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“Franklin’s Thrift” Released

June 10, 2009

“Franklin’s Thrift: The Lost History of An American Virtue,” published by Templeton Press, was released this week.   The contributors to this volume, myself included, trace how from the eighteenth century on the idea and practice of thrift has been part of the American vision of economic freedom and social abundance. The historic practice of thrift, far from being an exercise in miserly behavior, is rooted in the belief that communities can use the benefits of thrift to build themselves up and to forge social bonds. Thrift, we argue, is a prerequisite for community advancement.

As our own culture of indebtedness has brought us to the brink of economic failure, history calls our generation to the great battle of our times.  Our fathers and grandfathers secured the beaches of Normandy. We must secure a nation drowning in private and public debt. Without the practice of thrift there can be no wealth. Without wealth there can be no generosity. And without public and private generosity the social bonds that built this nation will tear at the seams.

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Control Yourself

June 8, 2009

Here is a good article from this morning’s Wall Street Journal.  It discusses how psychological biases can affect investment behavior. They quote me, but mostly I’m posting because it explains some basic psychological biases, and their impact in the currect economic climate, quite well.

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A Discussion of Thrift

June 1, 2009

This is a video presentation, largely based on my book, about the causes and consequences of a lack of thrift. It also discusses the current political and economic climate and how that relates to incentives to save.

http://www.youtube.com/watch?v=KKQAQ_buXW4

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Shrinking General Motors

April 1, 2009

“General Motors” just sounds big. It sounds like a company that is trying to make and sell something for everyone. When I ask my marketing class about their perceptual associations of General Motors, something I do when I teach the case “General Motors: OnStar,” invariably words like “big,” “old,” “outdated,” and “low-tech.” come first to my students minds.  This may or may not be a fair set of thoughts, but in many respects that is quite irrelevant. These first thoughts govern a whole lot of buying behavior.

But at some point in the conversation, after all of these negative comments have worked their way out of their heads and onto the blackboard, I ask if this is their perception of GM trucks. The psychology takes a sharp turn at that point. Many of the students have a completely different view of their trucks, believing them to be rugged and reliable.

GM is spending a great deal of money trying to recreate themselves as the kind of car company that could successfully make and market the “Volt,” a new type of electric vehicle. It won’t work. Once people have made up their minds what a company and brand is about it is exceedingly hard to change their view.  As GM looks to shrink itself, and most certainly that is what is going to occur, it should take a hard and realistic look not just at its union contracts but also what people will actually consider buying from them.

General Motors could become a profitable truck company. It will never be a profitable small car company. The cognitive stretch between what people think GM is and what they would need people to believe is simply too large.

The truck market is not going away anytime soon.  The Spanish-speaking market, a group that represents the next generation of American craftsman and contractors, will buy trucks from GM if GM focuses more than a token amount of their marketing efforts towards them.  That market would represent a regrowth opportunity for a smaller more-focused company. Those who work in the construction trades want big, tough and, yes, fuel efficient trucks.  They typcially put a lot of miles on their vehicles and fuel costs are very real to them. The “Volt” won’t sell, but GM can build these kinds of trucks — and perhaps more importantly, most people will believe they can.

So here’s to the General Truck Company. It at least has half a chance of survival. General Motors does not.

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The Thrifty Gene

March 25, 2009

This is an edited version of a post I put up a couple of weeks ago. It talks about how evolutionary psychology affects our decision to save during difficult times. It is published in Forbes.

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Reforming the Mutual Fund Tax Loophole

March 16, 2009

Important changes to our income tax structure are right around the corner. Increased government borrowing will exert pressure to find additional sources of revenue, and most of this additional revenue will be generated by increasing taxes on individuals. For those of you who have read my previous blog posts or publications, you know that I favor consumption taxes relative to income taxes, but let’s set this aside for the moment and examine one not-so-small, but highly under-publicized, loophole in our current tax system.  That is, the implicit ability to deduct the management fees that mutual funds charge their investors.

By deducting fees from fund assets mutual funds essentially disguise the fees that individual investors pay.  If you hire a money manager, or a financial planner, you cannot deduct the fees that this professional charges you from your investment returns. If you get a 10% return on your money and the money manager charges you a 1% annual management fee you pay taxes on the entire 10%. Because mutual funds deduct fees from assets before calculating return the tax situation is different. If your gross return from a mutual fund is 10% and the mutual fund charges you 1%  annual management fee you pay taxes on the net return — that is 9%.

This is a bigger money issue than it may first appear.  The aggregate net asset value of mutual funds shares held in the U.S. is about $10 trillion.  About half of this amount is held in non-tax-deferred accounts. So, the returns on about $5 trillion is exposed to taxes. The average mutual fund, considering both stock and bond mutual funds, charges about a .90% annual management fee.  That suggests that investors are paying about $45B a year in tax-exempted mutual fund management fees. If the average taxpayer pays a marginal tax rate of 25%, a simplifying but effective assumption given my purpose here, what you have is a little over $11 B that is not flowing into the government coffers that by all rights should be.

Why is this tax break particularly troubling to me?

  1. A tax deduction for money management is massively regressive.  The more money you have, the bigger the tax break you are getting.
  2. It is a loophole that is easily exploited. Wealthy individuals can, and do, pool their money with a reasonably small group of other individuals and legally start “mutual funds.” These funds are not marketed to the general public. They are constructed as legal tax shelters generated in order to allow their limited membership to deduct the cost of money management.
  3. Because no taxes are paid on the fees, many mutual fund shareholders will pay less attention to the fees that they are charged. If fees were made explicit, and taxes paid on the gross rather than the net returns, individuals would undoubtedly pay more attention to the fees charged and many people would be made better off for it.

The forthcoming overhaul of financial regulations should not focus exclusively on institutional transactions, but should grapple with needed changes in the retail market for financial services as well. Informed regulation of the financial markets and revisions in the tax code are inextrcibly intertwined. One focus of good regulation should be to close obvious tax loopholes. What I have written above is one example of a change long overdue.

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You May Be Richer Than You Think

February 17, 2009

The Wall Street Journal today posted a blog entry that referenced and quoted a conversation with me about how perceptions of wealth can be biased and how relative wealth is often more important than absolute wealth for personal happiness. Here is the link.  I thank The Wall Street Journal for their interest in my research.