Mortgage Schmortgage

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Election season is here, and one of the things we always hear about during these campaigns is tax reform. Candidates say they want to simplify the code, make it more fair, etc. Now we’ve talked about the deficit and financial problems before on the podcast in a macro sense, but for this pillar, I wanted to take a deep dive into one tax phenomenon in particular; the mortgage interest tax deduction. I got interested in it after hearing a couple other podcasts like planet money talk about it, and following the history of why it exists in the first place and where it is now was pretty eye opening.

Quick income tax history lesson:

In February 1913, the 16th amendment was ratified and put into law, allowing congress to enact a federal income tax for the first time. Inflation adjusted, this fell disproportionally on the rich, where individuals with incomes over $65K had to pay 1%. Then if you made over a half million, a few more tiers kicked in, with the highest tax bracket at 7% for those making $11M. This meant 98% of Americans paid no federal income tax at all. Yeah occupy wall street!

So most tax historians best guess as to why the personal interest deduction exists, is that it was simply too cumbersome and difficult to keep track of what was exactly a business (taxable income generating) expense, and a personal one. Especially when there were way more family farmers etc. Plus, since only 2% of Americans were paying income tax at all, it didn’t seem like a huge deal to allow for this deduction, as those high income entities were more likely to purchase things with credit for taxable income generation.

Fast forward to the early 1980s. Over the years the tax base had broadened considerably so a lot more people were paying personal income tax. Also, a lot more people owned their own homes, and the vast majority now financed those purchases with a mortgage. There was a big financial crisis in the early 80s much like there is now, and there was a big push to reform the tax code to get things back in line. Sound familiar? The CBO came up with a list of a bunch of things they could do to the tax code to balance the budget, and one of them was to limit the deduction for the personal interest expense.

Finally in 1986 there was a pretty big overhaul that did indeed limit the MID a bit. It no longer was able to be used on unlimited residences, could only be on your primary home mortgage, and it also made sure that you couldn’t deduct credit card interest either, as credit cards were becoming more prevalent. But in general, it still remained, and has basically stayed that way since.

So enough of the history, let’s look at where we are with the MID today. Still, the main purported goal is to encourage home ownership. So let’s think about what exactly that means and how we could measure it. In order for something to increase ownership, it has to take its effect at the margin. The ultra-rich are always going to buy homes, and the ultra-poor are always going to rent. So at the margin, we need to look at the hypothetical person/family that is deciding whether to rent or own. If, at that margin, the MID doesn’t encourage ownership, then we shouldn’t even have it. And this is the person that we are purportedly trying to help right? And the person that is going to have a horrible time if we get rid of the MID?

So today, who is taking the MID? Since 1991, only between 21 and 26% of taxpayers claimed the MID. Most of these taxpayers were in the top brackets. One of the main reasons people don’t claim it, even if they do have a mortgage, is that the standard deduction turns out to be more than the mortgage interest deduction would be.

Currently, the standard deduction for a married couple is $11,900. So anyone who is married and filing jointly gets to deduct that amount from their tax bill automatically. So in order to make it worth it for a couple to itemize and claim the MID, they would have to pay very close to that amount in mortgage interest. So I dug a step further to see if I could find what the average mortgage payment was and how much of that was interest. The most recent data I found said that the median home price in 2010 was about 220K. So let’s just assume the person put 10% down and is carrying a 200K mortgage. Chose 6% as my rate and saw that the first year of payments, $11933.29 was the interest portion.

So to sum up;

  • The MID started out as kind of a quirk in the tax code, probably there just for simplicity when we started the federal income tax in 1913. Never was there a mention of using it to encourage home ownership
  • Because of the standard deduction, people at the margin (the people that it’s supposed to encourage) aren’t taking advantage of it, and probably wouldn’t benefit from it. Only 1 in 4 Americans even claim it, and most are richer.
  • Liberal and conservative economists tend to agree that it doesn’t make sense to have this deduction anymore, but to suggest getting rid of it is a political hot potato, because of decades of rhetoric about how it symbolizes the American dream, and heavy pressure from the housing lobbies.

