Category: Economics

In Defense of Shrinking Airline Seats

CoachThe internet is abuzz about the new patent application from Airbus that reveals a concept which stacks passengers on top of each other – think bunk beds in coach class. The revelation conjures up images of ‘cattle cars’ and ‘sardines’, while renewing petitions for legislation to protect a minimum airline seat size. But is the popular narrative true that greedy airlines continue to cram in passengers like turkey stuffing, to extract as much profit as possible? Yes. But passengers are in favor of it – if it means keeping the cost of air travel down.

Patent applications like the one Airbus just filed are nothing new. Airlines and seat manufacturing companies always try to come up with creative new ways to fit in more passengers, such as the saddle seat and the hexagon concept. Airbus was quick to point out that they file hundreds of these kinds of patents each year, and the patent does not mean the new seats will be on your next flight. But would this really be such a bad idea?

Complaining about cramped air travel has become one of America’s favorite pastimes. It is true that seat size and passenger space has been declining while the average American traveler’s girth has been increasing. The seat pitch, which is the measurement from one point of a seat to the same point on the next seat, has shrunk 2 to 5 inches since 1985, while seat width has also shrunk a couple of inches.

Of course, the upside to all of this is that cost has come down…dramatically. Since 1985, the cost of an average domestic round-trip ticket has declined by an inflation-adjusted 30%! This is even after the airline deregulation that took place in the seventies. Going back just a few more years to 1978, we find that ticket prices have been nearly cut in half!

This leads us to a basic concept in economics. There are things we don’t like, or more accurately things we all wish we had or had more of, such as legroom on an airplane. The question is, at what cost? Alternatively, ask yourself how much are you willing to pay for that extra legroom?

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Patience Tames the Beast

 stock market crash illustration with graph going down and bear As a child, I often recall adults saying “Patience is a virtue,” or “Good things come to those who wait.” Living in a society whose zeitgeist revolves around the individual and instant gratification, patience tends to fall by the wayside. While there is inherent importance in risk-taking in order to achieve greatness, sometimes simply biding your time is the best thing to do. One of the caveats of playing the stock market is its incredibly volatile nature; you mess with the bull, you get the horns. To become a wise investor, you need an equal measure of risk-taking and knowing when to be patient. 

What Causes Volatility?

In terms of a volatile market, we have to look at both the short and long-term fluctuations of market value. The simplest way to address short and long-term volatility comes with an understanding of supply and demand. Prices are driven up when demand is higher than the amount being sold; inversely, prices drop when more people want to sell than buy. The effects of supply and demand on the market can be seen daily in the market’s closing numbers.

Many believe that a company’s valuation largely determines the stock price, but many are wrong! A company’s value (price multiplied by outstanding shares) does not determine the stock price; rather, it is the opposite. Another important key concept is a company’s earnings. In theory, earnings should be the limiting factor for why a stock rises or falls. Au contraire, mon frère. The earnings determine the ability for the company to turn a profit, while the stock price is determined by the interest placed in the stock by investors.

Long-term stock fluctuation (positive or negative) relies on supply and demand principles, as does short-term stock fluctuation. However, there can be factors outstanding as to why a market would go through a period of intense highs or lows. During times of war, low economic prosperity due to unemployment, or periods where foreign trade decreases, the market (usually) tends to take a decline due to investors not putting money back into the market. On the flip side, periods of intense prosperity seem to drive market values higher, due to investors having more money to spend.

How Do We Counteract Volatility?

Short-term volatility really has no way of being stopped or counteracted. The market will always undergo some type of decrease, increase and leveling out, stemming from fickle investors just like ourselves. We all try to increase our profit margins in the long term through wise investing, but short-term money can be made through incremental buying. If you don’t have a broker and rely solely on your own wisdom and whatever you can glean from your TV financial news channel, incremental buying should be the ace up your sleeve. As the market ebbs and flows from hour to hour, buying one-hundred shares per hour (more or less, depending on the current price) allows you to increase your chance of making larger gains. Buying stocks hourly allows you to decrease the overall money spent per stock when price decreases and increase overall profit per stock when price increases.

Incremental buying works nicely for the long-term effects of a volatile market as well. However, the best tool you can use to curb the effects of long-term volatility is patience. When experiencing a difficult market similar to the one we have now, sometimes the best thing to do is just wait. I would personally advise taking the incremental route, primarily as a mid-risk/high-reward option. There’s always the chance of catching the stock at a low point, right before the soar. But patience is one of the greatests tools in a good investor’s arsenal. I stress the importance of patience for two reasons. First, history shows that markets trend toward stability. Second, rash decision-making backed by poor market understanding makes you no money. Riding the wave to shore works better than fighting the current.

When Will It Stop?

BlackRock Inc. has called for a halt on the market if volatility increases. A halt on the market would cause a temporary cessation of trading in order for investors and companies to get things figured out and back on a stable track. This would include a ‘limit-up/limit-down’ clause where the market would be halted if securities drop or rise above a certain threshold. Experts are saying that the market should calm down once the Federal Reserve raises interest rates. An increase in interest rates would benefit those so-called thoroughbred stocks due to the sense of surety that investors attribute to them. The market beast may be wild right now, but it won’t stay that way forever. Starting this fourth quarter and looking towards the end of the year, keep an eye open for the market to be tamed.  

The College Funding Dance-Advice from a Leading Expert

imageIt goes without saying that a college education has become an expensive proposition. As many families and their kids wrestle with ultra competitive admission requirements as well as soaring tuition costs, advisors like California-based Ron Adams are highly sought after for their advice and wisdom.

As an ambitious journalist in Sacramento, I had the pleasure of meeting Ron over 10 years ago, and I found him to be a fountain of knowledge on the college admissions process. As one of the nations leading experts in college funding, he has assisted hundred of parents and students in significantly lowering their out-of-pocket expenses for four year college terms. His book, “How To Give Your Kid A 4-Year College Education Without Going Broke,” provides to those engaged in the admissions process practical strategies and tips on how to maximize financial aid. Ron also reveals little-known tools that college financial aid offices often don’t and won’t share with you.

Below is an excerpt from my recent interview with Ron, regarding recent developments in the college funding arena:

Ron, what sort of trends are you seeing in terms of tuition costs?

On a national basis, the cost of attendance for a public university is rising at about a 6.5% clip per year; for a private school, it’s in the neighborhood of about 7.4%. So if you do the math, that means that the University of Nebraska – my alma mater, which is currently right around $22,000 per year – will soar to around $44,000 in ten years. And if you look at a private university like Stanford, which last year was just slightly above $60,000 per year, it will rise to $120,000 over that same time period.

Why are we continuing to see such massive increases?

Frankly, it stems from a willingness on the part of banks to loan students pretty much any amount of money they need up to $20,000 per year. Colleges and universities know this, so they feel they can raise rates whenever they desire.

It sounds like lenders and the higher education institutions are colluding together

That’s true. Sallie Mae is an example of a college lender that willingly engages in this practice because they know that students can never declare bankruptcy on those loans. So 30 years from now, at whatever interest rate they are charging, they know that they will eventually be able to recover that money.

What a frustrating scenario for those seeking to go to college!

Michael, what I continue to see – which is the fault of the parents and, in some cases, the student also – is that they wait too long to get serious about the college funding process. Tragically, many become concerned about planning for this around the second semester of their junior year or even the summer of their senior year. That’s way too late. This process should ideally occur during their freshman year, in order to ensure the best possible access to these monies.

How does standardized testing play into all of this?

Students take the PSAT test during October of their sophomore year. A prep course for this is vital because when you get a good score, a couple of things happen. First, you become eligible for a National Merit Scholarship, which is a highly regarded source of money. Secondly, once schools are alerted to these scores, they send out letters inviting students to apply. They’ll often waive the application fee, extend an invitation to visit their campus for a tour and arrange for the student to meet with a professor in the desired field of study. So my message here is that those who wait until second semester of junior year or (heaven forbid) the fall of the senior year to begin their planning, are going to miss out on a ton of funding opportunities. Starting this process late makes it hard to recover. “

Fare Well with Wealth-fare

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What if there were a simple way to reduce poverty in America? In this scenario, the government would give everyone money, so that no one would be poor. Outside of proving your U.S. citizenship, there would be no screening mechanism or ‘need’ test required. Everyone would be provided with the same monthly amount, even if they were middle class or wealthy.

This is the essence of a new policy model being proposed which is called Universal Minimum Income or Guaranteed Basic Income where, in lieu of myriad government assistance programs, there would be just one program dispensing a monthly or annual payment to all citizens, irrespective of income level, background, social status or other factors. While this idea seems nutty at first, given the federal budget deficit, it does offer some interesting arguments when you consider its full implications.

Personally, I have never been a fan of government handouts. But this one caught my curiosity because of its egalitarian approach. Besides, who wouldn’t want a little (or a lot) more money in their pocket each month for basic necessities like rent, food, gas and booze. I added booze in there because life in a society of equals would be truly boring.

