

A surge in imports and falling exports subtracted 1.9 percentage points from the headline figure. As measured by GDP, exports are a positive for economic growth, while imports are a negative...

“The huge drag on GDP from trade in Q1 will almost certainly not be repeated in Q2,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics.

Here is the logic.  The GDP is calculated by adding Consumer spending + Industrial spending + Government spending + eXports and then subtracting iMports.  Because imports are subtracted in the GDP equation, they look to the layman like they shrink the economy.  How do we grow the economy?  Why, let's reduce that number that is subtracted!  But this is wrong.  Totally wrong.   I have tried many times to explain this, but let me see if I can work by analogy.

Let's say we wanted an equation to count the amount of clothing we owned.  To make things simple, let's say we are only concerned with the total of Shirts, Pants, and Underwear.   Most of our clothes are in the closet, so we say our clothes are equal to the S+P+U we count in our closet.  But wait, we may have Loaned clothes to other people.  Those are not in our closet but should count.  So now clothes = S+P+U+L.  But we may also have borrowed clothes.  Some of those clothes we counted in the closet may be Borrowed and thus not actually ours, so we need to back these out.  Our final equation is clothes = S+P+U+L-B.  Look familiar?

Let's go further.  Let's say that we want to increase our number of clothes.  We want wardrobe growth!  Well, it looks like those borrowed clothes are a "drag" on our wardrobe size.  If we get rid of the borrowed clothes, that negative B term will get smaller and our wardrobe has to get larger, right?

Wrong.  Remember, like the GDP equation, our wardrobe size equation is just an accounting identity.  The negative B term was put in to account for the fact that some of the clothes we counted in S+P+U in the closet were not actually ours.  But if we decrease B, say by returning our friend's shirt, the S term will go down by the exact same amount.  Sure, B goes down, but so do the number of shirts we count in the closet.  So focusing on the B term gets us nowhere.

But it is actually worse than that, because focusing on reducing B makes us worse off.  If B rises, our wardrobe is no larger, but we get the use of all of those other pieces of clothing.  Our owned wardrobe may not be any larger but we get access to more choices and clothing possibilities.  When we drive B down to zero, our wardrobe is no larger and we are worse off with fewer choices.

Returning to the economy, I don't want to say that it's impossible for increases in imports to drag the economy.  For example, if oil prices rise, the imports number measured in dollars will likely rise, and the economy will likely be worse off as we have to give up buying other things to continue to buy the oil we need.  But, absent major price changes, drops in exports more likely just mirror drops in C+I+G.  If consumers are hurting, they spend less on everything, including imported goods.   At the end of the day, none of these numbers (Mr. Keynes, are you listening?) are independent variables.

Postscript:  By the way, the trade deficit is a mirage in another way - it looks at only a subset of trans-national financial transactions.   The flow of dollars is (mostly) always in balance.  So if we are net sending dollars overseas when trading hard goods, the dollars come back in foreign purchases of investments and financial goods (which aren't included in the trade numbers).  Saying we have a trade deficit is the same as saying we have a net investment surplus.  For you physical scientists out there, measuring the trade deficit is like drawing your box around the process wrong such that you miss some of the forces.

If you really want to know our trade problem, it's not the trade deficit per se, but the fact that the funds coming back via investments are largely invested in value-destroying government debt rather than productive investments.

We have all heard that artists make very little money from their songs, and get "ripped off"by record labels and other folks in the chain.  I have always had mixed reactions to this.  I have no doubt that, with zero power and a burning desire to "make it big", young acts sign uneven deals with record labels.  However, I find it hard to believe that Beyonce is getting hosed in that negotiation.

I saw this chart in TechDirt about where the money consumers spend on music goes (I think this is for a CD sale):

So the performers themselves get about 9% of the retail price after everyone in the chain is paid.  That certainly seems paltry -- after all, they are the owners and creators of the music.  Everyone else is just in the service chain to make sure the music reaches the customers, all the accounting is done, the legal documents are correct, etc.

