Tuesday, May 19, 2015

An open letter to Bernie Sanders

Mr. Sanders,

I support your candidacy for President, and believe in your desire to help workers and students and the real American economy, but wish to suggest policies that would better achieve those goals while gaining centrist support for your candidacy.

First a poor policy suggestion
Imposing a transaction tax on securities trades is a bad idea with no economic purpose.  Instead raise taxes on trading profits, such as reducing or eliminating the preferential treatment of capital gains and dividends.  A concession you can consider for the capitalist class is to allow better tax deductibility of investment losses.

The reason for these policy suggestions is that investment is still encouraged, and investors should still prefer investing to putting money under a mattress.  It still meets the political hot button of getting the financial sector to pay their fare share, and also has the potential to raise significantly more revenue than a financial transactions tax.

Basic income as the important policy recommendation
Basic income of $15k per year, $1250 per month, should be given to every adult citizen including billionaires, union members, students, working families, both members of families where 1 or 0 adults are working, seniors, the disabled, and the substance dependent homeless.

Charles Murray calculated that $10k per year could be given to every American by eliminating conditional programs that Americans can beg for.  The extra $5k comes from simply raising taxes. Because both poor and rich taxpayers also get $15k, if taxes were raised just a flat 10%, then working Americans who make under $150k per year would have a net tax (sum of financial transfers with government) decrease.  10% of GDP is $1.75T.

Payroll deductions should be eliminated and turned into an income tax increase.  This does not affect working people at all, but would affect those who earn income through other means than wages.  UBI will be providing landlords and financial traders with a safety net too, though, so they should be paying into it.

$15k UBI is enough to eliminate all other social programs.  Those who receive Social security or disability benefits greater than $15k could still receive the difference above the UBI amount.  This way no one loses any benefits by switching to UBI.

Basic income is right for Unions and other workers
The worst the economy is doing, the poorer bargaining conditions exist for low wage (usually not unionized) workers.  Bargaining innequality can cause them to be taken advantage of by employers.  If basic income causes some workers to refuse unfair work conditions, then that is a strong incentive for employers to offer better proposition than "take this job or starve, minion", and it significantly improves the opportunities for those that do want to work.

That same benefit exists for union members.  Some people inclined to be lazy is great for those who want to work, and better work propositions will also incentivize those more inclined to be lazy to accept the propositions.  Basic income means better jobs with better pay for anyone that wants them.

Traditional political promises of creating many union jobs seems like a bad idea because its creating a tax pool to reward the winners of those jobs, and there is necessarily some less than 100% useful necessity to those jobs since they need to be created.  So its a policy of wastefully creating a handful of winners which the general voting population should understand is just a different 1% or 2% or 5% than them, just as you try to appeal to those outside the top 1% of income earners.  UBI is for the 99% without deceiving them that they will all become unionized winners.

Basic income is right for Students.
With $15k per year, young people will have the opportunity to choose further education much more easily than through a predatory loan system.  Education costs so much because the sales job that any sized loan is worth the cost of education is a successful sales job.  If students can be convinced to pay $40k per year for education, why take less money from them?  Unlimited education loans are a bad idea because of this dynamic of just promoting a more aggressive sales effort to increase the customer's loan burden.

Young adults genuinely enjoy the opportunity of college, and we don't have to pay them more than those who join the labor force.  We simply need to provide them the means to improve their lives as best they see it.  They may choose unconventional educational paths that they see as more conducive to the innovations that society needs, and may well be correct.

Those who can learn will learn.  While your free college proposal idea is worth considering, with UBI, just an affordable college option is much more likely to be the right budget constrained option.

A basic income election platform is a winning general election platform

  • UBI is a tax cut for 95%+ of Americans
  • UBI improves the quality of jobs by removing desperation from the bargaining process.
  • UBI improves the quantity of jobs by redistributing money where it will be spent, and workers need to be hired to collect that spending.
  • UBI improves the dignity of the poor by giving them the freedom to improve their lives without benefits being taken away, and lets them help themselves far more cheaply and effectively than any expensive supervising bureaucracy ever could.  This is especially true of housing, where people can find more suitable and affordable housing options than expensive unpleasant ghettos.
  • UBI improves education and innovation by letting people develop themselves/ideas without the constraint of paying for their next meal.
  • UBI is the only solution that permanently solves the unfairness of a social security fund insolvency to those who were hoping to be paid after the fund will be insolvent.  All other options seem to be to pay current retirees everything that was promised to them, while cutting programs/benefits to the young.
  • UBI creates electoral funding reform by making special interest pork toxic to voters in that it directly affects how much UBI they all receive.  UBI effectively funds every government program by an equal contribution of every citizen.  So, special interest interest groups have less opportunity to lobby politicians.
Leveraging social media to win the general election
I would recommend engaging with grassroots economists for video/audio conversations where policy discussions can be had with people who are fundamentally sympathetic with your goals, even if they want to nudge you towards arguably more constructive paths.

