Rules of Thumb...

Rules of Thumb are used to express complex concepts in simple terms.  While on occasion they can be somewhat limited in value, for the most part they have great value in everyday life.

In reviewing the wisdom of the 4% rule the other day, I ran a lot of different scenarios regarding retirement money and came to the conclusion that the "rule of thumb" was actually a pretty good representation of what was a very complex mathematical formula that could have thousands of scenarios.

And it struck me that these "rules of thumb" are not necessarily all that bad, for the most part.  They allow us to take very complex mathematical problems and reduce them to the simplest terms, which in turn helps us better manage our finances - or whatever.

And there are rules of thumb for a lot of whatever - everything from calculating the amount of board feet of lumber for a building project to how long to bake a cake.  They represent a collective wisdom, sort of a Wiki if you will, on how to best get things done.

From a financial standpoint, there are a number of "rules of thumb"out there which make a lot of sense.  And what we've seen in the past, is that when people discard these "rules of thumb" as being "outdated", well, bad things pile up in a hurry.

But note, don't confuse a "rule of thumb" with a mantra (my next posting).   Rules of thumb are based on calculations and math.  Matras are based on wishful thinking.

Here is a short list of some Rules of Thumb that I think make sense, in terms of personal finance.

1.  Don't buy a home unless you plan on keeping it at least five years:  In a normal Real Estate Market, the transaction costs of buying and selling a home can easily be 10% or more.  At 2% annual appreciation, which is the norm, it can take 5 years or more to recoup those transaction costs - and break even.  If you sell before the 5-year mark, chances are, you will lose money, as simple as that.

2.  The 4% Rule:  In retirement, if you spend no more than 4% of your savings in any given year (adjusted for inflation after the first year) you should have enough money to last you 25 years or more.  You can go through the complex calculations and scenarios, but for most people, this represents the safety net level of spending, where the odds of outliving your money are very, very slim.

3.  The Best Automotive Value is a Late-Model Used Car:  If you buy a brand-new car, the minute you get it home, it is a late-model used car.  But it is one you paid 20% too much for.  If you can find a used car, 1-3 years old, with 30,000 miles or less on the clock, in good shape, it represents the best value for the dollar, as it hits the "sweet spot" on the depreciation curve, in that a huge chunk of initial depreciation has come off, and it will depreciate fairly slowly for the next 3-5 years.  Such a vehicle can last as long as any new car, if properly cared for.  And most are still under warranty.

4.  Save 10% of your income:  It may seem hard to do, at any time in life, but for our generation, who is not assured a defined benefit pension, saving is not merely desirable, but essential.  How much to save is a hard number to crunch, but 10% seems like a reasonable goal, particularly considering that it is tax deductible in a 401(k) or IRA.   And no, please don't tell me you can't afford to save because you are living "paycheck to paycheck" while texting me on your new smart phone.  There's your 10% right there.

5.  A year's salary saved by age 30:  Again, this seems like a hard thing to do, and I certainly failed at this goal (although by age 35 I was far over it).  Others have different numbers or targets for age 40, 50, and so on.  The idea here is to have some goal, and this rule of thumb insures you will have enough saved to retire by age 65.

6.  The percentage of your savings in "safe harbors" should equal your age:  Again, this is a flat rule, but one that makes sense.  By age 70, you are not going to make a lot of money off of investments, but you want to preserve savings.  So 70% should be in safe and boring things, not stocks and corporate bonds.

And so forth....

There are of course, a lot more.  For example, see these sites:

http://www.bankrate.com/finance/retirement/8-rules-of-thumb-on-saving-and-retirement-1.aspx

http://twocents.lifehacker.com/10-good-financial-rules-of-thumb-1668183707

http://www.getrichslowly.org/blog/2009/03/09/25-favorite-financial-rules-of-thumb/

http://business.time.com/2012/12/28/9-handy-financial-rules-of-thumb/

http://realdealretirement.com/3-retirement-rules-of-thumb-that-actually-work/

The point of a "rule of thumb" is to take complex economic equations and reduce them to simple terms than you and I can use on a daily basis without resorting to calculus.   And people use these in all walks of life.    A contractor can look at a set of blueprints and using a "rule of thumb" based on square footage tell you the cost of construction in a matter of minutes - and how many board-feet of lumber are needed.

Your doctor can measure your height and weight and have a good guesstimate of your body mass index, without you having to strip down to your skivvies and sit in a tank of water.   Rules of thumb help us by taking complex data and reducing it to a simple equation.

They are, of course, no substitute for "doing the math" on any topic.  If the "rule of thumb" shows that something is promising, then you can get out your pencil and see if it really will work out.  For example, in renting out a condo or house, I could guess pretty accurately whether I would make money on the deal by using "rules of thumb" to guess at mortgage, tax, and insurance costs.  But of course, later on, I would get out my calculator or spreadsheet and go to town on the numbers to see exactly what I could budget for the project.