But it turns out that they may not be doing that badly.  I am a shareholder of ExxonMobil (XOM).  I own a piece of all the oil that XOM owns and controls, along with all the other shareholders.  Think of us as the band, though a really big band with lots of players.   That oil we own, like the band's music, has a ton of value.  When sold as raw crude, it goes for $40-$60 a barrel nowadays.  When sold in pieces (such as gasoline, or asphalt, or lubrication oil) it can sell for hundreds of dollars a barrel.

But out of those proceeds, we have to pay people to help us.  We have to pay managers, and lawyers.  We have to pay oilfield services companies and equipment companies and transportation companies.  We have to pay retailers.  When all those payments are made, before taxes, in 2014 we were left with just under 8% of every dollar we sell.  We own all this oil and we are not even getting as much as a musician!

And XOM shareholders do pretty well.  Owners of Wal-Mart only get about 3% of every dollar they sell.   In my company, I get about 5% of every dollar I sell.   And those evil health insurers?  Their shareholders get just over 2% of every dollar sold (all based on 2014 full-year financials).

Does that mean that Exxon shareholders are getting "ripped off" by Haliburton and Burlington Northern?  Is Wal-Mart getting ripped off by Proctor and Gamble?  Is Humana getting ripped off by GE imaging?  No?

I will reveal the ugly secret:  There is one person who is "ripping off" all of these folks, from Exxon to Rihanna to me.  That person is.... the consumer.  Yep, there are certainly many examples of people signing bad contracts in all these businesses, but the only entity systematically and consistently ripping all these folks off is us.  Because in a capitalist economy, we have the ultimate power.  We drive down the street to get the gas that is 10 cents cheaper, we now shop for our books and TVs at Wal-Mart and Amazon rather than at Borders and Best Buy, and we buy 99-cent individual songs on iTunes instead of buying a whole CD of songs we don't want for $14.99.

In campaigning for the Presidency, Obama made it clear that he thought that much of the violence and hatred directed at Americans was self-inflicted -- ie our often ham-fisted, aggressive interventionism in the affairs of other countries, frequently backed by military force, was aggravating the world against us.  If we stopped, the violence against us would stop.

I rate this as partially correct and partially naive.  As the richest state in the world, one whose culture pours into other countries to the dismay of many of the local elites, we will always earn the ire of many.  But we certainly have made it worse with our actions.

But this just makes it all the more frustrating to me to see Obama's continued support, even acceleration, of the drone war.  I am not sure there is any other practice that emphasizes our arrogant authoritarian militarism than the drone war.  Americans are not used to a feeling of helplessness, so it is perhaps hard to fully empathize.  But imagine the sense of helplessness to watch American drones circling above your city, drones you can't get rid of or shoot down, drones that lazily circle and then bring death from above almost at random.   I can't think of any similar experience in recent western experience, except perhaps the V2 rocket attacks on London in WWII.

The Obama Administration claims that these are clean, surgical tools without any collateral damage.  They do this by a rhetorical slight of hand, essentially defining anyone who is killed in the attacks ex post facto as being guilty.

As is often the case with government activities, it is worse than we thought:

Via the British group Reprieve comes a report asserting that U.S. drones in Yemen and Pakistan kill 28 "unknowns" for every intended target. What's more, "41 names of men who seemed to have achieved the impossible: to have ‘died,’ in public reporting, not just once, not just twice, but again and again. Reports indicate that each assassination target ‘died’ on average more than three times before their actual death."

So much for the precision of drone strikes, which promise a future of war in which civilians and other forms of collateral damage are spared ruin and destruction. As President Obama said in 2013, by "narrowly targeting our action against those who want to kill us, and not the people they hide among, we are choosing the course of action least likely to result in the loss of innocent life.”

