Sunday, February 24, 2013

Thelma, Louise, & Chloe's Cliff


Meet Chloe:

Single Mom- resident of US state of Pennsylvania
Chloe has two children, ages 1 and 4 who attend daycare so Chloe can work
Chloe works as a digital print operator with a gross salary of $29K/year.

Happy Story:

Hard to raise two children on only $29K.  However, tax payers help by providing health care assistance (CHIP), childcare subsidy, housing assistance, food stamps, and an earned income tax credit from the US Federal Government.  Chloe receives $28K in tax payer funded assistance.
Total Disposable Income = $57K  ($29K salary + $28K in welfare). 

Chloe’s Cliff  #1 (A $1,000 bonus costs her $9,000):

The store where Chloe works beat all its sales goals.  She is a really talented worker and shared in her store’s success by being awarded a $1,000 bonus just before Christmas.   This made for some extra nice presents under the tree.

The next year, when Chloe reapplied for tax payer funded assistance, she got the bad news-  Chloe’s benefits were going to be reduced because she made $30K ($29K salary plus $1K bonus).   Her food stamp subsidy was significantly reduced and she lost all her housing assistance. 

In total, Chloe now only could receive $19K in tax payer funded assistance.
Total Disposable Income = $48K  ($29K salary and $19K in subsidies).

Chloe’s Cliff #2: (Please don't promote me, I can't afford it):

As we said, Chloe is a good very good employee who has bettered herself by night school.  Her boss got promoted to run a regional network of print shops and Chole was tapped to take over as store manager- a big promotion and $8,500 per year raise.

But Chloe is smart and still hurting from the $9K financial hit she took last year.  She knows that at $37,500/year (Her original base of $29K/year plus $8,500 promotion), she will lose all her government assistance except the health care subsidy for her children which is about $7,500/year.
Total Disposable Income = $46K as compared to her happy story (above) where she had $57,000 a year!

Like Thelma & Louise:

The more Chloe works to better herself the lower her disposable income.  She feels a little bit like the two accidental outlaws in the movie.  But she has to protect herself and her family and therefore needs to take money from other citizens.  

And the bureaucrats that created these cliffs did so because they thought they were doing something good.  Chloe is stuck in her dead end job no matter how much she wants to better herself because the entitlement system keeps her there.  It is not about Chloe- it is the system.

Or did the bureaucrats create these cliffs to make their needy constituents reliant on them so they can hold power?  After all, the people in power are there because they understand how to exploit human nature.

Chloe’s self esteem is not important to the cliff creators.  In fact, Chloe is just an unfortunate casualty; a minority.  A vote that they won’t lose no matter how imprisoned they make her feel.

Addendum:

This posting is not anti-welfare programs.  I believe that social safety nets are important for a well ordered society.

The point is- a well tuned support system smooths the phase out of entitlements as the person’s after tax income grows.  But that would take some work by the cliff creators who will receive no personal benefit if they fix the problem.  The political incentive system is broken.

Here is the data:
The full report can be found here.
 
 

 

 
 

 

 

 

 

 

 

Monday, February 18, 2013

Modern Day Sharecroppers

Have you been watching the Student Loan bubble in the US? According to the WSJ, more than 12% are now delinquent. If you look at each borrower’s situation (financial condition and amount borrowed) a growing number of Student Loans are sub-prime. Interesting parallels between housing loans and student loans exist.


Housing: loans were made to people who couldn’t pay the mortgage who bought homes they never really could afford. The financial industry made all the money and everyone else paid. The government nationalized the mortgage reinsurance industry through Fannie Mae and Freddie Mac with the US taxpayer to foot the bill for all defaults. With the banks made whole there was no need to force foreclosures. After all, if the bank takes over the house then they have to maintain it! Why not just leave the delinquent borrowers in the house- rent/mortgage free- so they can do the up keep. Sort of like tenant farming.

Education: loans were made to prospective students who got degrees in fields with no jobs. The loans propped up the university system allowing them to raise tuition faster than inflation making institutional elites (professors, administrators, etc.) rich or get paid full time for very part time work. The government nationalized the student loan industry through the takeover of Sallie Mae leaving the defaults to be paid for by the US taxpayer. Also, student loans can’t be discharged in bankruptcy so you will be owned by the state until you pay off your debt. But you do get to keep your diploma and 15% or more garnished from your wages for at least the next 20 years. How’s that for a modern day sharecropper?



The best businesses in America are those where you can personalize your gains and socialize your losses. Or for the gamblers among you… like always playing with the House’s money.