Of course, the use of a handout for alcohol consumption would pique the wrath of those who believe that poverty is largely the result of an irresponsible lifestyle. As one of my Twitter trolls commented, responding to my recent tweet on guaranteed basic income:

“So there’s no reason to improve yourself? You have nothing to worry about? That has never worked. It didn’t work for the French. It didn’t work for the USSR. It won’t work now. I’d rather be free and poor than a slave to a State that meets my needs. Any liberal/progressive program will ALWAYS have the opposite outcome of it’s stated goal.”

What’s the Rationale for Guaranteed Basic Income?

At the risk of being branded a Bernie Sanders socialist, for kicks let’s explore the arguments in favor of Guaranteed Basic Income. For starters, today’s jobs economy is not what it used to be. Many workers are powering through 50+ hour work weeks, despite the fact that it’s still not providing them with enough money on which to live. Some might attribute this to greed on the part of employers; others might believe that it’s directly related to the decline of unionization. Nevertheless, a fact is a fact: for many, employment no longer provides a sustainable income because the wages of most American workers have stagnated or declined since the 1970’s. Moreover, about a quarter of all workers rely on some form of public assistance to supplement what they earn. Ultimately, advocates of the Guaranteed Basic Income proposition claim that it offers all Americans the opportunity to create a foundational base for living akin to the bottom level requirements of Maslow’s Hierarchy of Needs. “

The Geography of Personal and Economic Freedom

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My friends will tell you that I’m prone to frequent bouts of uncertainty in terms of where I want to live. One minute it’s Portland, OR; the next it’s Portsmouth, NH. Well today, its Chicago, IL. This I blame on a phone conversation with my pal John earlier in the week which rekindled my desire to return to the Windy City.

But I also have a rational side, one that pontificates on the unappealing side of a particular state or city. By way of an example, San Francisco, Santa Barbara and San Luis Obispo are all locales that get me jazzed; that is, until I consider issues such as cost of living, high taxes and onerous regulations that keep one feeling trapped and hamstrung. Then there’s Chicago and the whole State of Illinois which are both mired in a debt crisis of epic proportions. Things are so fiscally serious in the Land of Lincoln that IOUs are now being issued to many of the state’s lottery winners.

Another factor that I take very seriously is the fact that I’m a black male. So the vast majority of cities in the south are out, along with small midwestern towns with a ‘ville’ at the end of their name. And yes, I do look at racial profiling and stop-and-frisk statistics in places like New York that make moving there unconscionable.

The Economic Freedom Factor

At some level, I believe all of us value our freedoms and liberties. That’s certainly been the case for me which is why I’ve engaged in a great deal of due diligence in terms of finding a home. My current locale of Denver has perhaps been the most accepting place in which I have ever lived

The United Nations Doesn’t Understand Wealth Creation

U.N._LogoThe United Nations is wrapping up their latest summit with the approval of a new 15-year plan, containing 17 audacious Sustainable Development Goals, which include everything from eradicating extreme poverty and hunger to providing everyone with work, clean water and affordable energy. While evidently well-intentioned, none of these goals will be achieved through expensive top-down U.N. programs. Instead, only institutional reforms and economic growth will be able to bring about the kind of prosperity that the poorer nations should be able to enjoy.

The latest 17 goals are similar to, and an extension of, the Millennium Development Goals that were adopted as a U.N. initiative in 2000, with a goal end-date of 2015. The fact that these are 15-year plans already hints at what is intrinsically faulty with the U.N. perspective: that growth and prosperity can be centrally planned and socially engineered. The former Soviet countries and the current Chinese government also have 5 and 10-year plans.

The biggest error underpinning these varied U.N. goals is the fanciful notion that governments and U.N. programs can provide sustainable solutions to these problems by transferring wealth from one country to another. The cost is already estimated to be at least $175 trillion over the 15-year period. There certainly are goals which aid programs can attain, especially measurable and short-term projects such as delivering food to a disaster-struck area or vaccinating a specific population. But no program can engineer long-term economic growth, which is ultimately the only way to eradicate poverty.

If this seems unconvincing, consider that up until just a few hundred years ago, the entire world had lived in poverty for thousands of years (save for a handful of kings and nobles.) If redistributing wealth from rich countries to poor countries really fostered economic growth, then how did poor countries become wealthy to begin with, when there were no rich countries around at the time to help them? How did the ‘hockey stick’ of growth happen?