Well, sort of. From the Reprieve report:

As many as 1,147 people may have been killed during attempts to kill 41 men, accounting for a quarter of all possible drone strike casualties in Pakistan and Yemen. In Yemen, strikes against just 17 targets accounted for almost half of all confirmed civilian casualties. Yet evidence suggests that at least four of these 17 men are still alive. Similarly, in Pakistan, 221 people, including 103 children, have been killed in attempt sto kill four men, three of whom are still alive and a fourth of whom died from natural causes. One individual, Fahd al Quso, was reported killed in both Yemen and Pakistan. In four attempts to kill al Quso, 48 people potentially lost their lives.

The Washington Post reports on an updated CBO report:

The Affordable Care Act will reduce the number of full-time workers by more than two million in coming years, congressional budget analysts said Tuesday in the most detailed analysis of the law’s impact on jobs.

After obtaining coverage through the health law, some workers may forgo employment, while others may reduce hours, according to a report by the Congressional Budget Office. Low-wage workers are the most likely to drop out of the workforce as a result of the law, it said. The CBO said the law’s impact on jobs mostly would be felt after 2016.

This almost certainly underestimates the impact.   Why?  Well, one reason is that a lot of full-time jobs were switched to part-time jobs way back in late 2012.  That is what our company did.  Why so early?  Because according to rules in place at the time (rules that have since been delayed at least a year) the accounting period for who would be considered full-time for the purpose of ACA penalties would be determined by an accounting period that started January 1, 2013.  So, if a business wanted an employee to be considered part-time on January 1, 2014 (the original date employer sanctions were to begin), the changes to that employees hours had to be put in place in late 2012.  More on this here in Forbes.

In addition, this CBO report is  a static analysis of existing business.  It does not seem to include any provisions for businesses that have dialed back on investment and expansion in response to the ACA (we have certainly cut back our planned investments, and we can't be the only ones.)  This effect is suggested (but certainly not proven) by this chart.

The sequester and government shutdown were cited by the Left as reasons for a sluggish economy.  Which government action seems most correlated with a flattening in job growth?

Congress has ceded far, far too much legislative power to Administration agencies like the EPA.  The only check that exists for that power is process -- regulators have to go through fairly elaborate and lengthy steps, including several full stops to publish draft rules and collect public comment.  A lot of garbage gets through this process, but at least the worst can be halted by a public or Congressional outcry to draft rules.

But like most government officials, regulators resent having any kind of check on their power.  Just like police look for ways to conduct searches without warrants, and even the President looks for ways to rule without Congress, the EPA wants to regulate unfettered by public comment process.

The EPA has found a clever and totally scary way around this.  In short, they collude with a friendly environmental group which sues the EPA seeking certain rules that the EPA believes to be too controversial to survive the regulatory process.  The EPA settles with the friendly group, and a consent decree is issued imposing the new rules, entirely bypassing any rules-making or public comment process.  The EPA then pretends that they were "forced" into these new rules, and as a kicker, the taxpayer funds the whole thing by making large payoffs to the environmental group who initiated the suit part of the settlement.  Larry Bell describes the process:

“Sue and settle “ practices, sometimes referred to as “friendly lawsuits”, are cozy deals through which far-left radical environmental groups file lawsuits against federal agencies wherein  court-ordered “consent decrees” are issued based upon a prearranged settlement agreement they collaboratively craft together in advance behind closed doors. Then, rather than allowing the entire process to play out, the agency being sued settles the lawsuit by agreeing to move forward with the requested action both they and the litigants want.

And who pays for this litigation? All-too-often we taxpayers are put on the hook for legal fees of both colluding parties. According to a 2011 GAO report, this amounted to millions of dollars awarded to environmental organizations for EPA litigations between 1995 and 2010. Three “Big Green” groups received 41% of this payback, with Earthjustice accounting for 30 percent ($4,655,425).  Two other organizations with histories of lobbying for regulations EPA wants while also receiving agency funding are the American Lung Association (ALA) and the Sierra Club.

In addition, the Department of Justice forked over at least $43 million of our money defending EPA in court between 1998 and 2010. This didn’t include money spent by EPA for their legal costs in connection with those rip-offs because EPA doesn’t keep track of their attorney’s time on a case-by-case basis.