I believe such interviews and discussions would provide a basis for those excited about your candidacy to promote it substantively.  While you should obviously accept mainstream media interview requests, I am skeptical that they will sympathetically engage in the policies that can improve America with you, as opposed to the horse race, and so the best mainstream media strategy is to treat them as the sideshow that they are.  In my opinion, it is a mistake to treat them as relevant and something that you need more than they need you, because giving them that power is just letting them decide what is a wasted vote in the horse race they are predicting.

Saturday, May 16, 2015

All land in Florida is worthless

Land in Florida should be considered worthless today if it will eventually be flooded/unliveable as a result of sea level increases.  Where worthless means that if you own any such land, you should immediately sell it for whatever you can get, because whatever you can get is more likely to decrease than increase tommorow.

To understand this, you'll need to first understand how real estate is valued.  The short version, is that the only monetary reason to buy a house as that you expect it to increase in value.  All other revenues and costs tend to come slightly below break even.

A tax and interest rate normalized home

The importance of assuming a standard interest and property tax rate is discussed in the next section, but a 5% mortgage interest rate is the sign of a "normal economy", and if interest rates will eventually go up to 5% then your home will eventually drop in value as a result of affordability (main component of real estate value assuming constant liveability) impacts on potential buyers.

Annual Cost per $100k of home value
  • 5% interest.  The best mortgage rates.  (If you paid all cash, you can usually get 0.5% less interest than the best mortgage rate from government bonds)
  • 1.5% property tax.
  • 1% to 0,5% in sales commissions/transfer costs.  The average home is resold in 5 years.  5% in sales commissions from the round trip of buying and selling would make a 1% cost.  Keeping the home for 10 years lowers this cost to 0.5%
  • 0.2% insurance.
  • 5% maintenance and upkeep.  Every 25 years the roof must be redone.  Heating, cooling, plumbing, electrical, driveways, sump pumps, applicances are other costs that pop up regularly.  You can also add small things such as mowing the lawn in that you don't have to do any maintenance whatsoever on a government bond.  Also included in upkeep is the cost of modernizing the decor to maintain resale value.
It costs 12.7% of a home's value in operating expenses, while the rental value tends to be about 12%. So the profit to be made from home ownership is entirely the resale appreciation value, and there is a builtin "hopeful future" presumption that price might appreciate 0.7% per year.

liveability and affordability
For a housing market as a whole, liveability refers to the area's "benefits of living there".  Primarily the availability of jobs, but education, culture, climate, and federally subsidized huricane relief programs also count.

Affordability is mainly affected by interest rates and property taxes, but the cost of maintenance upkeep can also vary by area.  Affordability has nothing to do with the home's price.  The "presumably hopeful" model implies small appreciation, and everything is affordable to someone if it is certain to go up in value.  If interest rates go from 5% to 2.5%, then the real estate industry is good at getting people to understand that a home value changes from $100k to $200k, because both have the same mortgage payment.  It is however a major problem for home owners to have interest rates go back to normal, as that means a 50% cut in resale value.  Even though the real estate industry encourages most people to buy when homes peak in affordability, its actually the best time to sell.

Property taxes and Detroit
Property tax is very similar to paying rent to society for land that you "own".  It is a fair tax in that your ownership deprives the rest of society from owning the same land, and the tracing of ownership is as trivial as someone sat on it first.  Fairness can also be sought in the value of services and livability received in exchange of taxes.  What can be unfair is the unilateral power to gift or steal by changing the property tax rates.  Even less fair than property taxes is the fascism of asset forfeiture rules that bring swat teams to attack your in home poker game such that your stuff can be seized.  This is fascism that affects white people!  City fee increases are also a form of unilateral tax increases that are designed to fool the housing market's ability to make rational home purchase decisions.

