A study in the Arrogance of Incompetence

The Congress began the process of trying to understand the scandal at the IRS.  Steven  Miller who seems to have spent his entire education and career in Washington came off as someone with little concern for the possible issues raised by targeting groups by the IRS.   Politico characterized his testimony as follows - "And he maintained that he didn’t lie to Congress — even though he never revealed the targeting program in response to repeated requests from Republican lawmakers in recent years."   The former head of the Exempt Units group in the service, Lois Lerner, who will head up the IRS role in implementing the tax elements of Obamacare, has decided to take the Fifth Amendment.  The Washington Post gave Ms. Lerner Four Pinocchios for her explanation of what happened in this disgraceful episode.  That is as high as a public liar can get.

The NYT tried in an article to spin the story that the whole mess was created because the poor IRS workers in Cincinnati were "overworked."   They threw around huge numbers the IRS gets 70,000 (the article said 60,000) applications a year.   But that number includes all of the types of exempt organizations.  Most of the news services looked at a small increase in the number of applications from 2010 to 2011 and a slightly higher increase in the number from 2011 to 2012.    There were 200 employees in the office which means that even if all of those applications were for C4 organizations and presumably they were not the real increased workload was manageable.  They needed to make some ways to simplify the process of review.  But lets be clear here - according to many sources there were 400 organizations (among all of the applicants) that came under increased scrutiny.  At the height of the problem there were an estimated 2800 C4 applicants.

Critical to respect for government is an understanding that the tax agency operates in a professional manner. Neither Miller nor Lerner seem to understand that.    Comedian Dave Barry summed up the current esteem for the agency which he quipped “The IRS spends God knows how much of your tax money on these toll-free information hot lines staffed by IRS employees, whose idea of a dynamite tax tip is that you should print neatly.”   For an Administration that claimed it would be the most transparent in history - they certainly have not come close to that standard on this episode.

Isabella without Columbus

Inside Higher Education had a story this morning about Swarthmore College, a selective liberal arts college in Pennsylvania, that is considering whether to divest from its endowment companies that produce fossil fuels (coal, oil and gas). Part of this comes from the activities of one Bill McKibben - pictured at the left - who seems to think this would be a good idea.  (After all, it is not his money.)  McKibben, like all good ideologues, has established a blacklist which demands that these companies cease their exploration for new fossil fuels.  (It is not clear whether he has also demanded that we go back to a flat earth policy.)

When this story began last year one Swarthmore senior commented in a New York Times story - “We’ve reached this point of intense urgency that we need to act on climate change now, but the situation is bleaker than it’s ever been from a political perspective,” said William Lawrence, a Swarthmore senior from East Lansing, Mich.   There have been a couple of colleges with tiny endowments that have made the step but were Swarthmore to make join them it would slightly more important.   No one out of East Podunk Maine has heard of Unity College and while many have heard of Hampshire - it is out there on the fringes.

But were Swarthmore to make this step it would be significant.  Harvard's undergraduates have

requested the Harvard Board to do it.  So far Harvard's board has declined but what the request actually represents, besides economic insanity, is a real cost.   About 10% of the Russel 3000 involves companies that would be on the no-no list.  So the Swarthmore trustees decided to do an analysis of whether this bright idea made any sense.  Not a bad idea when your endowment really counts.

The IHE story details the potential costs.  For students at Swarthmore it would produce a couple of hundred million dollars in foregone revenue.  That could amount to an increase in tuition of about $13,000.   Swarthmore, like many other endowments (theirs is currently $1.5 billion) uses index funds to improve investing efficiency.   The paper estimates that up to 60% of the funds they use could be affected by this policy.   The five and ten year returns to Swarthmore have been pretty good - for the 10 year benchmark returns have exceeded averages by a bit less than 2% per year.

As the Swarthmore trustee paper suggests, managing an endowment over time is a complex set of tasks.  Fortunately, anyone with a bit of sense would look that this proposal and reject it immediately.

You cannot make these things up.

Huffpost did a story this morning about the President thinking he might go "Bulworth" on us.   David Axelrod - the Dick Morris of this administration commented - “It’s probably cathartic just to say it. But the reality is that while you want to be truthful, you want to be straightforward, you also want to be practical about whatever you’re saying."  Hmm, Practical as opposed to Truthful.   That is what I love about the Washington establishment, PT Barnum now spends full time in politics.  Only an allegedly brilliant strategist like Axelrod would not see the irony in his remarks.

As a reminder - here is the IMDB synopsis of Bulworth the movie -
A suicidally disillusioned liberal politician puts a contract out on himself and takes the opportunity to be bluntly honest with his voters by affecting the rhythms and speech of hip-hop music and culture.

This President, in his first campaign, worked very hard to obscure his political views, in part because he knew that if the American people understood the depth of his passion about liberal policies - they would not have elected him.  This all sounds like Bull but it is not worth much.

What is a Social Welfare Organization?

There are many reasons to form an organization that is not expected to generate a profit.   Some are formed to do charitable activities (like universities or hospitals) and others a formed for more narrow purposes for example cemetery organizations (501 c 13) have a very distinct purpose which is different from state sponsored workers compensation reinsurance organizations (501 c 27).   It all fits into that category first described by Alexis DeTocqueville called voluntary organizations.  When DeTocqueville came to the US in the 1840s he was amazed at the American ability to form organizations to benefit the community.

The Social Welfare category(501 c 4)  of exempt organization is a catchall.  The IRS has two standards to qualify for this status the organization "may be performing some type of public or community benefit but whose principal feature is lack of private benefit or profit."   Clearly informing the public about civic issues, when such a large percentage of the economy is dedicated to government, would fit into the definition.  But should it also fit with all sorts of other organizations that are formed for exempt purposes but not ones designed to influence our roles as citizens?

The NYT argued in a column this morning that advocacy organizations should be filed under §527 - which is a newer category in the code designed to allow groups to form to "influence the selection, nomination, election, appointment or defeat of candidates to federal, state or local public office."   But are groups like the Tea Party doing something more than trying to influence who is going to be the next member of congress from the fifth district?   The major difference between a 527 and 501 c4 is the requirement in the 527 to disclose donors.

There are really a couple of questions here.   First, is it time to rethink how we allow citizens to form into groups not seeking a profit which want to inform the public process and should we continue to make a distinction between groups which want to elect candidates and those that want to influence civic debate?  Obviously, that is something we should do.  But the suggestion that limiting political speech should not be on the list.  Citizens should be able to unite to petition both the government and their fellow citizens. (That you may have noticed was a very bad pun.)

Second, is this (like so many of the other Obama problems right now) an example of an administration that does not understand the limits of authority?   The current administration is not the first to use these kinds of discretionary actions to move opponents or reward friends.   These kinds of breaches should not be tolerated.  Cleaning up the current problem(s) is not enough.

Third, how can we regain a sense of limited government where these kinds of outrages would not happen?   The most direct answer is to reduce the size of the fisc that goes to the federal government.  The GDP ratio of federal spending (which exceeded 25% at at the high end of the downturn) should be reduced significantly.

Former Clinton Aide Joe Klein commented "As in most presidencies, there have been an awful lot of political hacks populating the mid-reaches of this Administration.  In the Obama instance, these have shown an anachronistic, pre-Clinton liberal bias when it comes to the rules and regulations governing many of our safety-net programs, like Social Security disability. And now they have violated one of the more sacred rules of our democracy: you do not use the tax code to punish your opponents."   From my perspective that is true, but not enough.

An Administration with Only Low Level Employees

As one who spent the early part of my career in Washington, I have been bemused with the continuous claims of this administration on responsibility.   Remember, that when they came in they claimed that this would be the most "transparent" administration in history.  In four recent incidents they have been both murky and arrogant (not a good combination).

#1 - The Alcohol, Tobacco and Firearms unit in the Department of Justice was caught in a hair-brained scheme to transfer to and then track illegal firearms with the Mexican drug cartels.   The scandal blew up when it was discovered that there were about 2000 guns where the ATF transferred ownership - or allowed it to happen - to the cartels.   Problem was that the guns ended up being used in illegal activity (SURPRISE!!!!).   When that fact became known, the Administration went into defense mode and claimed that some low level operative in the Phoenix ATF office had developed this plan to move a couple of thousand guns to illegal contacts.  (SOUNDS CREDIBLE DOESN'T IT)  These were not BB guns, many were high caliber weapons.  Evidently the standards that the ATF used for this program were different than the one used on the Obama Gun Control proposal.

#2 - In September 2011, Islamic militants (this administration seems incapable of using that term) attacked embassies in Egypt and Libya.  There is plenty of evidence that the Administration had knowledge of the attack while it was going on.  Yet, there is also plenty of evidence that they fiddled with it.   The President claims he described this as a terrorist incident - but the transcript of his statement does not confirm that.   What is more troubling is that the Administration tried to foist a story on the American public that the cause of all this unrest was a video that no one in the middle east had ever seen.   (Note - All this happened on 9/11 - but the Administration did not seem to grasp that the date somehow had significance.)   The Administration's dereliction of duty came in two ways - first, it consistently denied requests by the embassy in Libya to beef up security and second, it failed to send any kind of assistance as the attacks were taking place.   Neither the President nor the Secretary of State could be bothered.