The U.S. Chamber of Commerce has concluded that Sue and Settle rulemaking is responsible for many of EPA’s “most controversial, economically significant regulations that have plagued the business community for the past few years”. Included are regulations on power plants, refineries, mining operations, cement plants, chemical manufacturers, and a host of other industries. Such consent decree-based rulemaking enables EPA to argue to Congress: “The court made us do it.”

Every year I am required by law to fill out what is called the "Accommodation Report" by the Census Bureau.  As a lodging company (we run campgrounds) I must reveal my revenues and some of my expenses.  They ask for numbers aggregated differently from how we collect them for GAAP, so it is not a simple exercise.  But I do it under protest, even though several of my competitors do not seem to be similarly punished with this requirement.

Well, I don't actually fully comply.  We run over 150 small locations, and technically I am supposed to fill out an 8-page accommodation survey for every one of them.  This would take a week of my time.  So I pretend I have only one campground and report my summary revenue numbers for all our campgrounds as if they were for one location.   Also, a year ago the Census folks began demanding the data quarterly, and I told them to pound sand, that I was on the verge of not doing the annual report and so I definitely was not going to do all that work quarterly.

Well, this year it got worse.  For some reason, the survey this year had 3 extra pages asking me to break down my expenses in detail, in many categories that do not match those that I use in my bookkeeping.  Here is an example page:

First, not only do I not have time to figure this out (who tracks software purchases as its own item in the accounting system?), but it is not the government's business, particularly given that I am a private company.  Even the IRS is not this intrusive.

Further, at best the data I report will be used for nothing.  More likely, it will be used to justify new taxes on me, new regulations on me, or new subsidies for my competitors.  I have no desire to aid any of these activities.

Postscript:  And you know what I have zero patience with? -- otherwise free market academic economists who support this kind of data gathering because it is critical.  Yes, I am sure they much prefer to get free statistics for their work gathered via government coercion  rather than have to pay for it, as one would have to do if we relied on private companies to gather this data rather than the government.  There is absolutely no difference between an economist supporting government statistics gathering and any other company or individual asking that the government subsidize their inputs.  But, but, we are critical to the country!  Yeah, the sugar industry says the same thing.

I am simply amazed at this level of cronyism enjoyed by the sugar industry -- import restrictions on cheaper world sugar, price supports, and government loans that can be paid back with excess product rather than cash.

The U.S. Department of Agriculture is likely to buy sugar in the domestic market this year in order to drive prices up and prevent defaults on loans made to sugar processors, according to a USDA economist.

The USDA estimates it would need to buy 400,000 tons of sugar to boost prices to an “acceptable level,” said Barbara Fecso, an economist at the department. A purchase of 400,000 tons would amount to about 4.4% of projected U.S. sugar production in the marketing year that ends Sept. 30.

Domestic sugar prices have been trading at about 20 cents a pound, their lowest level in nearly four years, putting companies that make sugar from cane or beets at risk of defaulting on loans they received from the USDA when prices were higher.

People talk about these supposed government subsidies for oil companies, but every time I see a list of them they are dominated by things like depletion allowances, FIFO accounting, and investment tax credits, which are either standard accounting rules that apply to all industries or tax credits that apply to all manufacturers.  But Big Sugar gets real heavy-duty subsidies no one, except maybe ethanol companies and other farmers, get.

We have heard about the difficulty folks who are retired are having with low interest rates.  But low interest rates are having a huge impact on corporations that still have defined-benefit pensions.

Across America's business landscape, the gap between the amount that companies expect to owe retirees and what they have on hand to pay them was an estimated $347 billion at the end of 2012. That is better than the $386 billion gap recorded at the end of 2011, but the two years represent the worst deficits ever, according to J.P. Morgan Asset Management.

The firm estimates that companies now hold only $81 of every $100 promised to pensioners.

In general, everything happening on the liability side of the pension equation is working against companies. A big source of the problem: persistently low interest rates, set largely by the Federal Reserve....