Detroit's $500 houses are the result of increasing tax rates in the face of decreasing livability.  As people flea lowered liveable conditions and higher taxes, higher taxes and fewer services just extends the spiral.  A $500 house has that value because living there is not worth the tax bill.

Those $500 houses did not start out at that value, and represents a significant financial loss to many along the way, and the city bankruptcy will create more losses.

Land that is under water is worth 0. Multi-trillion dollar projects such as building a dike/levee system around the state would also bring the land value close to 0 if the tax increases mean that Florida becomes as poor of an ownership proposition as Detroit.

 If there is Florida land that is worth $100k at breakeven maintenance and normalized interest costs within the presumably hopeful model, then purchasing value exists only if you can buy it at a discount such that you can profit from the positive rental value created by the discount.  Purchasing florida land at a 50% discount provides for a 2.5% annual rental profit.  If the value decreases by 50% in the next 20 years, then you still break even as a result of the rental profit.  You also break even if you keep the property for 40 years, and it is worth 0 then.  But this is only possible if you are able to obtain a 50% discount from the normally presumably "hopeful future" price that homes have.  It also assumes no significant property tax hikes.

2030 is only 15 years away.  If sustainability hopelessness has sunk in by then, then that is all it takes for precipitous land value decline.  There only needs to be the prospects of trillion dollar dike mitigation plans to send land value and livability plummeting.  Florida doesn't need to be flooded to become worthless.  It just needs to understand that it will be worthless to become worthless.

2100 will one day be the visible future.  So will 2150.  In terms of land value, if 2150 is hopeless then today is hopeless.  Let me define stupid as simply being slow to understand, and susceptible to manipulation by wolves during their slow period.  Only the stupid don't understand the hopelessness yet, but it will eventually sink in as obviously as Greek or Detroit bonds not being viable investment today.

The logic of climate and bankruptcy denial
In one of my better essays I point out that there is a problem with democracy if most of the people and money voting only care about sustaining the economy and their lifestyles for the next 20 years because they expect to check out around that time frame.

For non scientists, climate change acceptance or denial is a faith based decision.  If a priest (or media puppet) will tell you that choosing faith in denial allows you to not make any sacrifices, that has obvious appeal compared to a faith that costs sacrifices.

For politicians, appealing to the more hopeful faith is easiest.  In the case of North Carolina's ban on accepting sea level rise, the main motivator is that entire beach front communities would be condemned (worth 0) if correct sea level rise models were accepted.  The land is still worthless, but it is a vital economic issue for those community landowners to borrow time to find someone retarded and unaware of the worthlessness to sell their land to.  Widespread disruptions occur when land prices pop, and hamsters seem happier if the wheel keeps spinning.

Attempting to maintain a lie as long as possible always makes sense to preserve the benefits of the lie.  It is still of course evil, and perpetuating the lie increases the eventual costs of dealing with the failure.  This never matters to the liar.

A motivator for climate action
Florida land is only worthless if it gets flooded.  It would be a far more useful step in preventing the outcome if Florida politicans were begging the rest of the world to prevent this rather than leading the denial effort.
These direct economic costs though do drive decision making all over the world.  Pretending your land will not become worthless necessarily ensures that it does because you are the one that should care the most.

Canada and Minnesota
If Florida land is worthless, and Canada and Minnesota will become tropical paradises, then that is where you should buy land.  It also explains Canada's hypocrisy on climate change where it ignores its climate treaty commitments, and promotes oil use and development.  Canada's conservative governement (and perhaps its other parties) are not to be trusted to not only continue oil promotion, but not to be trusted to increase Canada's land value by wishing for the destruction of the rest of the world.

The needed policy solution
Increase fossil fuel derived energy taxes such that gasoline costs $10/gallon (about $7/gal in new taxes. Up to $960B revenue with unchanged use.), and electricity rates are $0.30/kwh (about $0.15/kwh in new taxes.  Up to $409B revenue with unchanged use) (from fossil fuel based sources).  This can be offset with basic income paid by the tax increases.  Basic income is an equal cash amount paid to each adult citizen.

In this case, the amount of this basic income cheque would be based on the average energy expenses of each American.  Likely about $4000-$4800 per person (based on 240M adults).  If we can expect the average person to reduce energy costs by 20%, then we can consider an energy-tax-dividend cheque of 80% of the expected unchanged energy consumption costs.

For the average American, there would be no net cost from these high energy taxes.  The dividend cheque pays for the extra expenses exactly.  For those with small homes and small or no cars, then its a net benefit.  Those with large homes are those most able to afford solar electric and heating systems that would let them avoid the taxes.  Everyone would fix poor insulation and innefficient systems.