 

So that’s just one odd piece of the tax code that you can think about the next time people talk about simplifying the code. It seems pretty benign at first, but when you dig into it, it becomes hard to justify the 130B loss in revenue that the government loses by having this in place. I kind of wonder if there are other parts of the tax code that follow this same trend…

Life Hacks

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Life Hacks are clever, non-obvious ways to solve everyday problems. Originating from computer programmers who found new and “embarassingly” easy ways to complete tasks, the term Life Hack has blown up on the blogosphere and now hundreds of websites, blogs and reddits are completely devoted to helping you find ways to hack your life. In this podcast the Good Guys review some of their favorite Life Hacks as an introduction to a new segment for upcoming podcasts. Let us know if you have any Life Hacks that would be perfect for a GGTK! Thanks for listening!

Check out these links for other great Life Hacks!

www.HackCollege.com

www.43folders.com

www.lifehacker.com

Starting A Business

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Hey everybody! Ever wanted to start your own business? Well little did you know that one of our resident Good Guys, Mitch, has done just that. This week Mitch and his business partner Andrew give us a glimpse into how they got their business off the ground. We also spend some time going over our dreamlining challenge from last episode. Lots of good stuff in this one, thanks for listening!

Check out Vigilante Products on eBay. Mention this podcast episode and Mitch said he would throw in a discount, w00t!

Olympic Trivia


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Whether you are in love with the olympics, or sick of them – you WILL be watching.  Why not enrich your knowledge and/or gather some things to distract yourself during the seemingly endless coverage?  I took more than my fair share of online quizzes and wrote down all of the ones that were not incredibly boring.  Here are all the questions – play along with the episode, and you will definitely have some stuff to talk about with your buddies.

The first Olympic games (776 BC) were held in honor of which Greek figure?

Zeus
Athena
Achilles
Hercules

What do the five interlinked Olympic rings on the flag represent? 

The number of countries in the first olympics
The 5 major Continent blocks (Americas, Europe, Asia, Africa, Australia)
The 5 world races
5 is the number most associated with Peace

What do the colored rings on the flag represent

Designer’s favorite Colors
Each color exists at least once on every nation’s flag
Water, Stone, Fire, Light, Earth
Committee Vote

What do the colored rings on the flag represent

Designer’s favorite Colors
Each color exists at least once on every nation’s flag
Water, Stone, Fire, Light, Earth
Committee Vote

What is the Olympic Motto?

‘Citius, Altius, Fortius’ – faster higher stronger
‘It is not to have conquered, but to have fought well.’
‘The important thing is not the triumph, but the struggle.’
‘It is not to win, but to take part.’

__________ were not allowed at the first modern Olympic games in 1896, as their inclusion was deemed “impractical, uninteresting, unaesthetic, and incorrect.”

Medals
National Flags
Women
Uniforms

In what year did the Olympic flag Debut?

1896
1920
1965
1992

Which country is first in line during the Opening Ceremony’s Parade of Nations?

The country with the most medals from the last Olympics
The host city
Greece
Alphabetically 1st

Which of the following sports has not been an event at the Summer Olympics?

Tug-Of-War.
Croquet.
Roller hockey.
Live Pigeon shooting.

What word was eliminated from the Olympic Charter in 1971, causing controversy and dramatic changes in competition ever since…

Christian
Aggregate
Intentional
Amateur

Every 2 years, the Olympic torch is relit using…

The sun
Flint and steel
Leftover Oil from the previous torch
The torch is never extinguished

A Marathon is 26 Miles and 385 yards.  This distance is set because…

It is the distance between Athens and Marathon Greece
385 yards was added on so the queen could get a better view
It makes a lot more sense in metric
It was the farthest any runner got in the first Olympic marathon race

How many times has the winter Olympics been held in the southern hemisphere?