Pension liabilities change over time as employees enter and leave a pension plan. For financial-reporting purposes, companies use a so-called discount rate to calculate the present value of payments they expect to make over the life of their plan.

The discount rate serves as a proxy for the hypothetical interest rate that an insurance company would expect on a bond today to fund a company's future pension payments. The lower the discount rate, the greater the company's pension liabilities.

Boeing's discount rate, for example, fell to 3.8% last year from 6.2% in 2007. The aircraft manufacturer said in a securities filing that a 0.25-percentage-point decrease in its discount rate would add $3.1 billion to its projected pension obligations.

Boeing reported a net pension deficit of $19.7 billion at the end of 2012.

The discount rate is based on the yields of highly rated corporate bonds—double-A or higher—with maturities equal to the expected schedule of pension-benefit payouts.

Moody's decision last summer to lower the credit rating of big banks hurt UPS and other companies by booting those banks out of the calculation. And because bonds issued by some of those banks carried higher yields than other bonds used in the calculation, UPS's discount rate fell 1.20 percentage points.

This is obviously not a wildly productive use of corporate funds, to divert ever-increasing amounts of money to pay people who are no longer producing.  But at least corporations are acknowledged the problem (I will give credit where it is due -- thanks to accounting rules and government regulations that force a fair amount of transparency here).

It is interesting to note the Boeing example, where their expected rate of return on pension funds fell from 6.2% to 3.8%.  Compare that to corrupt government entities like Calpers, which bravely faced this new reality by cutting its discount rate from an absurd 7.75% to a still absurd 7.5%.  This despite returns last year around 1%.  By keeping the number artificially high, Calpers is hiding its underfunding problem.  An interesting reform would be to force Calpers to use a discount rate equal to the average of that used by the 10 largest private pension funds.

The fiscal settlement passed last night did absolutely nothing to improve the deficit or the financial sanity of government.  Its only purpose, as far as I can tell, was to let Democrats count coup on rich people as a reward for winning the last election.  It's like telling your kids that on their birthday, you will take them to do absolutely anything they like, and Democrats chose to display their disdain for rich people as their one act of celebration.    A few other observations:

• I had expected that they would gen up a bunch of fake savings and accounting tricks to pretend there were spending cuts in proportion to tax increases, but apparently they did not feel the need to bother.  Essentially only trivial spending cuts were included.
• At what point can we officially declare that the reduction in doctor reimbursement rates that supposedly paid for much of Obamacare is a great lie and will never happen?  Congress once again extended the "doc fix" another year, eliminating the single largest source of savings that was to fund Obamacare.  Congress has been playing this same game  -- using elimination of the doc fix to supposedly fund programs and then quietly renewing the doc fix later -- for over a decade
• The restoration of the FICA tax is probably a good thing.  Though I think the reality is something else, people still think of these as premiums that pay for future benefits, so in the spirit of good pricing, the premiums should reflect the true costs.  And FICA premiums have always been set about at the right level (it is only the fact that past Congresses spent all the money supposedly banked for future generations that Social Security has a financial problem).  In fact, we should raise Medicare premiums as well.
• Apparently, though I have not seen the list, this last minute deal was chock full of corporate cronyism, with a raft of special interst tax preferences thrown into the mix.

And so ends, I suppose, the 12-year saga of the Bush tax cuts, with tax cuts for the rich revoked and the rest made permanent.   The establishment media decided early on that it was going to run with the story line that these cuts were "for the rich."  The irony, that will never get any play, is that now, at the end, it is all too clear that this was far from the case.  Reversing the tax cuts to the rich only reversed a small percentage of the original tax cuts.  In fact, if the Bush tax cuts had been mainly for the rich, then the Democrats would not have even bothered addressing the fiscal cliff.

I frequently write here that almost never does a month go by, even in a state where I have operated for over 10 years, that I don't discover yet another tax I owe or license I must obtain.