 Some of these "rules of thumb" are numerically based such as the 50/30/20 rule, others are basic good advice (e.g., "Never co-sign a loan!").   The point is, there is some logic behind these "rules" that you can analyze and see if it fits your situation.

In most cases it does.  Rarely does it not.   There are few, if any circumstances where saving money is a bad idea and spending it is a good one.

But that doesn't stop the marketers from coming up with their own "rules of thumb" - or mantras as I call them, which is the subject for the next posting.

Neither Borrower Nor Lender Be...

If you would know the value of money, go and try to borrow some; for he that goes a borrowing goes a sorrowing.

BENJAMIN FRANKLIN, Poor Richard's Almanac

A lot of folks thought that Benjamin Franklin said, "Neither borrower nor lender be" but in fact, if he did say it, he was quoting Shakespeare:

Neither a borrower nor a lender be;

For loan oft loses both itself and friend,

And borrowing dulls the edge of husbandry.

This above all: to thine own self be true,

And it must follow, as the night the day,

Thou canst not then be false to any man.

(Hamlet, Act I, Scene III)*

There is a reason Benjamin Franklin, who never held an elected office, is on the $100 bill.  He knew a thing or two about money.

I was reading a "financial" site the other day and people were very self-importantly discussing the best ways to lend money to friends and family.  I was sort of appalled by the whole deal, for a number of reasons.

People who lend money to friends and family often do so in order to be big-shots.  They like the idea of being the one with the money that others come to, hat-in-hand, asking for a handout.  No one will admit to this, of course, but it is a big part of why people lend to friends and family.

Loaning or giving money to friends and family is a personal decision, but it is often a rotten one, as the Bard illustrates.   Not only are your motives in lending (or giving) money suspect, the result of such loans or gifts will alter your relationship dramatically.  You are no longer friends, once you have created a fiduciary relationship.

And eventually, of course, you will get pissed off that the friend never pays you back or shows sufficient "gratitude" for your loans or gifts. You become the friend with the perpetual problem, always bad-mouthing your borrowing friend to others, whining about how they are always hitting you up for money.  (By the way, the borrower does the same exact thing - trash-talking you, behind your back).

And in most cases, you can't afford it anyway.  In one forum, a person who loaned money to his "family" realized that the reason he was broke all the time was that he was handing out money to his "kin."   His "family" (siblings and parents) thought he was "rich" because he showed off his apparent wealth with fancy cars and cell phones and clothes, so naturally they asked him for some of it.

He realized he was spending himself into the poor house, and decided that whenever family members bought up monetary issues, he would change the subject from now on.

A better idea, I think, is to stop hanging out with your childhood family and instead find your own mate and form your own family and divert your energies and monies to that.  If you are "hanging out" with your parents and siblings well into your 30's, something is very, very wrong with your life.   You are not living it, you are still an audience to theirs.

And another good idea is to act poorer than you are by not buying bling cars and bling accessories.  If people think you are poor they will stop asking you for money.

It is like the "Mexican Grimace" I discussed before.  Whenever we saw our cleaning lady on the street, she would be frowning.  And during our ill-fated RV trip to Mexico, we noticed that many Mexicans, when walking on the street, tended to look upset or depressed, even though they were happy people.

The reason they do this is simple: In Mexico, if someone sees you smiling, they assume you are happy and they assume you have money.  So they figure out a way to take it away from you.   The Police, the government, your neighbors - even criminals.  All will take away your fortune if you appear to be fortunate.   So as a matter of urban camouflage, you act as though you are down to your last peso.  It is a smart move.

Never crow about having money, otherwise people will ask you for some.  And when you refuse, they will say you are "mean" for not "sharing" - even though you might have just barely enough to live on yourself - and fund your own retirement and health care.

From the borrowing side, it may seem like a sweet deal, shaking down family members for spare cash.  But it is a short-lived bounty.  If you are turned down for a loan from the bank, it is not because the bank is being "mean" or whatever, it is because you have no way of realistically paying back the loan.   Experts in finance at the bank have determined this - and you should listen to them.

I once was turned down for a loan from a small bank that I owned founding shares of stock in.  The VP who handled the loan was a personal friend of mine.  He still turned me down, and he felt bad about it. I told him, "You know, this is a wake-up call.   You are doing me a favor!  You have to make decisions like this based on hard numbers, and what you are telling me is that borrowing more money is a very bad idea.  I should listen to you!"

And you should too.   If a bank turns you down for a loan, going to a payday loan place is not a good idea - it is a horrific one.  And going to relatives or friends isn't much of a better idea, either.

The reason is, of course, you likely won't be able to pay them back and as a result, a lot of hard feelings will come about and you will lose your friendship or be estranged from your family.

A high school classmate of mine contacted me on Facebook back when I was still on it.  He was a ne'er-do-well and is living on disability most of his life.  He has gone though bankruptcy more than once.  I asked him how his brothers and sisters were doing and he said, quite honestly, "They don't talk to me too much anymore, because I keep asking them for money."  In other words, his "needs" for money caused him to lose the friendship of his own family members.

