American Airlines Baggage Fee

There seems to be a lot of uproar about American Airlines starting to charge its passengers $15 for their first checked bags. They aren't the first airlines to charge for baggage, but they are the first to charge for the first checked bags. Others who have implemented similar policies normally only charge for the second bag.

This is in response to several factors, most notably of which is the rising cost of fuel. Just today, oil sped past $135 a barrel before coming back down to around $130. This is causing American Airlines, and others as well, to try and find new sources of revenue.

The thing is, I'm not sure why people are so upset. A few things make me understanding. First of all, I understand that companies can't run at a loss forever. Consumers seem to forget that companies are in business to make money. American Airlines is hemorrhaging cash. If they need to raise their prices to meet cost then that's what they have to do. This brings me to my second point. Consumers have a choice on whether or not to fly American Airlines. There are a dozen other carriers that don't charge this fee which you are free to take if you so choose. That's the beauty of capitalism. So long as consumers have choices, then it doesn't really matter what any one company does. If one company tries to charge higher prices than their competitors for the same product, consumers will eventually migrate to the other suppliers.

So let them charge whatever they want. Don't like it, buy a ticket somewhere else.

Think Taxes Don't Matter?

Yes, in case it isn't clear, I'm moving. I'm moving out of the great state of California and to the gloomy state of Washington. Why on earth would I do that?

This is due in no small part to one of my favorite subjects, taxes. You see, California has an absolutely horrendous tax system. It has an astounding 9.3% levy on income over $56,642. To make matters worse, it has a pretty high sales tax and the gas tax doesn't help either. Now in comparison, Washington has NO STATE INCOME TAX. Of course it has to generate revenue somehow which it does so through sales, gasoline, cigarette, and property tax. But guess what. Everyting except the Cigarette tax is lower in Washington than in California!

Even if they weren't higher it would make little difference to me since I tend to save a great deal of my income rather than spend it, I don't smoke, and I don't own (and will not own for the time being) property. Now, I surely pay the property tax indirectly through rent but considering I can get a much nicer place for much cheaper than I can get in California, I think I can live with it.

Now I had a competing offer on the table with a company in California. The money was about the same but in the end it was pretty clear that the Washington offer was better simply because I would not be paying state income tax on it. Washington had a built in 10% edge. (There were other reasons I took the job but it's not like I ignored the effective 10% raise).

Ever hear of the Laffer Curve? It is basically the idea that you can only collect so much in taxes before the revenue drops off because people stop working or move to avoid the tax. Believe me, it's true. And the story isn't isolated to just me. I know plenty of other people who make a great deal of money who decided not to come to California in no small part to the rather unfair tax burden.

So instead of getting some taxes from me, and getting the productive work that well-paid workers provide, California will get nothing from me. But hey, you have the beaches and sunshine right?

The Housing Bubble

Most of the readers who read my blog know that I believe there is a housing bubble going on right now. I believe the top has been reached and that we are going to start to see price declines over the next year. How steep those declines will be remain to be seen.

What is interesting to me is the talk on the other side of the isle by those who do not believe a bubble is formed, who believe that prices will rise or stagnate.

I am a huge fan of real-estate. I believe it is normally an excellent investment. You get to live in the asset while the price appreciates. It is tax-favored so you can realize large captial-gains without having to fork anything over to Uncle-Sam. But what has gone on over the last three years is bordering on mania.

Economics is called the dismal science and it is a aptly named. You see, economics is not kind. We are witnessing a huge asset bubble that, when it burst, is going to hurt a lot more people than anything before it. Most everyday American's don't own stocks, and certainly didn't participate in the internet stock bubble. But most American's do own homes. And many new home owners have bought homes on exotic mortgages. It would be like all these Americans not only buying Microstrategy and Pets.com at the height of the bubble, but buying them on margin!

Of course the naysayers say that houses aren't stocks. Well stocks aren't tulips either, and we all know how that one ended up. An asset is an asset. And any asset can be prone to speculation. It is true that housing is more illiquid than stocks, but that may just compound the problem as pepole will be unable to get out of their homes and thus be upside down in their mortgage. The problem with the dot-com bubble was that the assets were illiquid. When everybody went looking for the way out, nobody was left to buy. They had to dramatically drop the price because the asset wouldn't sell. It wasn't liquid.

During the Dot.com bubble it seemed like any idiot could become a millionaire. He just needed an idea, a web-page, and Bam! he would issue an IPO and make millions. Well the same thing is going on in real estate. Idiots are making money. People who have no experience in housing, who wouldn't know a closing statement is or a 1031 exchange is, are making lots of money.

Near the top of any bubble, you will see that even idiots can be richly rewarded. But it can not last. You see, housing prices can not rise indefinitely, no asset can. Housing prices can not diverge from its underlying fundimentals for long, and real estate has. Stock prices are tied to the earnings the company is able to produce. Over the long haul, stocks MUST be tied to the earnings created. The price of a house MUST be tied to the rental income that it could generate if rented out. Over the long haul, a renter must be cash-flow positive, no one can sell at a loss forever. There is no magic behind it. It just must be. It's simple economics. Ignore reality at your own peril.

Because of the above facts, most recent homeowners are in for a scare. Wages have not increased. Rents have not increased. How can housing prices be justified? The answer, they can't be. When people realize the game is up, don't be standing in front of the door; you will get trampled. When nobody is left stupid enough to pay what you paid for your asset, what are you going to do?