WP Graphic of the Results of the IG report

#3 - IRS Scrutiny - Until yesterday  morning the Administration's most recent example was evidence that an office of the IRS which used the Exempt Organizations unit to give extra review for 501(c)(4) (Social Welfare Organizations) if they espoused conservative ideas or if they had certain terms in their names.  That started, according to an Inspector General's report in 2010 and then the Director of the Service told them to cool it.   Then in 2012, a "rogue" group started it up again.  (Is is coincident that 2012 was also an election year?) Reminds one of the Nixon administration.

#4 - AP Phone Records - Yesterday, a story developed that the Department of Justice used secret subpoenas to obtain home, office and cellular phone records of individual Associated Press reporters, allegedly to assist on an investigation about disclosure of classified information on a failed attempt by Al Qeada plot.   Most of the news class (and indeed anyone with a sense of the First Amendment) think this might have been a bit of an overstep by the Attorney General.   The AG defended his actions as a "one of the most serious breaches of security" in his 35 years as a prosecutor.

Second administrations often have problems.  But there are a couple of themes that tie these four together.   First and foremost, in each there is an almost megalomanic sense of authority - the Administration's officials know better how to do things than even the laws that are designed to constrain government.   That was what Frederich Hayek saw as a branch "knowledge problem" - the ultimate inability of officials to know enough about events to be able to control them.   Second, although this has not come out completely on the phone records fiasco - there is a pattern after inappropriate behavior.   Each of these steps happens at some point.   A) The President denies responsibility.  B) He promises to get to the bottom of the problem - and hold those who perpetuated this outrage responsible.   It is remarkable how he uses the same phrase repeatedly and then ignores ever actually holding anyone responsible.  C) He claims that the actions are a result of some low level functionary who acted without proper authority.  D) His spokesman dismisses efforts by the press or Congress to understand what happened by discounting the story as "old news."

Lord Acton was only partially right - his famous aphorism should be revised - absolute power (or even the assumption of absolute power) corrupts absolutely.

How do you do a destination wedding?

This is not a topic that I would normally write about but over the weekend became inspired when two friends of ours got married at Stanford Sierra Camp.   As my daughter taught me, when she got married, weddings are fundamentally a set of logistical events.  She was so well organized that she kept a massive three ring binder on all the details.   I am convinced that her vigilance made her wedding a memorable event but also kept costs down.    But as I thought about this weekend there were so many points where the couple paid attention to small details to make it superb.  But here are four details that made the event even more meaningful.

#1 - Location - find a place that can accommodate you and at the same time which has the opportunity for your guests to have lots of things to do.

Our location was in the Sierra and brought people together with good food and lots of outdoor activities.  On the first night we were there we had a "talent show" - which had a good range of talents - ranging from recitation to music of all types to a little humor.   Yesterday morning there was a not to strenuous hike up to some falls and for those who wanted to go a bit further.   The hiking group included all ages including a couple of people who were over 80.  Not everyone went - but for those who did not there was sailing on the lake and just relaxing.

#2 - Brand the Event and Personalize It.

The attention to detail on this event was incredible, beginning with the hold the date announcement.  When you signed up for the "Wedding Camp" you got a booklet back which had a schedule of events and other sorts of details.  Some gleaned from the normal SSC camper information and some unique to the event.   When each guest arrived there were two glasses and a bottle of wine that had been personalized for the wedding.   This morning, every mother received a rose with their name on it.  As you went into the reception area you saw a banner hanging over the fireplace which spelled out wedding camp.  Strewn around the central location were a couple of photo books with pictures of all of the people who were coming as well as some pictures of the couple.   There were also a couple of jigsaw puzzles from pictures of the couple then and now.  This morning a new puzzle appeared that said "Happy Mother's Day."

On the first night, to take advantage of the location, they did a cruise on a pontoon boat to gaze at the stars.  Without the normal light pollution that you have in a city - the sky is quite beautiful.

Every participant also got a Tshirt commemorating the event.   Because this was a camp event - the wedding cake was a S'mores cake - I spoke to the baker who had to do some ingenious baking to achieve the texture of that famous campfire food.  All those things made this event unique.

#3 - Make the meaningful parts of the ceremony for the couple - meaningful to the guests

This couple chose a non-religious ceremony and yet they included elements from Shabbot (the end of the Jewish Sabbath and the commencement of the week to come - and the wedding itself was late afternoon on a Saturday) and they also chose to use a Ketubah (which is a prenuptial agreement) which is not used much but helped to reinforce that a wedding is a serious event.   The couple chose to explain the significance of both the Shabbot (before we participated in it) and the Ketubah.   The Ketubah involved some levity (because part of the tradition in the contract is the dowery) but ultimately both ceremonies were treated with enough reverence to assure that all of us understood that this was not just a party.

