Good Debt, Bad Debt

For a while, I have been meaning to post on the subject of good debt and bad debt; and a fellow blogger's comment earlier this week gave me the opportunity to get my writing juices going. Here's an excerpt from my response:

Debt is good when you can do one of two things: 1) use the money you've borrowed to do something to improve your future income (examples: an individual going to college, a business buying more efficient machinery), or 2) spread out the cost of an asset over time to match the life of the asset (examples: house, car).

The problem is when people pile on debt that does neither of those two things, but instead is used to increase present standard of living with no regard to future decrease in standard of living on account of having to pay it back. (Of course, peoples' illusion that their house prices and stock portfolios could only go up and therefore they could keep flipping their mortgages and using their equity as a no-downside piggy bank was what caused, oh, only the worst global economic meltdown in the last 75 years.)

Compound the pain in this particular case in that federal subsidies of house (mortgage interest deduction) and car (highway construction) cause already irrational consumers to buy even more house and car than is socially optimal, with adverse consequences borne by the rest of us.

While the whole notion of "the government's budget is like my family's budget" is a little too simplistic, I do think it is correct to say that we should hold our federal government to similar standards as far as whether and when it is good to take on new debt. Optimists will say Obama's moves save us from a worse economic crisis and lay the foundation for an increased economic productivity and energy efficiency that helps us pay off the debt we're incurring to do all of this. Pessimists will say Obama's moves represent an increase in our government's "standard of living," which is to say a higher level of public expenditures with no commensurate enhancement in our ability to pay for them.

Time will tell whether we ought to have been optimistic or pessimistic about all this. And that's what we're all holding our breath about, both here in the US and around the world, and both us and generations to follow.

California Dreamin'

I got a chance to meet the wife of Robb Armstrong, creator of "Jump Start," at an event several years back. Having followed the cartoon, it was fun to hear her say how much of it was based on their own lives in the Philadelphia area. Of course, since I have become a father, the cartoon has taken on even more meaning, since it centers so much on kids, parenting, and marriage.

The plot lately has involved the NFL linebacker brother of one of the main characters being traded from the Eagles to the Chargers. I got a kick out of yesterday's strip, as it artfully captured a main pro and a main con of California living, as compared to Philadelphia living: warm weather versus crippling congestion. Even if you don't have a bi-coastal identity like I do, I hope you find this similarly amusing.

Two Thumbs Up for Mayor Nutter

1. I haven't been able to verify the validity of this link, but here's a podcast of my colleague Anne O'Callaghan from the Welcoming Center for New Pennsylvanians [link courtesy of Immigrant Power] on Mayor Nutter presiding over a swearing-in naturalization ceremony at City Hall. As noted in a recent report we did for the Welcoming Center which will be released shortly, the big cities in the Midwest and Northeast that grew did so because outflow of residents to the South and West was replaced by inflow of immigrants. Nice to see Mayor Nutter understand that if he wants to meet his goal of increasing the City's population by 75,000 over the next decade, being friendly to immigrants will be essential.

2. I attended the Mayor's press conference in which he announced the fusion of the City's Recreation Department and the Fairmount Park Commission. As he spoke of his own personal connection to these city assets - using the libraries and pools as a kid, teaching his daughter how to ride a bike on Belmont Plateau - he appeared to tear up before regaining his composure. Here is a true Philadelphian, who understands just how meaningful libraries and parks and pools and rec centers are to the well-being of our children and families, and who is doing what he can in a constrained environment to do right by these municipal assets and by our citizenry. I appreciated that out of our chief executive.

Don't Trash This Good Idea

Call me a contrarian, but here's yet another unpopular tax I'm in favor of: charging Philly residents per trash bag. I was talking to a friend of mine who works in the Managing Director's office, and he explained the mechanics to me: you buy as many City-certified bags as you need, can only leave out trash in those bags, and recycling is free. As far as enforcement, there's no incentive to dump your bags in front of your neighbor's house, because you've already paid for the bags.

There's still the very big problem of the City having to monitor that people weren't illegally dumping trash elsewhere; and you probably have to do something to counter-balance the regressivity of this "tax," in that it hurts the pockets of the poor more than the rich. But on its face, this idea seems to make perfect sense. After all, there's a big difference in cost to the City if I leave one bag out on Tuesday morning or ten, in terms of trash guys having to grab them, trucks having to move them, and dumps having to hold them. Making trash a variable cost for households creates an incentive to reduce trash in the first place, and to divert as much of what is created that can be recycled into recycling.

Apparently, at a dollar or two a bag, you're looking at getting yourself up to halfway to plugging the $1 billion hole in the next five-year budget. Of course, most of the calls to the City, and most of the people interviewed for this news story, were overwhelmingly against such a move. Too bad: it's not often you can increase revenues, decrease costs, and save the environment all in one fell swoop.


Less Oases

Because I am both busy and introverted, little oases throughout the week mean all the more to me. I currently have 16 possible oases a week. Each morning, between exercising and getting the kids up, I might have 15 to 60 minutes to check email, blog, and catch up on sports and news. Each evening, after the kids are in bed, I can sink into my bed for a good hour with a good book or a business magazine. And weekend afternoons, I may have one or two hours to catch up on errands, tidy up, or even relax.

I don't always get all 16 each week, but I try not to give up too many. But for the past few days, I've been a bit parched. I worked right through several pockets this weekend and into early this week, finishing up taxes and updating financial matters. Two nights this week, I've had church gatherings - our monthly leadership team meeting and our twice-a-month couples' small group meeting - that go long enough to infringe on both my evening as well prevent me from waking up early enough the morning after. And right smack dab in the middle of all this, Jada was a wreck one evening on account of a current bout of sadness.

In other words, over half my oases were shot this week. Thankfully, the taxes are done, there are no weekend house projects any more complicated than replacing a light bulb, and Jada now appears to be back to her normal self at bedtime. So I'm looking forward to a much-needed recharge of my emotional batteries.


News Flash: Driving is A Lot More Expensive Than You Think

I’ve been banging on the subject of higher gas taxes for awhile now, but haven’t really offered a whole lot of numbers. Well, thanks to the good people over at the Victoria Transport Policy Institute (VPTI), I now have some estimates. Check out their 500+ page report entitled “Transportation Cost and Benefit Analysis” here.

Importantly, they distinguish driving costs into three categories: internal variable, internal fixed, and external. “Internal” means they are borne by the driver himself, external by others; while “variable” means costs go up as you drive more, while “fixed” means costs stay the same no matter how much you drive. Therefore, “internal fixed” influences how many cars you buy, and “internal variable” influences how much you drive them.

Unfortunately, “external” conservatively represents over a third of the costs associated with driving: “internal variable” is 37 percent, “internal fixed” is 28 percent, and “external” is 35 percent. Which means that for every dollar a driver spends to own and drive his car, others bear an additional 54 cents (35% divided by 37%+28%). Which means we have far more driving than is socially optimal.

Even worse, many of the categories associated with “internal” costs are things many drivers don’t think about, so to the extent they discount them in their heads, what they think is their cost of owning and driving a car is even less than what it really is. Consider these 23 (!) costs associated with transportation:

• Vehicle Ownership Fixed costs of owning a vehicle. (internal fixed)

• Vehicle Operation - Variable vehicle costs, including fuel, oil, tires, tolls and short-term parking fees. (internal variable)

• Operating Subsidies - Financial subsidies for public transit services. (external fixed)

• Travel Time - The value of time used for travel. (internal variable)

• Internal Crash - Crash costs borne directly by travelers. (internal variable)

• External Crash - Crash costs a traveler imposes on others. (external variable)

• Internal Activity Benefits - Health benefits of active transportation to travelers (a cost where foregone). (internal variable)

• External Activity Benefits - Health benefits of active transportation to society (a cost where foregone). (external variable)

• Internal Parking - Off-street residential parking and long-term leased parking paid by users. (internal fixed)

• External Parking - Off-street parking costs not borne directly by users. (external variable)

• Congestion - Congestion costs imposed on other road users. (external variable)

• Road Facilities - Roadway facility construction and operating expenses not paid by user fees. (external variable)

• Land Value - The value of land used in public road rights-of-way. (external fixed)

• Traffic Services - Costs of providing traffic services such as traffic policing, and emergency services. (external variable)

• Transport Diversity - The value to society of a diverse transport system, particularly for non-drivers. (external variable)

• Air Pollution - Costs of vehicle air pollution emissions. (external variable)

• Greenhouse Gas Pollution - Lifecycle costs of greenhouse gases that contribute to climate change. (external variable)

• Noise - Costs of vehicle noise pollution emissions. (external variable)

• Resource Externalities - External costs of resource consumption, particularly petroleum. (external variable)

• Barrier Effect - Delays that roads and traffic cause to nonmotorized travel. (external variable)

• Land Use Impacts - Increased costs of sprawled, automobile-oriented land use. (external fixed)

• Water Pollution - Water pollution and hydrologic impacts caused by transport facilities and vehicles. (external variable)

• Waste External - costs associated with disposal of vehicle wastes. (external variable)

So if you ask the typical person how much it costs for them to drive, they might just think of gas, which at today’s prices is something like 8 cents a mile. Others might know, for tax or expense report purposes, that the IRS number for 2008 was 50 cents a mile. But factoring in all those costs above, the VPTI report conservatively estimates the number to be about 80 cents a mile for the average car and $1.00 for a SUV.

When you think something is 40 to 90 percent off, you tend to buy more of it. And that’s what’s happened with driving. And, as noted above, most of the cost is not borne by each driver unknowingly; it’s borne by society in very painful ways, whether bodily injury, lost time, environmental degradation, or inefficient land use patterns.

When gas shot up to $4 a gallon last summer, all sorts of rational behavior starting emerging. People made choices to take transit, carpool, and bundle errands. Some even bought fuel-efficient cars or moved away from isolated, auto-dependent places. Sadly, much of that behavior has evaporated as gas prices plummeted. Remember that at $4 a gallon, the per-mile cost is about 20 cents a mile. If you had in your mind that driving actually cost four to five times more than that, you might make even more drastic changes to your life.

Until we figure out how to price driving more accurately, those sorts of behaviors are not going to become commonplace. And we will all be worse for it, economically and socially and medically and environmentally.


God and Savings

Around this time every year, I slog through my tax returns, do a family budget for the year, and update a cheat sheet of assets and liabilities. In addition to the stress of replacing free time on weekend afternoons and weekday evenings while the kids are sleeping with harried manipulations of spreadsheets and forms, there is of course the anxiety associated with seeing your paper gains eviscerated by a wild bear market. I was schooled well, by my dad and my two stock brokers I worked for when I was 20: the most important rule in investing is to start early. Or, as Ben Franklin is said to have put it, “Compounding interest is the eighth wonder of the world.”

Some wonder: those of us who dutifully socked away money into aggressive portfolios commensurate with our long-range investment horizons (15-20 years from when we’ll spend our kids’ college savings, 30-50 years from when we’ll spend our own retirement savings) have essentially seen a decade’s worth of discipline torched in the last 18 months. The only consolation is that we’re still young enough for compounding interest to work in our favor: even using very low assumptions of real rate of return, each dollar we save today will have double the purchasing power for our kids’ college expenditures, quadruple for our own retirement expenditures.

Of course, central to my value system is the belief that my provision for my kids’ higher education and my own post-employment years is not by my own sweat or smarts, but by a God who even takes time to clothe birds and flowers (Luke 12:22-34). Indeed, this Bible reference is preceded by a biting story by Jesus about a man who pats himself on the back for laying up treasures for himself, only to be called a fool; so it is certainly possible and even likely, absent an active and ongoing repointing of one’s heart and priorities, to be unfaithful in the way we save today for tomorrow’s use.

Does that then mean that saving is necessarily unfaithful? Can it be argued that the more faithful believer spends down to help others today, and trusts that God will provide for the future needs of his family? The Bible passage above, and a surprising number like it, suggests that if we are currently erring in this generation, it is in not being radical enough about our monetary giving, whether by donating more of our incomes or by taking lower-paying jobs in the first place that are more servant-oriented. And to be sure, there are more than enough worthy uses of our free time, disposable income, and vocational skills.

But giving can become its own idol, and God gives us plenty of leeway to eat, drink, and be merry. It may very well be that the hyper-competent hedge fund manager would be better utilized for the Kingdom if she leverages her skills to provide liquidity to developing world communities desperate for market solutions, rather than assuming she should automatically discount her secular skills as irrelevant to eternity and instead raise support from friends to be in the full-time ministry. And let’s not forget how wonderfully fortunate we are that we can even think about the likelihood that we will live longer than we can work, which is a luxury unknown to most of mankind throughout history and even today, and then isn’t saving retirement then simply a matter of earning over 40 years enough for living over 80 years? (At least I think this is part of what Pastor John Piper of Bethlehem Baptist Church seems to be saying when he notes how hard it is to distinguish between spending on the present and saving for the future.)

In the end, there are no inherently sacred or soiled career paths, no absolutely good or absolutely bad approaches to money management. Rather, we must be ever mindful of our motives and our mission. If we are fortunate, God has given us an unprecedented confluence of innate skill, educational upbringing, and social freedom, in which we can earn a living while providing a positive contribution to society and to our trade, responsibly bless our kids so they have similar advantages, and prepare for post-working years in ways that will allow us to not be a burden on our families or on our government. Do we need to be open to ways we can radically sacrifice some or all of these fortunes for the sake of others? No doubt. But can we also look to redeem these uses of human skills, financial resources, and finite time so that they are as allocated to the Kingdom as possible? Absolutely. And if that means I can deliberately and responsibly bless my kids and my future retired self in ways that enhance our ability to enjoy God and make Him known in our unique ways, then let it be so.

Moderates of the World, Rise Up

In his column earlier this week, “A Moderate Manifesto,” David Brooks has penned a stirring call to the silent middle of this country, to mediate between a power-drunk far left and a reactionary far right. His words are timely for me, as I have lately been mulling over a post on my thoughts on the Obama Administration’s first month and a half in office. (Has it only been 44 days?)

I had been convinced by my Democrat friends, and had convinced myself as well, that Obama the President would not be as leftish as Obama the Campaigner. And the Administration started well in this regard, with center-right economics team picks and overtures to the other side of the aisle that had dyed-in-the-wool liberals howling.

Then I got sidetracked from issues and philosophies and worried myself over signs of inexperience: the way he let old guard congressmen subsume key policy decisions and struggled with the departures of key Cabinet picks found guilty of funny business with taxes. Did we know all along that he was too green but let our adoration of his soaring rhetoric fool us?

In my mind, he quickly regained his footing and found his stride during his address to Congress and his stops in key Republican states to sell the stimulus bill to America. And so while I continued to scratch my head with skepticism over his philosophies, I found myself accepting the fact that if I disagreed with my President, at least I respected his ability to make bold decisions and set a steady course.

But the Brooks article captures the gnawing feeling I’ve had in the last few days, that something is not quite right in Washington, and that there is a very real possibility that we are embarking on a disastrous sea change in the way we do government. And the Brooks article also captures the equally gnawing feeling I’ve had with many responses from the Republican Party, many of which ring hollow because they are either prefaced with “we admit we were just as bad when we were in power” or should be.

(On a smaller scale, the fiasco that was the California budget process last month was a microcosm of partisanship gone horribly wrong: gerrymandered districts leading to vitriolic primaries and equally vitriolic partisans on both sides; one side voting itself all sorts of plums and the other side digging in against tax increases; and then, when – surprise, surprise – state finances were on the brink, these same decision-makers were willing to risk a complete meltdown of the most important state in the nation rather than compromise on a budget and commit to a long-term solution.)

The irony is that the root cause of the financial mess we’re in is the illusion that we can have it all: big house, two gas guzzlers, and whatever else our credit limits can bear. And now the “solution” is cut from the same self-deception: we can spend our way out of recession, unsustainable environmental behaviors, and a broken health care system, with no time for the notion of opportunity costs.

Or is it, even worse, that we can afford to spend more than we’ve ever spent because the richest among us – and we shake a fist at them – will foot the bill, and rightly so, since it was their greed that got us here in the first place. Never mind that the top 1 percent of earners already pay 39 percent of federal individual income tax and 56 percent of federal business income tax; or that Obama’s proposed budget, by reducing the tax deduction on charitable donations, will hurt individual giving, which is by far our greatest mechanism for redistributing resources from the rich to the poor. Soaking the rich to give to the poor via the mechanism of federal government may sound like an enlightened version of Robin Hood, but it’s not the America I know.

Here’s hoping that glorious stable of brainiac economists that flocked to Obama last year can help knock some sense into this Administration, and remind our leaders in Washington of three fundamental truths: governments should not run banks or car companies, life is about trade-offs, and beware the unintended consequences. And in light of the vapid venom emerging from the so-called spokespeople of the Republican Party, here’s hoping a silent middle can become not so silent and not so caught in between, but rather assert its more reasoned perspective on business and government.

In short, a new “New Deal” is not what we need, nor is a sore-loser whining about irresponsible spending that comes on the heels of 8 years of irresponsible spending. Instead, how about some measured responses that unleash government where government can make a difference (say yes to properly pricing scarce resources and yes to infrastructure investment and yes to minimizing distortive tax policy) and signal government’s restraint in not mucking up Americans’ innate drive to innovate and create and build and grow (say no to protectionism and no to anti-immigration policies and no to regulations on industry that pander to our vilification of the rich).


Utilization and Availability

For the past three years, my firm has produced a Disparity Study for the City of Philadelphia. A Disparity Study looks at the utilization of businesses owned by minority, women, and disabled entrepreneurs, in contracting opportunities, versus their availability: disparity = utilization divided by availability. A disparity ratio of less than 1 means under-utilization - utilization rates are lower than availability rates - while a disparity ratio of greater than 1 means over-utilization - utilization rates are higher than availability rates.

Looking at both utilization and availability is important for two related reasons. Let's say Hispanics received 5 percent of professional service contracts in a particular jurisdiction. If Hispanics represent 40 percent of the population in that jurisdiction, the easy response is to say that 5 percent utilization is way too low. But what if Hispanics represent only 1 percent of professional service providers in the jurisdiction? (In other words, utilization is five times availability.) So the twofold take-away is: 1) the fact that Hispanics are 40 percent of the population and 5 percent of professional service contracts is not the problem, and 2) the real problem in need of fixing is that Hispanics are only 1 percent of professional service providers.

Unfortunately, people tend to focus solely on utilization rates that seem unfairly low, and thus push the powers that be to directly up those utilization rates. Or, another set of people might look at the numbers above and, seeing a disparity ratio of 5, pat themselves on the back for having achieved "over-utilization." A "disparity" analysis rightly brings the notion of "availability" into the conversation. So now the policy push is about more than "hey, government; give more contracts to minorities, women, and the disabled"; in addition, it's about "hey, government; work with the private sector to create an environment in which more minority, women, and disabled owned firms exist in the first place."

Furthermore, this concept applies to other fields outside of contracting opportunities, such as coaching positions and philanthropic endeavors. Let's be clear: inequities of opportunity on the basis of race, gender, and physical ability are tough topics to talk about and tough nuts to crack, but a broader discussion that looks at both utilization and availability is a more constructive way in the long run to make things better. Let's not settle for either "fixing inequities is too hard to try" or "all we have to do is force decision-makers to pick more of whoever they're not picking enough of now," but rather let's treat this as the important goal that it is and press towards "how can we work together to increase both the use of under-used groups AND the pool from which we'd draw such candidates in the first place."

Los Angeles is (Cough, Cough) #1 in Congestion

Here's a list you don't want to be featured prominently on: America's 100 worst intersections, according to Forbes Magazine. Too bad for the LA metro area, which claims a third of them, including 11 on the Hollywood Freeway alone.

Admittedly, congestion also means popularity, and in fact the Big Three metro areas (New York, Los Angeles, and Chicago) accounted for 87 of the top 100; the San Francisco Bay Area had five, Austin four, New Haven two, and Dallas and Honolulu one each. And in some cases (the article specifically mentions 580/101 in Marin County), it's a matter of poor layout.

But congestion is also auto-centricity gone terribly wrong, with negative impacts from lost human productivity to lost fossil fuels. Here's hoping the result of a spotlight on these 100 intersections isn't to try to solve the problem by building even more road capacity, thus exacerbating the root problem.


Green Jobs: Hot Stuff or Hot Air

I don't agree with everything in this article - "The Green-Jobs Engine That Can’t" - but it's worth a look because it reminds us that we need to be very careful about what we're expecting out of the "green" revolution. If it is part of retooling our physical plant and our human capital away from dying ways and toward approaches that treat natural resources as the scarce and precious things they are, good. If subsidies can ease the otherwise painful transition away from inputs we're addicted to and industries that no longer can produce living wage jobs, good. If we government can give private industry a boost in innovating its way to a leadership position in technologies and processes that are demanded the world over on account of new environmental realities, good.

But if we carelessly ask for dough to prop up pet projects in the hopes people will take our inspiring rhetoric at face value and not ask for a more reasonable cost-benefit assessment, not so good. If we use taxpayer dollars to pay people to do things that the market isn't demanding instead of leaving those taxpayer dollars alone so they can be allocated to their highest and best use, not so good. And if our reliance on balky federal funding and programmatic mechanisms lead to convoluted actions that keep the money flowing but work against financial profitability and energy efficiency, not so good. So let's keep our eyes open on this.

My Trendy Kids

Apparently my kids are both part of trends related with international adoptions, at least according to this Philadelphia Inquirer article, which profiles a local couple who started down the China process and ended up with a Taiwanese baby. Jada's 2005 adoption from China represents that country's high water mark in terms of volume to the US; since then, the Chinese government has become more restrictive, more Chinese families have stepped forward to adopt, and the process has lengthened considerably. And before Aaron's 2007 adoption from Taiwan, there weren't a whole lot of babies in need of one-way tickets to the US; but last year, 267 made just such a trip as adopted children.

Meanwhile, South Korea is phasing its program out by 2015, Russia is cleaning up its act and its numbers are therefore down as they get more deliberate, and Guatemala is on hiatus until further notice. As the article notes, "the once-stable universe of international adoption has turned upside down." All the more reason for us to be grateful our two are already right side up in our home.


Who Needs a Car

Ever since Amy took on most of the car-oriented errands like grocery shopping and pediatrician appointments, my own driving trips have dried up to almost zero. In fact, in the entire month of February, which is admittedly a short month, I only used the car five times: 1) on February 5, to drive our babysitter home after our small group meeting, 2) on February 7, to visit my friend in Montgomery County; 3) on February 19, when the small group Amy and I are part of met in the Narberth house of the only couple in our group that doesn't live in our neighborhood, 4) on February 21, to take my family to the zoo and then a nearby restaurant; and 5) on February 28, to take my kids to the aquarium. Per the rules I established for my June 2008 car tracking, that sums to 11 trips and less than 100 miles, or less trips but more miles than that month.

Clearly, our lives here in University City do not need to revolve around the car. Even in cold and inclement weather, it's not that hard to get myself to work and my kids to school just by walking; I must have had 20 different meetings downtown, and transit was easily the easiest way to get to them; and apart from the three Saturday trips described above, plentiful weekend fun could be had within walking distance or was an easy subway or trolley ride away.

If we didn't have small children, we'd probably jettison our car altogether and completely rely on Philly Car Share. As it is, having one car between the two of us adults, and putting less than 25,000 miles on it in our three years of owning it, is saving us something on the order of $7500 a year (8,000 miles x 1 car vs. 12,000 miles x 2 cars, @ 50 cents a mile, minus the cost of tokens, and, what the heck, an extra pair of shoes). As a colleague of mine pointed out in his testimony to City Council last month, at today's interest rates, you could get well over $100,000 more house with the money you're saving.

And you wonder why I think, long-term, dense and transit-served places like Philadelphia are going to be a better real estate investment than sprawled out neighborhoods in Phoenix, Atlanta, and Houston. People aren't dummies when it comes to what they'll pay for a house; and once gas prices soar again, transit systems demonstrate their stability and convenience, and more and more highways crumble and clog, less and less potential buyers will look at a location that can save them $7500 a year in out-of-pocket costs with little to no adverse effect on their quality of life and say, "I'd pay a premium for that."