At the same time he was borrowing money from family members, he was acquiring exotic pets.   And this is not atypical of the family borrower.   Often people will ask family members for money rather than sell their hobby car or motorcycle.  They claim they are broke, but their body is covered with thousands of dollars of tattoos - and they bore you with their plans for yet hundreds of dollars more. They text you from their new smart phone about how they can't make their mortgage payment.  And they don't see the irony.

Or they smoke tons of pot (which is expensive) and complain they can't hold a job - but hey, can you "loan" me $500 until next week?   As the lender, are you being kind, or just enabling their lifestyle?

Rather than face hard truths or take action to fix their finances, they take the easy route - hitting up friends and family for money.

Recently another friend asked me for money to help pay medical bills.  I was a bit astounded in this day and age of Obamacare that anyone could have problems with medical bills.  But with co-pays and deductibles, they had run up quite a bill with the hospital.

I asked him if he had contacted the hospital's billing department and asked for payment terms.  Many hospitals make their profits based on Medicare/Medicaid/Insurance payments and the co-pays or deductibles are just written off.

For example, another friend of mine was hospitalized for diverticulitis.  Hospitalization was not really necessary, but they had empty beds and medicare was paying - so why not?  Better to get 3/4 the daily rack rate than nothing.  And now you understand why health care is so expensive in this country.

But odds are, the accounting department would have worked with my friend to accept monthly payments, interest-free, at a level he could afford.   After all, if he declared bankruptcy (again) they would have to write the whole amount off.   Anything they can get from him is "found money".

The worst thing you can do with staggering medical bills is put them on a credit card or - as my friend intended - pay them with a consolidation loan.   Now you actually owe that money to a 3rd party, and they are not going to be as accommodating as the Hospital.

But even in situations of medical debt, a lot of people don't really "need" money from friends and relatives so much as they don't want to make changes in their lives.  They don't need the money to pay the debt, but to be more comfortable or to maintain their current comfort level.

For example, my friend with the hospital debt lives in one of the most expensive places to live in the country.  High rents, high food costs, high gasoline costs, high taxes  - a high cost-of-living overall.   You would think that being on disability they might seek out a cheaper place to live, where their meager dollars would go further.  Hitting up friends and family for money is not a long-term answer to their problems.  Living withing their means, is.

But again, common-sense advice falls on deaf ears. No one wants to hear things that appear to be difficult or require difficult decisions.  Borrowing money from friends appears to be "easier" and when they don't cough up the dough, you can blame them for your misfortune instead of looking inward as how you got to where you are in the first place.

It may sound cold-hearted, but I have very little sympathy for people who lend money to family members and friends and then complain about how rotten it is they never got paid back.  I have a little more sympathy for people in financial difficulties, but not much.  If you find yourself in a situation where you are begging for money from friends or family members, maybe it is time for a wake-up call.   Because borrowing money is not a long-term solution to anything.  It barely is a short-term solution.

And let's face it, in this country, even if you are "destitute" you can qualify for a lot of free things - places to live, a free cell phone, food stamps, free bus fare, public assistance, etc.  Compared to the rest of the world, even the poorest among us in the United States is living like a King.

Stop playing "bank" with your family members and friends.  Whether you are the banker or the borrower, it is a lose-lose proposition.

* This quote from Hamlet has a double-meaning. Polonius is not just giving financial advice, but making a lot of boring platitudes - bloviating and blasting hot air. In that regard, this quote is apt for this blog!

Standardized Tests - Testing Students or Schools?

In the 1960's and 1970's, standardized tests were used to test students.  In the 2000's, they were used to test schools.   All hell broke loose.

A lot of ink has been spilled about "No Child Left Behind" and standardized testing in the last few years.   Under the "No Child" law, schools became obsessed with standardized testing, as the results of these tests would determine how much funding the schools got, or if teachers got raises or bonuses - or even whether the schools should be closed.

Not surprisingly, some schools, such as in Atlanta, started a wide-scale cheating organization, so that teachers, and more importantly, administrators, would get raises and bonuses.   Teachers would have "erasure" parties where they would erase the last page of each test (with the hardest questions) and replace them with the correct answers.   A lot of people went to jail over that - some for a long time.

But it was a predictable outcome of a horrible Republican policy.   They created a system of economic rewards that was impossible to play straight - so everyone cheated.   The policy was based on the flawed assumption that all students have equal innate abilities and that if they are not learning then it must be the school's fault.

But as any observer of human nature can tell you, some people are just cold stone stupid.   And the more stupid a person is, the more likely they are to be poor.   And poor people tend to live in poor neighborhoods (bootstrapping poverty, but since they are stupid, they fail to see this) and go to poor schools, which perform poorly.   You can "incentivize" them all you want, they will never get good grades on average.   Yes, a few will do very well, unless their peers bully them into suicide or pressure them into joining a gang.

But stupid is as stupid does.  And instead of punishing schools for "failing" perhaps a better alternative is to structure the schooling to the student, and not the student to the schooling.

Let me explain what I mean.

When I was in school, we had standardized testing, with "SRA" tests going out to Procter, Iowa, to be graded, just as in the Simpson's cartoon above.   From this testing, we were tracked into different levels of learning - A, B, and C-levels.   The A-level students were college-bound and were given more to learn and the best teachers.  We were expected to take AP courses and go on to excel in college.

The B-level students were expected to go to college, community college, trade school, or go into business.   They took more practical courses ("business math") and perhaps even vocational training.

The C-level students were the hard cases - kids who could not read a sentence, much less a book, by grade 9, or indeed even by graduation.   The goal here was to find something for them to do as a career and try to keep them out of jail.    Vocational training was probably the best bet.

Now, a lot of people had a problem with this tiering of students.   Some said it was unfair, as students were "tracked" and thus determinations were made at an early age that could affect their whole career.  If a kid is pigeon-holed as "dumb" early on, he might be sent off to the C-level, when he should be in B-level or A-level  - with disastrous results.

Indeed, this almost happened to me, as some of my elementary school teachers thought I was retarded.  In Kindergarten, they handed us a "ditto" showing different sets of objects to color in.  "Color the objects that are the same".   One line had a fire truck, a taxi, a tractor, and a tomato.   Given that it was color-based, I assumed the correct answer was "firetruck and tomato" as both are red, and I colored them in brilliantly.   But the teacher thought I was retarded, as the "correct" answer was "fire truck, taxi and tractor" as these were all vehicles.   Frankly, I thought they had very little in common, particularly the tractor.

In the 4th grade, a teacher thought I should be "held back" because I could not memorize the multiplication tables.  7x7 still gives me fits, but this never stopped me from taking three semesters of Calculus, Differential Equations, and Number Theory.   As it turns out, there is a lot more to "maths" than memorization, although the half-wit 4th grade teacher we had was convinced that mathematics began and ended with memorizing things.  Indeed, in her world, memorization was the key.   History was nothing more than names and dates to be memorized, instead of actually analyzing what happened and how it affects us today.

In both cases, my Mother resisted efforts to "set me back" and I suppose that was the key - parental involvement.  The other thing that saved me was....standardized testing.   While my school performance was somewhat lackadaisical (a 5th grade report card recites, "Robert is a smart boy and could do well, if he ever learned to apply himself" - very prescient!) my standardized testing scores were always very high.   

So I went on the "A" level track, although I always got "B's" in the A-level courses, particularly after I started smoking a lot of pot in Junior high.   But getting B's in the A-level courses was better than straight-A's in the B-level courses, which so many of my friends did, which got them on honor roll, although not college-bound.

All the controversy about "tracking" aside, though, I think it was a better system than what is being tried today.  The Republicans are pushing this fiction that "all kids can succeed" and "no child should be left behind" and thus the idea of "mainstreaming" all students together is being pushed.  The end result is that the former "C-level" student feels like even more of an idiot in class, as everyone else "gets" the material that is over his head.  The "A-level" students are bored by the pace of class, which by necessity is "dumbed down" to B-level at least.

In the name of equality and fairness, we have insured that everyone gets a shitty education.   Oh, but we all have self-esteem!  And safe spaces.  And bullshit - moreso than when I was in high school.

Standardized testing back then was used to test students not schools.  And the end result, although it had its flaws, tended to tailor education to the student, rather than vice-versa.   Identifying the students at-risk is not a bad idea, but a good one.   They need different classes more in line with their skills and intelligence - classes that will better prepare them for life.   And there is nothing wrong with this.  Not everyone is cut out to go to college.  Some people end up selling used cars.  Someone has to.

Today, we use standardized tests to test schools and not surprisingly, the schools in rich communities do well, not just because they are better funded, but because wealthier people tend to be smarter people who have smarter children, books in the home, and whatnot.  Of course, you can't say that today without being accused of being "elitist".

But in a perverse way, we end up punishing the poor by saying their schools suck because their students don't test as well.   And the way we proposed "fixing" this was not to improve these schools or provide specialized education for less-able students, but to punish the schools by taking away their money.

And we wondered why this didn't work.

Standardized testing has a place in schools - not to test the schools, but to test the students.   It can tell an administrator which students - regardless of background, income, race, or gender - would be better served by a college-prep education, and which might be better served by more remedial education or vocational training.   Both groups of students end up with a better education and better life opportunities as a result.

Fortunately, No Child Left Behind - one of George Bush's signature accomplishments - has now been deemed an utter failure.    It appears some sort of reform is on the horizon.   Perhaps we can go back to the old days of standardized testing - when we tested students, and not their schools.  Perhaps.

The Consultants - Telling People the Obvious

Consultants sound like real geniuses, but really most of their advice is common sense.  Since you pay a lot of money for advice from consultants, you may be more inclined to follow it.

A recent article in Forbes Magazine profiled two business consultants who specialized in helping out small businesses.   The biggest problem they faced, they said, was getting people to accept their advice and take action to rescue failing businesses - often family businesses that are seeing smaller and smaller margins over time.

They had an interesting business model themselves, using telemarketers to solicit business using cold-calling.  About one out of a thousand calls results in a lead, and maybe less than half of those as customers.   Talk about long odds!

But what struck me as interesting was that the advice these consultants gave was pretty much basic common sense:  Tighten up your bottom line and prosper.

And yet, customers of theirs were reluctant to do this.   Why?

Well, the two pieces of advice are often hard to swallow: Fire employees and fire clients. In any business, over time, you accumulate more and more employees, often at higher and higher wages (and costs) with lower and lower productivity.  Suddenly "nothing seems to get done around here" and you hire yet more people to get things done - and the circle continues.

(We saw this in the large manufacturing plants in the 1970s - particularly auto plants. Old-timers felt they were now in "the country club" and didn't have to work as hard.  The newbies were supposed to do all the real work.  So management kept hiring more and more people to get work done, with predictable results - quality suffered and labor costs increased.  Oddly enough, law firms and I am told accounting firms work the same way - with "senior associates" leaving work at 3PM and forcing the junior associates to work until 9.   Maybe a shakeup is due in that industry as well).

And sometimes, the least productive employee is Old Sam or Old Edna, who has been with you since the beginning, has some of the highest wages in the place, and the highest costs in terms of health care, retirement, and vacation pay.  And since you like Old Sam or Old Edna and have become friends with them, you are loath to fire them or even have a strong talk about their half-hour cigarette breaks.

And outsider can see this, as the owner of a small business, you can't.  It is like the cardboard box in the hallway that you set down temporarily - five months ago.  They start hoarding employees - unproductive ones at that.

The second piece of advice also seems counter-intuitive.  Clients are something to be cherished, not fired, right?  Wrong.   In most businesses, including mine, there is a small group of regular clients who pay good prices and demand little of your time.   There is also a small minority of clients who constantly demand discounts and argue and bicker over every little thing - taking up the majority of your time.

As a result, you spend 95% of your time servicing 5% of your client base - the least profitable part.   Fire that client, and you can also afford to fire Old Sam and Old Edna, whose primary job was probably hand-holding that client on the phone all day long anyway.

Consultants are in a way like Motivational Speakers - when your company starts hiring these, it is a tacit admission that management no longer has a clue as to what is going on.   And they are not cheap.   The company profiled in the article specializes in helping small Mom and Pop businesses, and they charge $250,000 for this service.

The people who follow their advice often thrive and thus believe the fee is "worth it" in terms of increased profits.   And if you can't see the obvious, well then, it is worthwhile.

My own experience with consultants illustrates how they work.   I was working at a large manufacturing company that had huge overhead costs in terms of labor, plant, and taxes.   We were in a high-tax State full of socialists who thought that "taxing big business" was a way to make everyone rich.   The unions thought that regular strikes were a way of teaching management a lesson.   Our plant infrastructure dated from World War II and was costly to maintain.  And since we spent so much on taxes and labor, there was no money left for improvements or repairs.

As a result, our costs were high, profits were thin, or non-existent, and quality suffered.   Our other competitors - in the US and abroad - had lower labor and plant costs as well as lower taxes.  They were able to plow money into R&D and make better products with higher quality, undercutting our prices across the board.

The consultants came in and made the obvious suggestion:  Shut the place down.   It was hemorrhaging cash and would eventually go bankrupt unless someone changed course.   Borrow money, build a new plant down South, hire non-union labor, and design new, cost-effective higher-quality products.  Management resisted this message, of course.   If your career is based on running this rust-belt factory, closing it down is admitting defeat.   And you may be secure and comfortable in your life - where you live, your job, the people you work with, and so forth.

Eventually, corporate management stepped in and closed down the place before it went bankrupt.  Today, the products are made in Southern, non-union plants, or in Mexico or other overseas locations where labor is cheaper.  The folks in the pro-union high-tax State all argue that this is grossly unfair and of course not their fault.  But when you "milk" a business for all its worth, whose fault is it when it fails?  Everyone's.

My next run-in with consultants was at a law firm.  Again, the managers had lost their way and were unable to see their way to the future.   What started out as a small firm with a few attorneys who based the partnership on their personal friendship.   However, over time, one or two of the partners ended up bringing in all the work, while others had a respectable practice of their own.   One or two barely billed enough each year to cover their own salaries, sometimes less.

As you might expect, the partner bringing in millions in billables wasn't happy that his "friend" was getting paid nearly as much as he was, even though he billed less than his salary.  It was a situation ready to explode.

The consultants came in and stated the obvious.   Get rid of the dead-weight partners.   Fire the marginal clients who paid little and demanded a lot.   Cut associate's salaries and get rid of those who were dead weight.

And this advice did not go over well with anyone.   But it was the correct advice, of course.   The end result, however, was that the firm broke up.   Associates left (some good, some bad) and the partners with clients of their own found work at other, larger firms.  Others scrambled to make ends meet.  A couple took early retirement.