Today, I got a note from the state of Arizona that we must license our two septic pumping trucks with the state.  Already, these are licensed each year with the County in which they operate, a process that includes a fee (of course) and an inspection by the County.  Now I have to fill out a bunch of forms to send the exact same information to the state, with yet another fee (of course) and the need for another inspection each year by the County.  I asked if my current County license would suffice to cover the inspection, and I was told no.  So, to operate this truck in Arizona I must

• Fill out forms and send fee to County
• Get inspected by County
• Fill out forms with the same information as already sent to County and send fee to State
• Get inspected yet again by County, but this time on the state form
• Repeat every year

It is interesting to note that the state does nothing except file my form and bank the fee.  This is just another money and power grab -- more cash for the bureaucracy and yet another useless task (filing these forms and sending out compliance letters, etc) to justify their headcount.  Then the next time someone suggests "brutal cuts" to state budgets, everyone can scream that the rivers will run brown with sewage because the state won't have the people to collect all the paperwork that duplicates what the County already collects.

Just after wasting an hour or two of my time with this (and sending it to my managers to waste days of their time), I got a happy note from the US Census Bureau that I had been selected to file quarterly reports about my business (they have a special survey of the lodging business -- I presume they do this for other industries as well).  I wrote back:

To Whom It May Concern:

I am not sure what we have done wrong to be punished with this extra workload, but unless I hear back from you that this report is required of us by law under threat of some sort of dire consequence, we will not be filling it out.

We are a small company and only I, the President, am equipped to fill out this form.  We already fill out your annual survey and it is incredibly time-consuming for us, for it asks for data in ways we do not normally track it.  Further, it asks for our P&L in a form that does not match GAAP accounting, which causes all sorts of difficulties in completing it.  And we don’t normally compile results on a quarterly basis, only annual, so this report would be particularly onerous.  We actually have to run a business here.

Finally, I might add, I am loathe to send the government yet more data since this data will likely just be used as a justification to raise my taxes or increase our regulatory burden.

So no thanks.

PS- let's just assume the "you have a crappy job" jokes have already been made and move forward from there in the comments.

While this may be familiar territory for readers of this blog, I have a post up at the Privatization blog on the history of private operation of public parks.  In this article I quoted one of my favorite over-wrought criticisms of private operation of parks, this time from the San Francisco Chronicle:

The question is, how will these agreements work over time? If parks remain open using donations, what is the incentive for legislators to put money for parks in the general fund budget? And who is going to stop a rich crook or pot dealer from taking a park off the closure list and using it for fiendish pursuits?

LOL.  "Fiendish pursuits?"

I also had an article there a while back about government accounting systems and how they make such privatization efforts difficult:

Back when I was in the corporate world, "Make-Buy" decisions -- decisions as to whether the company should do some task itself or outsource it to companies with particular expertise or low costs in that area -- were quite routine.  Even in the corporate world, though, where accounting systems are built to produce product line profitability statements and to do activity-based costing, this kind of analysis is easy to get wrong (in particular, practitioners frequently confuse average versus marginal costs).

But if these analyses are tricky in the private world, they are almost impossible to do well in the public sphere.  Grady Gammage, a senior and highly respected research fellow at Arizona State University's Morrison Institute, has as much experience with public policy analysis as anyone in the state.  Several years ago, he spent months digging into the financial numbers of Arizona State Parks, with the full cooperation of that agency.  A critical question of the study was how much it actually cost to operate a park, vs. do all the other resource and grant management tasks the agency is asked to perform.  Despite a lot of effort by Gammage and his staff, he told me once that the best he could do was make an educated guess --plus or minus several million dollars -- as to how much of the Agency's budget is spent actually operating parks vs. performing other tasks.

The reasons that this is so hard is that the parks agency's budgeting process was not set up to determine true net operating gains and losses at parks.  It was set up, like most public accounting systems, to enforce accountability to different pools of money that have been allocated by the legislature for certain tasks.  This tends to lead to three classes of problems that cause public make-buy decisions, as well as ex post facto third-party analyses, so difficult.  Since I am most familiar with the parks world, I will discuss these three issues in the context of parks: