Category: Economy

Let’s do something constructive!

Beneath the tsunami of “Obamacare Failure” coverage, a significant event occurred November 1st, and most people aren’t even aware of it.  For reasons that are too complicated to detail here, the temporary increase in the Supplemental Nutrition Assistance Program (“SNAP”, aka “food stamps) implemented in 2009 as part of the federal government’s economic stimulus program, expired.  For those who, like me, haven’t followed the details of SNAP, here’s the basics:

  • As part of the American Recovery and Reinvestment Act of 2009, SNAP was temporarily increased, with the design that the increase would phase out as inflation pushed the cost of a FDA-determined minimum food basket to the increased level.
  • The SNAP increase served a two-fold purpose:  pump cash into our struggling economy, and help those who found themselves in a financial bind due to the economic downturn.
  • In 2009, experts expected food basket inflation to cause the benefit to expire in 2014.  Subsequent government decisions accelerated that expiration to Oct 31, 2013.
  • Inflation hasn’t met expectations, resulting in a real cut in benefits:  $36/month for a family of four.

That may not sound like a lot, but when you consider that based on the FDA’s food basket calculations which value a meal for one person at $1.70-$2.00, that equates to approximately 5 meals that family of four won’t be getting through SNAP.  If you want to read all the details, there’s a pretty good rundown on this page.    Macro impact is that for FY 2014, about $5 billion dollars will be cut from SNAP, impacting 47.6 million people, or 15% of the US population.  (For those who are happy to see the $5 billion cut to SNAP, don’t get too excited, the money’s already been reallocated to aid states with teacher salaries and Medicaid federal matching dollars).

I’m not writing to advocate for an increase in SNAP.  The cut is a done deal (although there are new, much more dramatic cuts being discussed as part of current budget negotiations, which bear watching and future consideration.  If they are approved, the following proposal will be even more relevant, and on a much grander scale).  No, I’m calling on the readers of this blog to demonstrate their compassion and love for their fellow man, and to prove that we can offset cuts in government programs by stepping up to provide private support.  Google “SNAP cut food bank” and you’ll get hundreds of articles from across the US where local news sources have interviewed food bank managers who are trying to prepare for the increased demand resulting from the SNAP cuts.  The bottom line is that local food banks are already tapped out, so they don’t currently have the resources to make up the gap caused by the latest cuts.

So let’s help them out.  Find your local food bank.  Many churches sponsor one, and many areas now have consortiums that work together to provide more food, more efficiently.  You can donate money, time, or both.  Here’s the cool part:  That $1.70-$2.00 for one meal that the FDA calculates?  My local food bank can provide SEVEN meals for $1.00 through efficiencies generated by buying in bulk, wholesale pricing, etc.  You can make up that $36 cut for a family of four with just a three dollar per month donation!  [I did the math multiple times:  $36 equates to roughly 20 meals (18 meals at $2, 21 meals at $1.70).  $3 at the food bank buys 21 meals.]

Too often I hear people railing about government assistance programs needing to be cut.  Well, this one was, and people are going to miss meals because of it.  We can fix that.  Will you?  I’d invite everyone to give some, but I’d really encourage you to give sacrificially–$3/ month would be nice, but how about $20?  Or $50?  Or giving up one day off a month to go help in the facility?

“Then the righteous will answer him, ‘Lord, when did we see you hungry and feed you, or thirsty and give you something to drink? When did we see you a stranger and invite you in, or needing clothes and clothe you? When did we see you sick or in prison and go to visit you?’

“The King will reply, ‘Truly I tell you, whatever you did for one of the least of these brothers and sisters of mine, you did for me.’ ” –Jesus, quoted in Matthew 25:31-46

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Stop being so Irrational!

A few months ago I read a most intriguing, intellectually challenging book that provides incredible insight on how people think.  Written by Daniel Kahneman, a psychologist who won the 2002 Nobel Prize for Economics, Thinking, Fast and Slow is an amazingly informative read if you’re remotely interested in how people think and make decisions, and why.  Based on Kahneman’s several decades of professional research, the book is also an incredibly difficult read that will make you painfully aware of just how lazy your System 2 can be.  So what does this all have to do with my insulting imperative in the title?  Did you catch the part about him being a psychologist who won the Nobel in Economics?  In part it’s because Kahneman’s research stood all of modern accepted economic theory on its ear.  See, economics is based on an assumption that humans are rational decision-makers.  Kahneman proves that assumption is glaringly false.  You are irrational (and so am I).  Worse than that–we like it that way.

So what, you say?  Well, for starters, your irrationality causes you to make some really poor decisions.  I won’t attempt to try to summarize all of a 498 page book on how people think, but one concept Kahneman and other students of decision-making have explored is extremely relevant today.  I’ve been struggling for quite some time to understand why large numbers of extremely intelligent people who I know (and many more that I don’t) can be so easily deceived by information, statistics, and sound bites that are sensational and powerfully emotive, that with minimal basic research will prove to be manipulatively misleading, if not totally inaccurate.  Kahneman, and those who have built upon his research, have given description and supportive research to a behavioral bias that I have observed on my own: our human tendency is to look for evidence to support what we already believe, and to avoid or discount any evidence which contradicts our beliefs.  Referred to in decision-making as the supporting evidence bias, variants also appear in scientific research (the systematic positive bias).

Two (potentially) big problems here:

1)  WYSIATI:  Kahneman identifies a phenomenon in thinking that he refers to as “What You See Is All There Is.”  When operating in our “fast-thinking” mode (System 1), we tend to make snap, intuitive decisions based on the information readily at hand, as if that’s all the information that exists.  Unfortunately, it’s those things that we don’t know about which can often cause us the most harm (as former SecDef Donald Rumsfeld so famously and accurately opined).

  Example:  A school teacher living in the Midwest earns $30,000 per year.  In an effort to improve her standard of living, she seeks teaching jobs in other parts of the country, and takes a job teaching in Bush Alaska paying $60,000 per year.  While expecting to double her income and her standard of living, she fails to take into account that the cost of basic necessities in Bush Alaska can be double to quadruple the cost of the same items in the Midwest.  By failing to consider the unknowns, and failing to seek evidence to disprove her assumptions, she inadvertently lowered her standard of living.

2)  Failing to seek contrary information can lead to inaccurate results:  A more clinical example here.

“Students were given the sequence of numbers 2, 4, 6 and told to determine the rule that generated the numbers. To check hypotheses, they could choose a possible next number and ask whether that number was consistent with the rule. Most students asked whether a next number “8” would be consistent with the rule. When told it was, they expressed confidence that the rule was, “The numbers increase by 2.” Actually, the rule was, “Any increasing sequence.” A better test would have been to check whether a next number incompatible with the hypothesis (e.g., “7”) was consistent with the unknown rule.”

In other words, you’re irrational.  But so am I, and Dr. Kahneman even acknowledges that he is too.  Now you’re aware that you have a problem-what are you going to do about it?  Here’s what I have done:

1)  Make it a habit when facing difficult, important, or costly decisions, to deliberately seek to disprove my preferred position.  This is incredibly difficult to do, but it’s powerful.  First, though, I have to acknowledge I have a bias, and make a concerted effort to set the bias aside while I attempt to prove the opposite.

2)  Deliberately seek experiences that are outside my comfort and familiarity (within reason here…).  Read things I disagree with.  Listen to both Fox News and MSNBC.  Better yet, seek primary sources to understand the full details of what was said or written, not just the selectively re-broadcast sound bites.  Cultivate friendships with people who believe differently than me.  Notice I said “friendships.”  They’re my friends.  I love and respect them.  I get to know them for who they are, and I appreciate them.  Then when I find myself in disagreement with them over an idea, I can more readily seek first to understand and appreciate their position, even if I still disagree.  Sometimes, I even find out that I’m less than fully informed!

3)  Assume that I don’t have all the information, and when I find that I am dumbfounded by the stupidity of others who can’t see the solution that is so right and obvious to me, recognize that I am almost assuredly operating under WYSIATI.

I’ll leave you with what is arguably my favorite quote from almost 500 pages of deep, intriguing thoughts:  “We know that people can maintain an unshakable faith in any proposition, however absurd, when they are sustained by a community of like-minded believers” (Kahneman, 217).

Supporting evidence bias is inherently irrational, and it’s hurting our culture today.  I want to think better.

Let’s Talk Oil Economics!

OK, so no one appears to want to discuss religion, so let’s discuss oil and gasoline prices.   That seems to be a popular topic of late.

It seems everyone is upset about the price at the pump, and is looking for someplace to aim their frustration.  Two popular targets for blame are the government and big oil.  In the interest of total transparency, I am an employee of a major oil company, but I don’t have any “inside knowledge” to share.  Instead, I hope to help readers understand a few things about crude the oil industry, so that maybe there can be a little less anger in the world.  If you’re of the mindset that big oil is nothing more than a bunch of rich guys chomping big cigars and scheming how they can screw you out of more money, hopefully you know me well enough to know that stereotype is not accurate.  If you’re convinced I’m one of those rich guys, you might as well quit reading now, because nothing I’m going to say is going to convince you otherwise.

In the interest of brevity, I’m not going to try to cover all the details of the very complex economics that determine oil and gas prices.  A good source to understand that is the US Energy Information Administration website.  It’s full of all sorts of educational material and statistics about what’s going on in the world energy markets.  If you’re convinced that you can’t believe anything you read there because it’s a government agency, then tighten your tinfoil hat and surf on, because nothing I’m going to say is going to sway you.  If you’re still here, then here is a specific page on that site than can help you understand the basics of the market.

What I specifically want to talk about today is some recent rants I’ve seen on the internet, and heard from politicians, talk show hosts, and generally frustrated consumers about the “obscene” profits earned by oil companies.   The media, politicians, and anyone else that wants to work the public into a frenzy loves to talk about “big oil” profits.  The numbers are astounding–no argument there.  Let’s take Exxon’s annual Consolidated Statement of Income for 2011, where they reported an income of $486 billion.  That’s obscene, right?!  No company should make that much money!  We should revolt!

But keep reading on that same report.   To generate that obscene amount of income, they spent–$413 billion.  Then, they paid income taxes–$31 billion.  When you subtract that from their income–the number that’s thrown around to get us all lathered up, you get to an actual earning of $42 billion.  I’m sure we’d all like to try to suffer along on such a paltry sum.  It’s still a huge number, that can easily frustrate us at the pump.  That’s a lot of money!  But stop to think about it a minute–they invested $413 billion to earn that $42 billion.  That “b” word makes this all unfathomable, so let’s get the numbers into normal consumer terms, by just dropping the “billion”.  They invested $413 to earn $42.  Hey, that’s still a 10.2% return on investment-none of us can earn that in our money market fund or CD at the bank, right?  Let’s hate ’em.

Not so fast.  Let’s pick a company that everybody loves… how about Apple?  Apple’s most recent annual report runs through 3Q 2011; close enough for our purposes.  How much income did Apple earn in their most recent reporting year?  Only $108 billion.  Nothing close to Exxon.  But let’s look do the same analysis:

  • Expenses (I’m including Cost of Sales in this numbers for you financial gurus): $74 billion
  • Income taxes:  $8 billion
  • Earnings:  $26 billion

There’s that “b” word again.  In normal human terms:  They spent $74 to earn $26.  Poor Apple, they only made–wait–they only made 35% return on their investment.  35%!  That’s highway robbery!  The only people I ever heard of who could collect 35% on their money were loan sharks!

OK, one more just to be fair.  Everybody knows that computer companies rip us off.  Let’s go for something everybody likes-food.  How about a nice, friendly, likeable company:  Nestle.  Purveyors of Gerber Baby Food, and my personal favorite, Nestle Toll House Morsels, aka chocolate chips, aka the perfect snack food!  Data from their 2011 Income Statement:

  • Sales:  $83.6 billion
  • Expenses:  $71.1 billion
  • Income taxes:   $3.1 billion
  • Earnings:  $9.8 billion (there’s some other things in their report that I’ve left out, but this is their earnings)
  • 13.7% return on investment

So, what’s my point?  Don’t get sucked in by the big numbers the media throws around.  Sure, the super majors earn huge profit numbers, but they spend huge amounts of money to do it.  And they have to, because it takes a lot of money, and a lot of risk, to drill for oil.  When things go wrong, they go bad wrong–as we’ve seen in recent history.  If they don’t have the opportunity to earn a decent return on their investment, why would they spend the money?  As seen above, 10% isn’t a huge return, compared to many other industries that we don’t vilify.  And it is hard work, done in extremely inhospitable places all around the world.  And where do those billions in earnings go?  To their shareholders.  If you own a mutual fund, 401k, or are part of a private pension plan, you’re very likely one of those shareholders.  Federal Government Thrift Savings Plan?  Yeah, you too.

Why are pump prices so high?  Well, it’s complicated.  Is it big oil’s fault?  Not really.  Should we hate ’em?  I submit that if you look at it rationally, your answer will be “no.”  If you need someone to be mad at because you don’t like your gas bill, and you want a simple world to live in where someone else is to blame for all your “problems,” sure, go ahead.  Hate “big oil.”

Somebody pass me a cigar…