It would have blown up eventually, due to the inequalities in the billing and compensation.   The consultants just jump-started the process.   Sadly, if some of the partners had heeded the advice of the consultants, maybe the place wouldn't have come apart.   But no one likes to hear advice like, "You need to take a cut in salary" and if you have an equal vote in the partnership, you'll vote "NO" to such a proposal, and wonder - like those factory workers - what the hell happened when you come to work one day and the place is padlocked and closed. 

How do companies end up this way?   It is the same thing that happens to all of us, even as individuals.   We focus too much on "getting through the day" or the quarter or the year, and don't focus on long-term goals or see long-term trends.   We made a profit this year, so everything is good, right?   But long-term, our product line or service will diminish, and how long can that go on before we close our doors?

This is how companies like Sears or Blockbuster or Radio Shack or JC Penny stay alive for so long.   There is enough momentum to carry them on for years.   But no one wants to talk about the long-term trends (and annual losses) that are dragging the company down.   An outsider can see that the inevitable will eventually occur - stores will close, the company will downsize, and eventually go bankrupt, if nothing changes.

And often, people at companies like this just "hope" that things will change.  "Maybe people will suddenly decide to like buying Sears products again!" they say, as if the Internet could be wiped away by wishing it so.  Meanwhile, obvious things like taking the great Sears Catalog and putting it on the Internet were shouted down.   Today, it is too little, too late for them to go online, and half-assed ideas like "Internet to store" simply don't work.

Worse yet are pie-in-the-sky ideas that are touted to "jump start" the competition and revitalize the organization.   The aluminum block engine in the Vega and the state-of-the-art assembly line in Lordstown Ohio would make production so cheap, GM could beat the Japanese at their own game!  But the untested technology backfired and made matters worse for GM, not better.

When GM started closing plants in Flint, Michigan, local politicians decided to make Flint a "tourist attraction" even though there was nothing there of interest to see.  They spent millions on this folly - and that was decades ago.   Not much has improved since.  Today, the place is bankrupt and making headlines for all the wrong reasons.

On a personal level, the same thing can happen to us.   We spend money and borrow more.   A credit card crises is "solved" by a home-equity loan (helpfully offered by our local bank).   We congratulate ourselves on our financial acumen and go out and buy more stuff, reasoning that the increased "equity" in our homes means we are getting wealthier.   The increased debt-load is, of course, ignored.

People then flock to financial gurus, who tell them the obvious, in a book for $19.95.    You have to pay back those debts, eventually.   Borrowing more and more money is not a good idea.    If your net worth is going down over time, you are not getting richer, just accumulating more junk.

But with the Gurus, it is the same as with the Consultants.   Advice is easy to give, hard to take.   Just as we don't want to fire our clients or "Old Edna" we don't want to cut back on our spending or think hard about where our financial future is going.  We made it through another year, and that is enough for now.   We just "hope" that things will get better over time or that "our ship will come in" someday.

The good news is, of course, that the advice that consultants give is basically stuff you can figure out yourself for free, if you are willing to listen to your own gut instincts.   This is, of course, the hardest thing to do.   It is easier to pay for a seminar or a book and then take someone else's advice as since you paid for it, it must be good, right?

And as in a business, with a family, you may find members "vetoing" common sense advice in favor of their own personal fiefdoms.   Dad wants to keep his Harley and the hobby car in the garage, of course.  After all, it's "paid for" and "isn't costing anything" and is "an investment" - right?   Similarly, Mom isn't going to give up her shopping sprees and her honking new leased luxury SUV.   And junior tells you that you are rotten parents for not giving him the latest cell phone and video game console.   All the other kids have them, right?  He won't be popular in school with last year's iPhone, and that would just be the end of his life right there, because as we all know, being popular in High School is the most important thing in life.

And sadly, that is probably why so many people divorce today - which doesn't solve these economic problems, but amplifies them.   So many relationships are little more than a race to the bottom, with each family member seeing what they can get out of the deal - using spending as a retaliatory weapon.

And maybe, that's where people need consultants.   Because they won't listen to each other but will respect an outside authority.

The Problem With Free College

Bernie Sanders wants to make college free, arguing that college is the new high school, and high school is free.   Is this really a good idea, considering that colleges are privately run?

The free college idea is not new, and in some countries, it is already free or nearly so.  Bernie Sanders argues that "College is the new High School" and thus should be made free.  There are a number of problems with this.

First of all, yes, he is right, College is the new High School - and this is not a good thing.   This reflects how shitty High School has become and how we have infantalized our children so that by the time they are 18 they are still children and no longer ready to fly a B-17 against the Nazis as our ancestors did.   We have made High School into preschool, and that is the problem.   The solution isn't to extend High School until age 22, but to put the guts back into High School again, lower the drinking age to 18, and treat young adults as ADULTS again - and give them a High School diploma that is more than just a certificate of attendance.