It would further prevent any new oil refineries, pipelines, coal and gas plant from ever being built.  There doesn't need to be any subsidies for clean energy because they will become significantly cost preferential due to the taxation of CO2.

Part of a larger UBI program
A $4000 energy tax dividend cheque significantly helps in providing a total UBI of $15k (or $16k to cover the poor's extra energy expenses) while limiting other tax disruptions.

Since I mentioned property taxes and the relationship to livability in this essay, this is a good place to introduce how local funding can contribute to a total UBI available to a resident.  Increasing property taxes by 2% of market value sounds high, but its not if it is redistributed to every resident.  Those with the largest houses pay more again, but they have the same option as everyone else to increase the density of people in their homes.  Increasing density also helps reduce energy use.

Such a property tax would increase the liveability of a city by more than the tax cost, and so increase the market value of homes.  Its more affordable to live in the city for renters and so homeowners can increase their rents, or get good rates for boarders.  If total UBI (including federal province/state) is high enough, then massive city budget items related to homelessness and crime can be slashed and significantly improve livability at lower social operating costs.

Providing an additional $2000 from local revenue ($3000 after police and homelessness cuts) towards UBI would make more expensive urban centers more livable and desirable, and would let cities compete on progressiveness.  Conservative shitholes can stay shitholes if they prefer lower land values with no taxes, and bringing it back to Florida, if they prefer policies that will drown them, its not Canadians or Minnesotans that should have to convince them otherwise.

Wednesday, May 6, 2015

Slashing public education can provide UBI funding and better education

Basic income of $15k per year for adults allows our society to eliminate poverty, eliminate the cost of government programs that are designed to fight poverty including old age and disability payments up to $15k per person, and because tax payers also get $15k cash, even if tax rates are increased substantially to pay for basic income, 98%+ of individual tax payers would have a net tax cut as a result of UBI.

This paper focuses on education reform as a way to increase funding for UBI, and then also, because education touches on all levels of government funding, the topic of avoiding the massive imminent US municipality bankruptcies is also solvable through UBI.  Its related to education reform in that it allows buys in from education related unions.

A war on teachers?
While replacing public education with a cash dividend to parents seems like an attack on teachers and education, I've shown that we can reduce class sizes and have 2 teachers per class for less cost than our current system, and potentially much higher pay for teachers.  So it is actually a plan for large scale education job creation for those outside of the school board bureaucracy.

I mention this near the top because of most people's reactionary desire to protect empires that they do not even profit from.

The cost of US education
All figures come from this US government document
The US spent $10500 per pre-college pupil in 2009.  NY state as over $18k.  Washington DC is calculated at over $29k (though the linked document under reports that).

Replacing education funding with giving a cash grant of $8k per 60M potential pupils (to their parents) would save $125B in government costs.  Parents would then spend whatever they want on the education they want for their child.

There doesn't have to be anything wrong with how education is provided for this proposal to make sense.   We all love education, but that love gets abused into "we must love education at any price", and a political ploy to get more votes is to increase education funding.  We necessarily better receive the education that we want if we are paying directly for it, and we have that power and can afford to pay for it because of UBI.

Parents will continue to buy education with UBI because its obvious:  One of the findings of the Dauphin, Manitoba minincome experiment was negative dropout rates.  Students who had previously dropped out reenrolling, and few if any new dropouts.  Once you remove financial stress from a family, tremendous improvements in child outcomes materialize.

Private education business models
If a teacher paid $24000 in rent for a facility that can act as a classroom for about 8 months (excluding holidays) of weekday day time use, that is $3000/month of revenue for the classroom holder for which they provide cleaning and maintenance services.

If a teacher charged students $5k/year and had 15 students, he would have a net profit of $51k/year while still having summers and Christmas/spring break off.  The teacher can make more by having more students or a higher rate per student.  Teaching is also suitable to part time work if that is what the teacher's preference is.

If an administrator can provide a sales function testifying how great the teachers he represents are, and then closing the parents to hand over payment then he provides great assistance and relief of non-teaching functions to teachers.  They could take $1k/student/year in fees for this service (the parent is charged $6k so far)

If a teacher's assistant who specializes in simply being good with kids, being aware of social goals for age/grade appropriate learning levels, then that assistant can essentially be assigned as a constant to students, and the assistant works with instructors on what curriculum to focus on, then with 25 students per class, part time instuctors whose skills just need to be specialist field knowledge and good communication, then the "teaching assistant" and instructor can split $101k per year after rent is paid.