#4 - Assure audience participation 

The talent show did that but so did the use of WEDPICS - a smartphone app which encouraged guests to snap pictures.  As I said yesterday - one friend who is a wedding photographer thought there would be a lot of crappy pictures but in reality the album from the wedding has a lot of shots that a normal wedding photographer would not capture.   The WEDPICS album is different but is really interesting - they compliment each other.

If you are planning a wedding soon or if you have a son or daughter that is likely to be married soon and is considering a destination wedding - you might want to start with these four principles - but if you are serious send me a note and I will give you details - they should write a book about how to bring all these elements together.

Understanding the new world....

We are at a wedding of two friends at the Stanford Sierra Camp.  When we arrived yesterday we were informed that the couple was using a new APP called WedPics.  It is a sharing application that allows individuals to snap photos with their phones and then upload them to a common site.

When our son got married, at the end of the reception, I had the bright idea to ask all the people with cameras to let me copy their memory cards.   Between me and a friend who is now in the wedding photography business we got a total of about 700 photos but the request to the guests yielded another couple of hundred shots.   Most were horrible but some were quite good - in places where neither my friend nor I had been.  WedPics is a good implementation of that notion we did seven years ago.

I did a note to my friend (who is now in the wedding photo business) who immediately dismissed the idea.   He looked at the site and said "there are a lot of crappy pictures on the site (for this particular wedding)" - that is undoubtedly true.   But the idea behind WedPics and other APPs like this is crowdsourcing.   You get to capture what is already happening at social events like weddings.   The iPhone is now the most popular camera in the US.   From my perspective having a professional photographer use this has several advantages.   First, you are conforming to something that is already happening but you appear to be supportive.   Second, you may indeed get a shot which you missed.   Third, the most likely hard core users of smart phones for pictures at events like weddings are likely to be people who are more likely to use the services of a wedding photographer in the future and you have encouraged them to think your business is supportive of this "disruptive" technology.

Markets are changing in all areas - even wedding photography.   This looks like a real opportunity which the smart professionals will embrace.

The oppressive nature of the AMT

Here is a short lesson in average and marginal rates on income taxes and why they matter.   An average rate on income taxes relates the amount of taxes you pay compared to your income.   If I make $50,000 and pay $12,500 in taxes my average rate is 25%.    The marginal rate is the rate applied to additional income.  In a progressive system the tax rates increase as your income increases.   For example the 2013 tax rate tables for a person who is married an filing jointly look like this -

• 10% on taxable income from $0 to $17,850, plus
• 15% on taxable income over $17,850 to $72,500, plus
• 25% on taxable income over $72,500 to $146,400, plus
• 28% on taxable income over $146,400 to $223,050, plus
• 33% on taxable income over $223,050 to $398,350, plus
• 35% on taxable income over $398,350 to $450,000, plus
• 39.6% on taxable income over $450,000.

As our income increases I pay at a higher rate.  Most people only think of the average rate they pay but marginal rates have a much greater effect on incentives to work.   If marginal rates are too high people will substitute non-income activities for income - they will take more vacations or (if they are dishonest) take some of their income under the table.   I am a conscientious taxpayer - I do not do all the tax games that some people do.  Indeed last year my average rate was 25% which was about 7% higher than the average rate paid by the President, who made considerably more than I did.

I came home yesterday to get a communication from the IRS which suggested that I had underpaid my 2011 taxes.   I went back to my files to figure out whether their assessment was correct and found that for some reason that I had failed to include one 1099 from an investment firm where I have multiple accounts.   The missing data showed I had about $4000 in additional income.   The incremental increase in taxes for that amount of income amounted to a marginal rate of 33%.

But then there is the kicker of the AMT (Alternative Minimum Tax) which is that bizarre remnant of tax policy which was put there to punish miscreants who (some people think) don't pay enough tax - or at least that was the theory.  The provision requires you to take all your income/deductions and figure your tax and then if you meet certain conditions an additional rate is assessed that rate is paid in addition to the tax you owe from the regular code.  The AMT complicates the code and at the same time is quite arbitrary.   The AMT assessment added another $2300 or a marginal rate of 58% (far higher than any of the posted rates) - the combination of the regular and AMT additions for this increase in my income amounted to an 88% marginal rate.   By any standard that sounds a wee bit excessive.