Second, College is different than High School in that you don't have an automatic right to attend any College you want to.   You go to High School and they have to take you in.   In fact, you are required by law to school your children.   You can't not send them to High School, at least for the first few years.  So Bernie is comparing Apples to Oranges, which he tends to do a lot.

And yes, if you want to home-school your kids, you can - on your own nickel.  Similarly, if you want to send your kids to private school you can - but you have to pay for it (Republican voucher schemes notwithstanding).

In order to get into College, you have to apply and have to have the grades and SAT scores.   Unlike High School, admission is not a matter of right.   If everyone is guaranteed free college, then it goes without saying, that everyone should have guaranteed free admission.   How exactly would that work?

The third problem is that most Colleges and Universities are private institutions, albeit non-profit (although some odious ones are for-profit!).   Even "State Schools" are quasi-independent from the government, as legislators are finding out the hard way, when they try to fire people like "Professor Click".   So the comparison of High School - which is a government owned and run institution - with Colleges and Universities - is completely apples and oranges.

And this brings about the fourth problem - costs.   If you say "Free College" what does that mean?  That the government would pay any amount of tuition that the College or University decides to charge?   Or like Medicare, the government would decide what is a "fair" tuition amount (much as they decide what doctors can charge)?  If so, who pays the difference?  The student?   If so, College is no longer free.

Or do we just nationalize all College and Universities?   Bernie isn't clear on this, and like so many of his ideas, they are half-baked.  Nationalizing anything usually results in costs escalating out of control, so this would be a horrific idea, if the idea is to get the overall cost of College down.

The fifth problem with "Free" College is that once you subsidize any activity, you raise the real costs.   It doesn't matter whether it is the home mortgage interest deduction or tax credits for electric cars, once you put in tax subsidies or government grants, costs go up, not down.   For example, most Americans buy a home based on monthly payment, and they factor in the tax subsidy in the form of home mortgage interest deduction.    Based on monthly payment and interest rate, they figure out how much home they can "afford" in terms of purchase price.   Without the tax subsidy, they could afford less, so they would pay less, as demand dropped.   The mortgage interest subsidy ends up just raising prices, not lowering real costs.

(And this raises the issue of what to do about for-profit colleges?  You can bet the for-profit colleges would love it if the government paid them directly, instead of indirectly through guaranteed student loans, as they do now.   Free college would be a boon to the for-profit college industry.  But that does not mean the degrees would be of any value whatsoever).

Which brings us to the sixth problem.   Once you create a subsidy, it is damn near impossible to get rid of it.  If you got rid of the home mortgage interest deduction, for example, people would lose their houses - particularly those who recently bought.   Get rid of the tax credit for electric cars, and likely they will go away as well.   Or take farm subsidies.  Once you enact them, it is damn hard to get rid of them, even after some of them have been shown to be harmful or ineffective in the marketplace.   Once you have "Free College" and it doesn't work out the way you planned (which it likely will) it will be impossible to make it un-free again.

And countries where this has been tried have had this problem.   In the UK and other European countries, the government has tried to raise the nominal tuition rates in order that at least some of the cost be recouped.   Students rioted and protested.

Which brings us to the seventh problem - people do not appreciate that which is free.   When you make college free, it becomes even more of a joke that it has already.   College degrees are not only expensive today - most of them are worthless.   People go to school and spend tens of thousands of dollars on an "education" and end up working in a service-sector minimum-wage job.   It is not that college is too expensive these days, but rather that it is a poor value proposition for most people.

Consider this:  For people getting Liberal Arts degrees, a college education is about as valuable as a brand-new Yugo automobile.   The Yugo was a shitty car and not even a "value" at $3999 MSRP.   Making Yugos free doesn't make them any more of a "value" to the consumer, it just creates a huge cost for the government (meaning taxpayers) to pay.    A better idea is to make better Yugos - better college educations - so that people get value for their money.

Which brings us to the eighth problem with "Free College" - most people are going to get worthless degrees, much as they are today.   I recounted before how a friend of mine got a degree in Physics in the UK, which I thought was pretty keen.   But then he explained to me that he received an "ordinary degree" which means he basically showed up, some of the time.   Unless you have a "first" or a "second" degree, your degree is worthless.   And if college is "free" this only encourages more young people to seek worthless majors, rather than think hard about the cost/benefit proposition of college.

And this goes back to the premise of Saunders' argument - that any college degree is somehow the key to wealth an success in America.  It isn't.   If you go to a good college and get a good degree, it might help you up the economic ladder.   If you go to shitty college, get shitty grades, and get a shitty degree (or any one of those three things) you are just wasting time and money - whether it is your money or the governments is irrelevant.   Degrees in "Liberal Arts" from no-name university with a 2.5 grade average are not going to qualify you for any job other than waitstaff at the Outhouse Steakhouse - for the rest of your life.  The best that can be said of such degrees is that they keep young people out of the workforce for another four years.