2 mentors per class at 25 students reduces the teacher student ratio compared to 15 class size.  It prevents potential accusations of abuse or abuse by providing an adult witness.  It allows classes to proceed if one of the teachers has a personal emergency/absense.  It provides different styles that might better relate to individual students.  It provides co-supervision where parents or authorities can ask one adult about the other.

If a dual teacher's assistant model is adopted, parents might be willing to pay an extra $500 for the benefit.  Each extra $500/pupil allows for $12500 to be split among the teachers.  These earnings are in addition to the $15k UBI every adult citizen receives.

As a parent in this model and $6500 education costs.  You save $4000, and have $1500 left over to spend as you wish.  Your kids will volunteer ideas if you lack any.  As a non-parent, you save $2500 per year.  Where savings are defined as costs the government doesn't pay and so doesn't need to take from you.

State and Municipality business models
With public spending reduced by $125B, states and municipalities get their share of those savings.  But part of the above private business model included having a landlord paid $3000 per classroom per month, and the owners of current schools (governments) should see opportunity in being that landlord.  They provide a place to run around and play, gymnasiums, student supplies storage, intraclass socialization, and so provide good value at $3000 per month, even if private home classrooms could be offered at a lower price.

With 60M students at a current average 30 students per class, this would be an additional $48B/year in revenue for school owners (before evening and weekend rental revenue), and so total $175B savings for public coffers, or over $1000 of UBI funding per citizen.

The simultaneously most distopian and most utopian possible statistic

Spending $29,400 per student in a society would be a sign of incredible wealth.  Under the above private model I can imagine 6-8 pupil class sizes with 2 instructors.  Several computers of varying portability per student, Celebrity inspirational guest speakers.  Field trips to distant nature and museums, and I haven't run out of money to spend, but lack ideas to spend them on.  Fantastic educational experiences and outcomes are imaginable from such high spending.

The above does not describe Washington D.C.'s public education system which does spend $29.4k per student.  They produce a 30%-50% literacy rate among exiting students, and 50%-66% graduation rate., with poor (under 3%) college readiness.

The truly distopian unmasking of these statistics is that if you accept that the US has an oppressive racist school to prison and murder pipeline, and whether or not this is intentionally oppressive systemically imposed poverty, it doesn't improve educational outcomes no matter how much is spent on education, and so makes the cradle to prison pipeline just more expensive.

The costs of poverty are both substantial in direct programs that, with considerable futility, aim to bandaid poverty, and directly and indirectly dealing with the consequences and prosecution of crime.  America's love for systemic oppression that includes employer funded healthcare and massive student loans creates a moral flexibility in a desperate workforce that leads to greed, death, theft and fraud.

While sensible people can understand that is worth a high price to not live in such a distopia, it seems to me, as though all politician led proposals to throw money at the problem are idiotic hopeless and potentially intentionally so, as they all increase the environment of oppression and/or dependence on the salvation from oppression of conditional benefits.  UBI solves these issues directly and immediately by providing the means to people to improve their own lives.

Can black people be trusted to spend the right amount on education?
Many people fear that many other people cannot be trusted with money.  If you are one of those people you will retain your right to criticize other people's choices and apparent lack of concern for their children.  In truth, poverty and desperation is what makes for disapprovable choices.  White people will eat other white people if stuck on a Chilean mountain.  UBI in general cures poverty by providing socialized financial support that is not dependent upon staying poor for eligibility.

Deinstitutionalizing education is meant to create improvements for all, including the disadvantaged.  Everyone, though, benefits by customizing education programs to their needs.  In the case of municipalities with a high concentration of disadvantaged families, paying $8k per student instead of $30k per student can create budgetary room to improve the lives of those families.

There is an optional extra educational service layer that could consume the extra $1500 that parents might be able to pocket after paying for the previously described education programs.  The layer would act as a consumer union negotiating prices and services, would provide needs assessment for children so as to direct them to specialist teachers and programs, possibly acting as a mutualization agent for special program costs (You hope your child doesn't need an extra $3000-$6000 in remedial education programs, but if he does, it is paid for by the mutualization surplus created by those parents who don't need the supplemental services).  This agency (can be private competing with public alternative) would offer to make all the decisions regarding your children that school boards currently do.  The agencies might develop curriculum, ensure that programs supporting patriotism and religion are core indoctrination programming, and provide everyone who wants the freedom from any decision making the opportunity to live life as they always have.  There is also a possibility (not one I encourage) of forcing those parents deemed unfit to join such an agency to make education decisions for their children using their cash dividend paid on behalf of their child.

The Pension System
A promised pension is the maximum possible amount that you can receive from that promise.  The actual amount you will receive depends on bankruptcy and how much money is in the pension fund, and how much is taken out of the pension fund to pay for other areas of bankruptcy.

There is a large impending set of bankruptcies set to affect major US cities much as Detroit's slow process is unfolding.  If you are a young worker for a city that is insolvent and soon to be bankrupt, then every day in the last 15 years that your city did not resolve (become) bankruptcy is a day that you were stolen from.  It is a day that you made pension contributions, a day that existing pensioners were paid, and a day that the pension balance and city finances went further down.  Those that stole from you are specifically the pensioners that were paid for days that you won't be.

The reason that it is theft is that when your city's bankruptcy is finally resolved, the amount that your pension will be adjusted down is much higher the later this date happens, and the more drastic the underfunding.  If you pay in for 40 years, receive nothing, and your future pensionable earnings are adjusted to 10% of what you were promised, then you have lost far more than if you paid for 5 years, and your future pension is adjusted to 90% of what you were promised.

In the Detroit bankruptcy, a plea that seemed to resonate was "Don't cut benefits to current retirees... just future ones".  The logic behind this is that the old are more deserving of the same promise being kept for them if they are more dependent and desperate upon the promise.being true.  This is unfair for the same reason that stealing from those who can afford to eat after you have stolen from them would be wrong too.

Basic income as a solution to municipal pension shortfalls
Basic income/social dividends are a new government administered entitlement.  Anyone with a promised government entitlement does not lose anything if that entitlement (or a portion thereof if it is higher than UBI) is replaced (rather than supplemented) with UBI.  Someone else might gain more than you if they were not previously entitled to anything, but you thinking that is unfair is simple jealousy.

Basic income can be paid by all 3 levels of government, and 15k can be a national (total) average.  The financial mechanism that would be used to transfer municipal pensions to UBI payment system is that the pension fund would be transferred to the UBI provider along with the pay-in obligations of existing government workers.

The benefit to existing and retired workers is that they will be paid what they were promised under the conditions they were promised them.  The not so politically pleasing catch for those workers is that they will be paying more into UBI than non government workers, but they of course have the freedom to go work elsewhere, which may please other tax payers.

Education and other unionized government worker buy ins
The one inefficiency that I will mention exists with our institutionalized education system is that the business of education has more to do, or at least too much to do, with making sure that teachers are performing either in averages or thresholds than in individual children learning.  This seems important and necessary considering that parents are forced to submit to whatever services are provided, and so measurement provides accountability because we can't let these parents down.

There is a significant portion of the education budget that is spent ensuring teachers are meeting board standards which would not be voluntarily paid for if parents had a choice in education services, and can change their choices when their own standards are not met.

Reducing total education spending does mean that some people would lose income.  Teachers would not be in this category.  Education salespeople wouldn't either (they have potential to earn much more given enough sweet talk of paying parents)

As a "package deal" for education and other government workers, UBI pays them 15k too, trutifies the pension lies they were promised, all without the obligation of any future work, and thus the freedom to do anything else.

Further incentives to reduce government jobs may be necessary for UBI acceptance.  These would take the form of severance packages, but even then provide significant social improvement and cost savings while still creating the income distribution society needs to function effectively.

Higher education and certificate objectives
UBI has been commonly understood to facilitate higher education.  $15k for young adults would be enough to afford studying full time and paying living expenses in most countries.  It would significantly decrease the need for student loans, and thus should lower tuition.  The private model for pre-college education described above would also work for college.  If instructors are paid more, but are teaching 300 class size auditoriums, then the cost to students could be very low.

The value of education certificates, though steeped in wizardry, is important to all stakeholders.  Its actually the only transactional benefit involved for students.  Education would be much cheaper still if independent certificate authorities collected fees for test taking, and had no other part in the education process.  It would enhance the independence of the certificate provider from self assessing the value of the education it provided.

This model is suited to self-directed, self paced and internet enabled learning.  Certificates are much more useful for skill assessment than learning, but certificate testing/providers are the least costly possible education model, and one that maximizes the legitimacy of that certificate by removing conflicts of interest.

There would remain value in general learning skills/experience not capturable by certificates and that is what colleges would market themselves on, but cost would be more relevant to the student customers.

Saturday, May 2, 2015

A financial metric: Shareholder Margin Performance

This financial metric of Shareholder Margin Performance (SMP) is similar in philosophy to the management accounting "contribution margin" metric for projects, but it assesses the company as a whole and can be computed from financial statements.  This may be the single most useful barometer of a company's performance for shareholders.

SMP = Net income less ((Other income and R&D expenses) * (1 - tax savings resulting from these expenses)

The margin value is calculated as a percent of revenue.
Per share values should use visible diluted shares as the divisor.

Other income is non-recurring exceptional items.
R&D is presumed to be a worthwhile investment that will increase future revenue and income.
Sales and Admin expenses tend to grow uncontrollably with revenue and this metric correctly encapsulates the level of control managment is exercising regarding these expenses.
Taxes are significantly increased by stock option compensation schemes, and the ratio properly reflects the extra costs imposed on shareholders by such schemes.

The ratio validates to external investors the exact return from R&D that would be needed to justify that R&D.

For growth companies, the per share value is a better metric than earnings.  If you can imagine a "terminal" annual sales value, then the margin ratio determines what those sales would contribute to shareholders if management has some disposition to paying shareholders

Share price as a multiple of SMP margin
Because SMP is a better metric than EPS, there is a more universal multiple that can be used to calculate fair share price, though there is still substantial company-specific modifiers.

As a starting point, use a 5% fair interest return for a 20 year period in the company's weighted markets.  While national rates may be lower than this, they reflect supply disruptions and forced purchases that may be temporary, and a real AAA credit rating, would have reasonable investors accept such returns in free conditions.

The most universal adjustment is the disruption risk factors to a company.  Crocs, Sony Walkmans, Blackberry's and Myspace all had spectacular sales growth at one point.  Many companies do not have visible sustainability challenges, though looking backwards they are obvious, and caused price overvaluations.

For simplicity assign an optimistic terminal sales value that seems to have a 50% chance of occuring.  If they are disrupted, they are most likely to churn their wheels breaking even for a while.  Crocs, Blackberry, Sony, Myspace all still exist.  Their market price is substantially lower than their peaks but there can be hope that they will rebound.  Using a 50% likely sales target with the breakeven fallback position means that a shareholder should expect a 10% return at the sales target.  There is still substantial risk for overvaluation using this technique, but disruption doesn't happen until it happens, and obtaining a fair price based on the likelihood of disruption is still appropriate.  Buying or not becomes a decision based on the fear of disruption.

Of the 4 companies mentioned, Sony is the only one that has paid a dividend.  Since 1990, it has paid about $10, and its shares are up $3.  So dividend payout and management predisposition for payout is critical to mitigating any risk of disruption.  Some companies (MCD) are likely to pay (close to) their entire market value in dividends over the next 20 years, and so its shareholders are substantially insulated from disruption.  Other companies have dual class share structures that make their board unaccountable to anything but bare minimum Delaware regulations.  They will not pay dividends, and will not accept reasonable takeover offers as their piggy bank can better continue to serve them if they keep control of it.

The final adjustment to the SMP multiple is incorporating this management disposition and accountability factor into an adjustment to the previous value.  A company expected to pay 0 dividends over the next 20 years should be worth 75% of its disruption discounted value.  A company expecting to pay 100% of its market value in dividends over the next 20 years should be worth 100% of its disruption discounted value.

With respect to takeover potential, as important a factor as management predisposition, is the market size of the firm.  A company worth $2B still has enough potential fishes large enough to pay $4B for it.  $20B and $30B companies, not so much.  While there is substantial overlap between 0 dividend paying companies and those uninviting of takeovers, there is a qualitative adjustment combined with the previous dividend discount that should bring companies as low as 50% of their disruption discounted value based on their size and level of board control and shareholder disdain.

Blackberry was once a $200+ stock.  Never paid a dividend.  At the time they were too big to be taken over.  Today, much of their remaining value is based on an actual eagerness to receive a reasonable takeover bid (~$15/share?).  Even if you would evaluate a low sustainable disruption discounted SMP company value, there would be a premium for takeover potential.