0
2
3
5

The first suspension for drug abuse was at the 1968 Mexico City Games. The drug in question was ______________. The competitor was a Swedish pentathlete, Hans-Gunnar Liljenwall.

Marijuana
Cocaine
Tetrocyclera
Beer

How many modern Olympic games have been cancelled?  Over the past 117 years only three Olympic Games have been cancelled and in every case it was due to a World War. (1916, 1940 & 1944)

1
3
4
0

At the 1900 Olympics in Paris, champions were given ________ instead of medals as they were believed to be more valuable

grapes
paintings
silken robes
cocks (male chickens)

What percentage of the silver medal is silver?

100
92
67
8

Which city hosted the Winter Games only two years after the previous Winter Games had been held?

Calgary
Moscow
Salt Lake City
Lillehammer

Basketball has been a regular Olympic sport since 1936. From then, until the year 2000, only three teams have won Gold. The USA and Russia (or earlier the USSR) are two of them. Which is the only other Country to take the gold medal?

China
Serbia
Yugoslavia
Australia

In what order do athletes enter the stadium at the CLOSING ceremonies?

No particular order
By country and medal count
By country ascending
By country descending

 

 

 

The Dan Plan

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If you quit your job and spent all your time _________ , how good could you get? How many times have you asked yourself this on Thursday afternoon in your cubicle?

This week, we had the great pleasure of interviewing an incredibly Good Guy To Know; Dan McLaughlin of thedanplan.com.  Two years ago Dan quit his job as a commercial photographer to try and become a professional golfer. He had never played a serious round in his life, and wasn’t even sure if he should golf left or right-handed

This would be pretty amazing on its own, but where it gets really cool, is that he didn’t do this just to follow a dream (it really was never a dream at all), but he’s testing a theory. That theory set forth by Dr. K Anders Ericsson, and popularized by Malcom Gladwell’s popular book Outliers, claims that in order to excel at some endeavor, natural talent is less important than spending 10,000 hours of deliberate practice honing the skill.

The tricky part of the study, is that this theory was based on only observational data looking at various groups of people that had already attained ‘expert’ status. So be they violinists, or hockey players, Ericsson found that the ‘experts’ usually attained that level only after 10,000 hours.

So the Dan plan is all about conducting an actual experiment. He deliberately chose golf, not only because it’s a fun outdoor activity (and presumably more marketable to the mainstream), but because it was something easily measurable, non-subjective, and has a very defined endpoint. If he chose to become an expert stand-up comic, it would be pretty difficult to gauge his progress, and certainly impossible to decide when he became an expert. Golf affords the opportunity to track a handicap, and ultimately we will know he’s reached the elite level when he gets his PGA tour card.

So please have a listen to the interview and visit Dan’s website. This project is about so much more than golf. It’s about how far a human can push themselves towards accomplishing incredible things. Dan just recently passed the 3,000 hour mark and his progress so far has been remarkable. Oh yeah, and he’s doing this all on his own dime, so check out the donation page on his website, and help him keep this project going so that next Thursday afternoon when you’re sitting in your cube, you really CAN say “yeah, if I really went all in, I could definitely become a professional _________”

Travel Hacking

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Travel hacking is simply defined as the utilization of technology, rewards programs and social connections to travel the world.  At its most basic level, travel hacking allows you to see more of the world for less but as you follow travel hacking deeper into the rabbit hole, you find that it is much more than that!  In this podcast, the Good Guys interview Scott Meyer, an expert in travel hacking, and an all-around GGTK.   Listen as Scott teaches us the tips and tricks to saving money while traveling all over the world.  You think you know, but you have no idea!  Thanks for listening!

Hey Listeners!  Go check out Scott’s Travel Hacking Norway book!  You can get the book locally at Ingebretsen’s in Minneapolis, online at Amazon (visit http://travelhackingnorway.com to get there quickly) and on his site at: http://scottdavidmeyer.com
Also, Scott offers FREE tips on travel hacking twice weekly at: http://scottdavidmeyer.com
Some of the sites Scott mentioned were:
CHALLENGE UPDATE:
Chad has proposed the greatest challenge of all time and every listener should try this one with us.  Go out and buy a botte of Glenlivet 12 year scotch and finish off every day for the next 2 weeks with a little nightcap! All good guys to know should have an appreciation for the finer things in life!

 

Scotch Pronunciation Guide:  http://www.esquire.com/features/drinking/scotch-pronunciation-guide-5836909?click=main_sr

Terraforming

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Terraforming, or “earth-shaping,” is the process of changing various elements of another planet or moon’s environment to more closely resemble that of earth’s.  Specific focus is centered on the manipulation of atmosphere, temperature, surface topography, and ecology, and the end goal is to create a world that is habitable for humans.

The term seems to be first used by author Jack Williamson in his story “Collision Orbit,” published in 1942.  Since then, it has been the subject of science fiction books and movies, but has made its way into respected scientific inquiry, and has even been the topic of numerous NASA-hosted debates.

Terraforming first entered the scientific arena in 1961, when Carl Sagan submitted an article to the journal, Science, outlining a proposed method for altering Venus’ atmosphere by seeding it with algae.  He reasoned that the algae would make organic compounds out of the water, nitrogen, and carbon dioxide that are present.  The idea was ground-breaking, but further discoveries about Venus’ atmosphere (including the fact that it contains clouds of highly-concentrated sulfuric acid) made this method impossible.  In 1973, Sagan submitted another article, titled “Planetary Engineering on Mars,” which  seemed more promising.  NASA ran with the ideas outlined in his article, and three years later, concluded that it was possible to make Mars into a habitable planet.  At this point, the idea exploded, both in scientific and popular literature.  So far, the costs required to undertake any sort of terraforming have been completely prohibitive, but the scientific principles behind it remain relatively sound.

We have a pretty good understanding of the elements humans need to survive, because it’s easy to study our own biosphere.  Earth’s atmosphere is made up of 78.1% Nitrogen, 20.9% Oxygen, 0.9% Argon, and 0.1% Carbon Dioxide and other gases.  We have extended regions of liquid water, a viable energy source in the sun, and protection from solar radiation thanks to our atmosphere and magnetosphere.  In order to survive elsewhere, we need to replicate these conditions as closely as possible, and we need to create a system where these conditions are sustained over a long period of time.

At this point, our sights are aimed at Mars.  It’s relatively close, seems to have at least some water frozen at its poles, and may have even supported life in the distant past.  However, Mars presents a great deal of significant challenges before it could support even basic forms of life.

Temperature, Air Pressure, and Atmospheric Composition
The most vital parameters that need to be changed in order to successfully terraform Mars are temperature, air pressure, and atmospheric composition.  Thankfully, these three parameters are tethered to each other, and thus, a change in one will help move the others in a beneficial direction.

Mars’ surface temperature ranges between 81 F and -225 F, with an average around -67 F.  Obviously, we’ll need to heat Mars up in order to sustain life as we know it.  Mars is cold for a couple reasons – number one being that it is farther away from the sun than earth (a full 50% farther).  Secondly, Mars’ atmosphere is thin, so it can’t trap much of the solar energy that does reach its surface.

Mars’ atmospheric pressure averages 600 Pa, compared to Earth’s average atmospheric pressure of 101,000 Pa.  As such, even if the temperature on Mars reaches above freezing, ice won’t melt because it remains below its triple point (look up your chemistry!).  Instead, it sublimates – turns directly from a solid into a gas.  In a couple places at the bottom of huge depressions on Mars’ surface, where atmospheric pressure increases to 1155 Pa, liquid water can be made, but this is rare.

Currently, Mars’ atmosphere consist largely of carbon dioxide (95.3%, compared to 0.1% here on Earth).  It contains only 2.7 %  Nitrogen, and 0.2% Oxygen.  Interestingly, Mars’ current atmospheric conditions are very similar to the atmosphere of early Earth.  Of course this begs the question, “Can we transform Mars’ atmosphere following Earth’s example?”  So far, scientists think the answer is, “yes, ” and a number of ideas have been floated so far:

1. Orbiting mirrors
The idea: Station a gigantic mirror such that it reflects the sun’s light onto one of Mars’ poles and heating up the surface so that CO2 is released into the atmosphere.

From Wikipedia:
There is presently enough carbon dioxide (CO2) as ice in the Martian south pole and absorbed by regolith (soil) around the planet that, if sublimated to gas by a climate warming of only a few degrees, would increase the atmospheric pressure to 300 millibars,[6] comparable to twice the altitude of the peak of Mount Everest. While this would not be comfortably breathable by humans, it would eliminate the present need for pressure suits, melt the water ice at Mars’s north pole (flooding the northern basin), and bring the year-round climate above freezing over approximately half of Mars’s surface.

2.  Kamikaze asteroids
The idea: Send asteroids ripe with ammonia and nitrogen hurling into Mars to create a runaway greenhouse effect.

From Wikipedia:

Another, more intricate, method uses ammonia as a powerful greenhouse gas (as it is possible that large amounts of it exist in frozen form on asteroidal objects orbiting in the outer Solar System); it may be possible to move these (for example, by using nuclear bombs to blast them in the right direction) and send them into Mars’s atmosphere.[7] Sustained smaller impacts will also contribute to increases in the temperature and mass of the atmosphere.

3.  Huge halocarbon factories
The idea: Establish factories on Mars that produce large amounts of halocarbons, again resulting in a runaway greenhouse effect.
This would be nearly impossible, given the extreme energy requirement, and need for 1000’s of people to keep the plants running.

4.  Clouds of darkness
The idea: Spread dust into Mars’ atmosphere, darkening the planet so that it can absorb more light and thus, more heat
From Wikipedia:
Reducing the albedo of the Martian surface would make more efficient use of incoming sunlight.[12] This could be done by spreading dark dust from Mars’s moons, Phobos and Deimos, which are among the blackest bodies in the Solar System; or by introducing dark extremophile microbial life forms such as lichens, algae and bacteria. The ground would then absorb more sunlight, warming the atmosphere.

Next steps
After we’ve increased Mars’ temperature, atmospheric pressure, and altered its atmospheric make-up, we need to start depending on biology to help us out.  Primitive plants (algae, plankton, etc…) can turn atmospheric CO2 into oxygen, and plankton can turn dissolved CO2 into oxygen.  As the oxygen levels start to rise, we can introduce more complex plant life that requires at least some oxygen to survive (grasses, trees, etc…).  Of course, once we have abundant plant life, animals are next…

From Wikipedia:
If algae or other green life were established, it would also contribute a small amount of oxygen to the atmosphere, though not enough to allow humans to breathe. On 26 April 2012, scientists reported that lichen survived and showed remarkable results on the adaptation capacity of photosynthetic activity within the simulation time of 34 days under Martian conditions in the Mars Simulation Laboratory (MSL) maintained by the German Aerospace Center (DLR).[13][14]

UV Radiation
The biggest issue facing our terraforming project is Mars’ near lack of a magnetic field.  Without a strong magnetic field, solar winds will literally blow away an atmosphere over hundreds of thousands of years (this may be what happened to Mars in the first place).  A magnetic field is also instrumental in deflecting UV radiation, which is lethal to nearly all forms of life.  A thick atmosphere does a pretty good job of shielding UV radiation, but even if we put our own atmosphere on Mars, we would still be facing excess amounts of UV radiation.

How long would it take?
With current technology, our timeline looks like this:
Colonization and/or construction of mirrors = 100 years from now
Warming to the point that CO2 releases = 200 years from now
Seeding of microbes = 25-50 years
Oxygen production to levels breathable by humans = 40,000 years.

 

Middle Class Stagnation – or not?

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First thing first: Solitude Challenge Results!!!

So finally back to a nice boring economics podcast again. This is a bit like a nerd alert on steroids but is kind of true to my theme of bringing an alternate view, backed by data, to some conventional wisdom. This time, I want to tackle the alleged stagnation of the middle class.

Everyone knows the media spin on this. Articles like this have been a dime a dozen in the last several years. The basic theme is that over the last several decades, while America has grown a lot economically (Think of where we were 30 years ago), the vast majority of those gains have gone only to the super-rich. And those in the middle class have ‘stagnated.’ That is their real wages have either stayed the same or declined.

So to examine this, I’m going to use for the bulk of this podcast, an incredible working paper put out by an economist at Cornell named Richard Burkhauser. I actually heard him interviewed on one of my favorite podcasts; Econtalk. (Episode here).  What I really like about his work, is that not only is it a great perspective on kind of a hot button issue, but it is also a great example about how important it is to define our assumptions and exactly what we are measuring when doing this type of analysis.

So let’s dive in and see what Burkhauser and his team did. At the root of everything, they are basically trying to answer the question; ‘How has the middle class done over the past 30 years or so, and is it true that they have stagnated?’ So the first question we need to answer, is how do we measure that? Personally I think the best way to measure well being would be to take all sorts of stats about how much leisure time people have, what kind of cool electronics they have in their house, combined with their income etc. But that type of data is super hard to get, so we are a bit limited by the data that is out there.

The simple answer is to just measure their income (inflation adjusted of course). So we just go to the IRS, get everyone’s tax returns, take the average each year, and whammo, we’ve got a nice looking graph that definitely trends up and to the right. Case closed, everything’s good right?

Turns out that when we are talking about income, just simply taking the average to find the “middle-class” has some problems. The main problem is outliers. With all of the economic growth over the past few decades, there have been some really super rich people created, and those outliers can artificially bring up the average and make the middle class look a little better than they probably are.

So the generally accepted way to measure income, or at least to find the middle class, is to look at median income. Quick review on what a median is, you just line everyone up in a gigantic line, and pluck out the person in the exact middle. No calculations necessary, you’ve found your median income.

Our next question is what are we lining up? Should we line up every single person? Man, woman, child etc? Obviously then you’re going to wind up with a ton of individuals that look like they have no income. That might be valuable for answering certain questions, but remember, we are asking ‘How has the middle class done?” So for our question, a stay at home mom of 2 whose husband makes $100K should probably not be seen as living in poverty because her personal income is zero. So instead of lining up individual people to find the median (middle class) income, we need to use some type of sharing unit.

This is where the Burkhauser paper really gets awesome, because his whole thesis is that this next decision we can make, has big implications on what he resulting data looks like.

So there are basically two sharing units that he addresses; the tax unit, and the household. It’s very possible that these are exactly the same, and actually, in most cases they are, but let’s define what they are and what each means:

Tax Unit: This one’s pretty easy. A tax unit is whatever is filed on your income tax return. So you and all your dependents. So in the traditional family example, that man, woman, and two kids would be considered one tax unit. These people might not necessarily all live under the same roof; think a college student whose parents still claim them as a dependent. The data on tax unit income comes from IRS records. So when we are lining things up to find the median middle class income, think about a bunch of tax returns sitting in a gigantic line, and we pick out the middle one.

Household: This one gets a little trickier. A household contains everyone who shares living expenses. The important nuance to note here, is that a household could have multiple tax units. Think of when we first graduated college. When we were living in Minneapolis together right after college, we had 4 separate tax units in one household. So as we decide what to put in a line as we are trying to figure out median income, picture actual houses being put in a line, and we pluck out the median house.

So are you starting to see how it’s possible to get a very different measure of median income based on what sharing unit you decide to choose? Think of where we would have fallen in that big line when we were all living together. So let’s say that the four of us were each making $30K. If you searched for us in the tax unit line, we’d all probably be below the median and pulling that median income down. But if you combine our incomes and looked at us as a household, all of a sudden our household income is now $120K and it doesn’t look like we’re struggling quite so much.

So in general, most researchers have used the IRS data to measure ‘well being’ of the middle class. This means they are using the median tax unit as their sharing unit. So they looked at data that took them across the last 3 business cycles. The business cycle is probably a podcast pillar in of itself, so I won’t get into it right now. But over the last 3 business cycles, starting in 1979 and going to 2007, the median income has only gained 3.2%.

Now that is legitimately stagnation. That is a horrible figure. Only gaining 3.2% over 30 years is really bad. But let’s first dissect exactly what that is measuring. For one, that is something called Pre-tax, pre-transfer income. Burkhauser actually used data from the census that happens every year instead of the traditionally used IRS tax return data. This is a survey that happens every year that asks people about their income. And the designation of “pre-tax, pre-transfer income” is important.

Pre-tax, pre transfer income means any income that is basically cash coming into the sharing unit. So obviously this includes wages from jobs, farm income, interest, dividends, rents, trusts, etc.

So if we just look at pre-tax, pre-transfer income, that number looks pretty grim, but let me re-iterate the question we are trying to answer: ‘How has the middle class done over those past 30 years.” Is pre-tax, pre-transfer income really the right metric to be looking at when considering well being. At least Burkhauser thinks no.

So the next metric that we can look at, that is a little bit broader, is pre-tax, post-transfer income. This includes everything from the pre-tax pre-transfer, plus it adds in social security, workers comp, etc. So any government transfers of income. Because when we are talking about well being of the middle class, it makes sense that we should include these sources of income for families right? These programs have actually grown considerably over the last 30 years,  so when we add that transfer income in, we see the increase in median income almost double to 6% since 1979. Still not awesome, but not as bleak as most studies might have you believe.

Burkhauser argues that still our measure of median income isn’t broad enough. (When we are specifically talking about well being). We need to actually be talking about Post-Tax, Post-transfer income. This includes all the crazy stuff that happens on tax returns. Because a lot of middle class people, particularly home owners, participate in some great programs that allow them to be even better off. So maybe someone gets a homeowners credit or energy credit or something. Burkhauser says that this affects their well being as well. When these credits and liabilities are added in, the average tax unit looks even better off. 9.5% since 1979 to be exact.

Remember, we are still talking about the tax unit instead of the household, which we think is probably a better metric to use when talking about well-being of the middle class right?

So finally, Burkhauser argues that the last piece we need to add in is employer health insurance. This isn’t a figure that IRS researches were able to get to because it isn’t reported on tax returns. But employer provided health insurance definitely is something that has improved the well being of most middle class individuals over the past 30 years.

When we add in the employer provided health insurance benefits into the median tax unit’s income, we get a growth of 18.2% since 1979. So again, still not a crazy increase, but you can already see how the argument that the middle class has totally stagnated is starting to get a little shaky.

Ok, so far, we’ve still just been talking about the tax unit. Remember earlier when we said that this was maybe not the best measure any more when we are trying to answer a well-being question? Instead, we thought it would be better to use the household as the sharing unit. So just to quickly review, the tax unit is just lining up the tax returns. So you plus your dependents. The household, is everyone that you share ‘stuff’ with. So there could be multiple ‘tax units’ within a household sharing unit.

When we look at the median growth of the household, Burkhauser’s team found the following data since 1979:

Pre-tax, Pre-transfer: 12.5% (compared to 3% for tax unit)

Pre-tax, post-transfer: 15.2% (compared to 6%/tax unit)

Post-tax, post-transfer: 20.2% (compared to 9.5%)

Post-tax, Post-transfer + health insurance: 27.3% (compared to 18.2%)

So you’re starting to see that when you see a number published, in order to really understand that number, we need to ask a little bit about what the assumptions are. There was nothing wrong with the calculations that other statisticians did, but their assumptions were different and so they were fundamentally asking different questions.

Now Burkhauser takes it even one step further and adjusts all of the figures he looked at for size. This one is a little harder to grasp, but not totally and has to do with a benefit to sharing. So let me pose a question. Let’s say the four of us were single and all made $20K/year, and we are trying to assess our economic well-being. You would agree that individually, we would be better off living together under one roof right? This is because of the benefit of sharing. Going from a one bedroom to a two bedroom apartment doesn’t double the price right? So we are a little better off economically because each of our $20K goes a little further when we can share things like rent, utilities, maybe we share food so we can buy in bulk, etc.

This is actually the way they set the poverty limits as well, so it’s not a controversial idea that we should be able to adjust the numbers a bit in order to show this. For instance, the poverty line for a one person household is anything under $11,170. For a two person household, this doesn’t simply double, it goes only to $15,130.

So I won’t go into how they adjust for this, but basically the gist is that the more people that are in a household, the more economies of scale can be taken advantage of, especially if there are multiple earners in that household, so there is a calculation that researchers do to pad that a little.

So finally what we end up with, is a figure for (deep breath) – Size adjusted, Post-tax, post-transfer, median household income has increased since 1979 36.7%. So thinking hard about what we are measuring and choosing our assumptions very deliberately is supremely important when trying to answer important questions. ESPECIALLY when there are policy decisions being made on this. Now I know that probably felt like a long time, but it really is just scratching the surface of this study. I would really recommend you listen to the econtalk episode where they go through it in depth because it took me a few times through to really get a firm understanding, and I’m still not positive that it’s totally solid in my mind. Here’s the whole table that summarizes everything:

 

 

 

 

 

 

 

 

 

 

 

 

So in addition to being a cool alternative look at the well-being of the middle class, and just how badly is the middle class doing, this study really hits home about how important knowing your inputs, and thinking about what question you are trying to answer is supremely important.

TOR – The Black Market Internet

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OK, maybe “The Black Market Internet” is a bit of a dramatic title.  However, on one level it is very true.  This episode we talk about TOR (The Onion Router).  I stumbled across TOR when I was reading about some of the latest legislation regarding government intervention in our internet lives.  People are scared about losing their privacy.  This is where the TOR network comes in handy.

The TOR network is a complex beast, but luckily it is incredibly simple to install and use.  On the most basic level, TOR is just another web browser that you can use.  It’s like Internet Explorer or Firefox, except nobody can figure out what you do or where you go.  It’s useful for a TON of things from law enforcement to secret communication to basic personal privacy.  I used it earlier to send an email to the Good Guys and believe me, I couldn’t figure out who sent the email.

So whether you just want a bit more privacy so that Facebook or Google aren’t advertising based on your Amazon shopping history, or if you are buying items you could not get in person, TOR may be a cool thing to check out.

Their website is www.torproject.org  where you can download all the necessary software and be up and running in no time.

Cockney Rhyming Slang

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Ello Govna!  With Mitch just returning from a trip to London, the location of the upcoming 2012 Summer Olympics, the good guys take this opportunity to learn about Cockney, or Ryming Slang, a unique facet of the dialectal English from London’s East End.  Also an absentee Chad proposes a Rubix Cube Challenge, Mitch brings in a new Nerd Alert and Perek makes a glorious return to the reddit.com forums with another Today I Learned.  Hang up the dog, get off your Aris, grab a Britney and enjoy the show!  Thanks for listening!

Interested in throwing some Cockney slang into your everyday language?  Check out http://www.cockneyrhymingslang.co.uk/

or, use some of our own personal favorites:

“Stop being an elephant!” = Elephant and castle = A**hole

“Give me a Britney!”  = Britney Spears = Beer

“Let’s go to the near!”  = Near far = Bar

“Can I borrow some bees?”  = Bees and Honey = Money

“Go park the Scooby!” = Scooby Doo = Subaru

 

An example of Cockney Slang from the brilliant movie Green Street Hooligans!  (viewer discretion advised)

Green Street Hooligans