You'd be better off going to welding school or at least learning a trade.  Which brings us to the ninth problem with "Free College" - not everyone is cut out for college, and in fact, many succeed better without it.   The guy who poured my concrete driveway the other day never went to college.   He has a successful business, however, and owns his own ready-mix truck.   Does he need to study "the great authors" or "African-American studies" to do his job?  Would he even want to, or succeed in such studies?   Given the guy is a Trump fan and a racist, I think such an "education" would be worthless to him and moreover would just frustrate him, as he failed at it.

The tenth problem with "Free College" is who pays for it?  A lot of young people have naive ideas that we could "just tax the rich" to pay for college.   But the entire operating expenses of every college and university in the United States, if added up, is a staggering amount.  The government already spends over $60 Billion a year in financial aid programs.   Depending on who you ask,  they would have to either double or triple this amount.   But the costs would not end there.  If college were "free" then obviously more people would go (why not?) and costs would escalate further.  And if colleges could bill the government for their fees they clearly would have no incentive to keep fees reasonable - further raising costs.

We already spend billions of dollars to subsidize college.   With grants, loans, and work-study programs,  it is possible to go to college, even if you have little money.   I went to night school while working for $16,000 a year.   The key of course, is the word "working."   Sure, making it easier for the poor to attend college might be a good idea.   But free college for the rich?  Or even the middle class?  Why?  Just so we can be more comfortable at someone else's expense?

Which brings us to the problem of what exactly is free college anyway?   Do we mean just free tuition or does this cover room and board and other expenses.  In order to live for four years, a student needs to pay for their room and board, and this can add tens of thousands of dollars to the cost of college.   Even if tuition was "free" a student would still need to come up with money to at least live in a dorm.   Do we provide this as well?  Or is this based on need?   It is an interesting question.   A lot of student loan debt is not just for tuition, but for living expenses as well.

The eleventh problem with "Free College" is that it will never, ever happen in the United States of America and this also illustrates the problem with Bernie Sanders' pie-in-the-sky ideas.    Even if Sanders were elected, he cannot dictate by fiat that such things will happen.   He would need a majority in both the House and Senate to make such a thing into law.   And even if the Democrats controlled both the House and Senate (highly unlikely) many conservative Democrats would vote against these socialist proposals.  A Sanders Presidency would make the gridlock of the last eight years look like the express lane.

Hillary tried to address this in the last debate - noting that Sanders' plan also requires the States to fund this fiasco.   Getting 50 States - most with Republican governors - to go along with this plan while they struggle with their budget deficits is not only highly unlikely, it simply ain't gonna happen.

And this is what makes me sad about America - not that we try to vote for a free lunch, but that people even think a free lunch is possible.  Economic and Political reality are thrown to the wind in favor of "what's in it for me!"

And online, you see this sort of attitude from so-called "Millennials" who have issues with their parents and think that we should start taxing the savings of Americans to pay the bills that college students have rung up.   They went to crappy college and got a crappy degree with crappy grades and now they can't find a high-paying job because they are not qualified to do anything.    And somehow this is our fault and the measly sums we have accumulated to survive in retirement are to be taken away and given to younger people to make things "fair".   I can only say, I hope they never grow old and have that happen to them.   Sure, it is fun to use the elderly as a punching bag - just remember you will be one too, someday.

Hey, I get it.  I hated my parents, too.   But I never thought that I had a "right" to their money.  I worked my way through 14 years of night school and spent ten years after that paying off $38,000 in student loan debt (worth over $65,000 today).  So excuse me if your $25 grand in debt doesn't seem like some onerous burden.

And please, don't whine about "high rents".  I have a condo I rent out in Alexandria, Virginia for $1100 a month, including utilities (and it sat six months unrented with no takers!).   That sounds like a lot, but in 1989, I was paying $900 a month (nearly $1800 today) to rent an apartment just down the street.   In terms of "injustice" to this generation, I just don't see it.   If anything, they have it far easier than we had it back then.

Of course, back then, we didn't have cell phone and cable TV bills to pay.  Right?

Something has changed with this latest generation.   And maybe the infantilization of young adults is part of the problem.  Maybe further infantilizing them by making College a place to park for four years is a really, really bad idea.

Maybe a better idea that making "College the new High School" is to put the balls back into High School.   Make it hard.  Make it tough.  Make a High School diploma worth something.  In order to graduate from High School, you should know at least one foreign language.   Today, we graduate students who cannot read and write their own.   In Europe, kids know two or even three languages by the time they graduate from High School.  In America, many can barely speak English.

Stop pandering to students and stop coddling them.   Give teachers authority to discipline students without fear of retribution.   Let's stop feeling sorry for ourselves and feeling sorry for some dumb-ass kid who won't put down their smart phone in class.   And at the same time, give these kids the rights and responsibilities we once had - to have a beer at age 18, and to have responsibilities and freedoms in life.

Maybe, if High School becomes the new High School, we will graduate fewer whiny "Millennials" who think the world owes them a living.

Just maybe!