Some company valuations (with 35% tax benefit of R&D expenses)

Linkedin recent quarters

- Revenue Devel OtherInc NetIncome Shares SMP SMPps
Q1_2015 637.7 165.5 _4 (42.5) 134 0.106 0.505
Q4_2014 638 150 _7 _17 127 0.133307 0.669685
Q1_2014 473 121 1 _13 127 0.137421 0.511811
Q1_2013 325 81 0 23 124 0.232769 0.610081

At $9B revenue 20 years from now. the disruption discounted value would have dropped from $20B in Q1 2013, to $9.54B in Q1 2015.

With 0 dividends paid, disdainful management and overvaluation, the value should be adjusted down by 50%, and so LNKD has dropped in fair value performance from $10B to $4.7B.

The ratio accurately captures the extreme decline in the company that is not simply the result of overspending on R&D.  Growth has been bought with heavy sales and admin expenses,

To get to a $30B value, you need to assume $27B in sales and a return to 2013 SMP margins of 23%, and the growth deterioration at extreme expense expansion doesn't support this.

In my view, LNKD has been facing disruptions to the market opportunities it saw in 2013.  Its reaction to those disruptions has been overspending and the consequences of those reactions are described by the lower SMP margins.

- Revenue Devel OtherInc NetIncome Shares SMP SMPps
Q1_2015 435.9 189.7 9.1 (162.4) 640 (0.103) (0.07)
Q4_2014 479 181.7 0.5 _125.3 640 _0.0156994 _0.01175
Q1_2014 250.4 149.3 1.3 _132.3 570 _0.144169 _0.0633333
Q1_2013 114.3 47.5 _1.3 _10.5 570 0.185652 0.0372281

Twitter has worst problems in that it would still be unprofitable if it had no R&D expenses.  Its not the case that young companies simply have low ratios, as its 2013 SMP margin was a low but respectable 18.5%.  What its done since simply hasn't worked.


- Revenue Devel OtherInc NetIncome Shares SMP SMPps
Q1_2015 3543 1062 2 509 2836 0.338 0.422
Q4_2014 3851 1111 _20 696 2836 0.371631 0.504637
Q1_2014 2502 455 0 639 2609 0.373601 0.358279
Q1_2013 1458 293 _10 217 2609 0.283916 0.158662

While there is some deterioration over last year, at $27B terminal sales, the disruption discounted value would be $90B.  A drop of $10B from last quarter and last year.

The company still deserves a 50% discount as a result of its concentrated dual class share structure and impossibility of being bought out.  It will pay 0 dividends for the next 20 years.  Value of $45B-$50B
Still its R&D spend gives it the power to stiffle LNKD and TWTR's growth.

If FB will spend $4B per year in R&D, it needs $12B in cummulative incremental sales to justify it.  If those sales can be amortized over 5 years, then it needs a $2.4B annual sales increase to just break even on the R&D.  It is meeting this threshold so far.

LNKD on the other hand at its current SMP margin, needs to turn $700M in annual R&D into $7B in incremental cummulative sales.  It is not expected to meet the break even $1.4B amortized annual sales increase, and so either its R&D is wasteful or the sales and admin costs are too expensive to obtain its sales.

- Revenue Devel OtherInc NetIncome Shares SMP SMPps
Q1_2015 17258 2753 157 3586 689.5 0.305563 7.64815
Q1_2014 15420 2126 357 3452 685.2 0.298434 6.71607

Google improved its SMP margin over last year.  At $150B expected sales 20 years from now, there is a $450B valuation.  A 50% discount factor is still appropriate though there is a small unlikely probability of divdidend as a result of the ageing and potnetial retirement of some of the founders.  At least more likely in the following 20 years after the first 20.

At $225B fair value, GOOG is the least overpriced of the companies mentioned, though it is not at all immune from disruption.


- Revenue Devel OtherInc NetIncome Shares SMP SMPps
Q1_2015 21729 2984 _77 4985 8237 0.320983 0.846746
Q1_2014 20403 2743 _17 5660 8367 0.365338 0.890881
MSFT has better margins than GOOG.  Its revenue potential has a lot of variance as it can both disrupt others and be disrupted.

At 35% SMP margin and $150B sales 20 years from now, it has a disruption discounted value of  $502B (above its current market value).  Because it will likely payout $300B in dividends over the next 20 years, only a 10% uncertainty discount is deserved and so a $450B market value is indeed a fair valuation for the company (assuming $150B in eventual annual sales), and $400B at $133B in sales.