People are hopeful. They always want to believe that this time is different. Economics tells us that it never is. Believe me on this one. The housing market is on the cliff, and its about to take a dive.

NYC Subway Strike

It looks like the NYC Subway Strike may be over. I don't really take either side on the issue as I think both the city and the workers are wrong. Here's why.

I don't like unions but I also beleive they have a right to exist so long as it is a voluntary association. If a group of workers wants to strike to gain concessions in wages and benefits, I have no problem with that. My only beef with them is there fairly unrealistic expectation. An operator can expect to make on average in $63,000. Even in NYC that's a lot of money for relatively low-skilled work (Yes you can live in the city on that. I did with much less). They then want to insure that they can retire, with full benefits, at 55. Compare this with Private-sector employees and the gap is just huge.

However, I think Bloomberg's comment that the workers are being "selfish" is dead on; I just don't think that's a bad thing. People have to do what people have to do. If you believe you are not getting paid enough for your job, you need to be able to leave the job. The $1 million fine is pretty ridiculous. Forcing these workers to work because of some "public need" is just outrageous. Is it making it harder to live in the city? Yes. Is it hurting the city economically? Yes. But tough. If you are going to live in a city that depends so much on its public transportation, and then allow the operator of said system to unionize, then you run the risk of this exact thing happening. Nobody should be allowed to compel someone else to work just because they "need" them to. Slavery ended a long time ago.

I guess my big problem is (big surprise) the Federal government. The federal government mandates that workers are allowed to strike, and that employers can hire temporary workers to replace them. The problem is that the employer MUST take back the striking workers after the strike has ended. This is just stupid. If you want to strike you forefit your job. Why on earth should I take you back?

Of course labor loves this law but it is now backfiring in their face. Again, just another perfect example of what happens when government makes up illogical laws to try and "protect" a class of citizens. How did it backfire? Simple. NYC just made it illegal for public employees to strike. That is why they are now being fined $1 Million a day. That is why union leaders are facing criminal charges. They have made it illegal for someone to leave their job. Doesn't that scare anybody else?

You give government an inch, they will not only take a mile, they will take serveral miles.

Death of the Union?

Most people know I'm not a big fan of unions. I think unions have their place in certain industries where there is a monopoly by the owners; the sports industry is one of the few examples I can really think of, education is another. But overall, I think unions just don't make a lot of economic sense.

Whenever you deal with a group, you are going to get a wide spectrum of talent. You are going to get high, average, and low performers. Unions ensure a set wage structure with little latitude for performance based differences. That means if you are capable of doing twice the work of someone else, you will still get paid exactly the same. This of course builds in an incentive to do as little as possible, why strain yourself if there is no incentive to? As a diligent and hard worker, I want the ability to negotiate my own wage.

Union membership has been on the decline. In 2004, 12.5% of Americans belonged to a union. An even smaller percentage, 7.9%, if you count those workers in the private sector. The latest strike by a large union is happening now. The mechanics of Northwest have refused to accept a 25% wage cut and have gone on strike. Northwest in turn has hired replacement workers to fill the void. They seem to be doing the job. This past weekend, Northwest flew 98% of its schedule. Many of the Northwest mechanics have expressed surprise that Northwest was able to fly as many flights as they have been able to.

This is the new age of labor economics where companies are playing hardball with their employees. Employees are quickly finding out just how replaceable they are. Look at some of the major strikes in the past few years. The NBA had its players, all millionaires, crawling back in 1999. More recently, the NHL absolutely crushed its union and got major concessions. If you don't care about the problems of millionaires there are the examples of the California Supermarket Strike or the Catepillar strike in 1995. In each case, the owners played hard and refused to back down and each time the "workers" caved in and gave back major concessions.

Almost all employees have an over inflated sense of how important they are to the company's bottom line. However, as several examples have shown (some personal to myself), companies are finding it easier and easier to replace their workers. Is this shift of power toward employers permanent? Given the fluidity of today's workforce, the erosion of loyalty (both by companies and their employees) and the decreasing expectation of lifetime employment, I think labor is in for a tough battle.

Are Athletes Paid Too Much?

I swear this is not a sports all the time blog but I wanted to briefly touch on the subject of if athletes are overpaid. Often you hear that sports athletes are paid way too much to play a child's game. To give you an idea of what I am talking about here are the salaries of the highest paid athletes in each of the major sports.

Kevin Garnett - $25,000,000
Alex Rodriguez - $25,000,000
Donovan McNabb - $15,000,000

So are these athletes overpaid. Absolutely not. How the heck can I say that? I don't think anybody in our society can really ever be overpaid. We live in a society where you are free to accept a job and someone is free to hire or not hire you (more or less but I won't get into the details here). This is especially true in sports where the ONLY thing that matters is how you perform and do your job. Obviously the owner of each of these clubs believes that each of these athletes is worth the money. Nobody put a gun to any of their heads and forced them to give the money to the players. Just to put into perspective you need to see what each of these teams are work and make

Team/ Value of Team/ Yearly Revenue

Minnesota Timberwolves $230 $85M
New York Yankees $849M $223M
Philadelphia Eagles $617M $134M

Now if the players don't get the money who will? The owners. A lot less people whine that they are making too much money. Some people complain that instead of making all this money that they should reduce ticket prices. Well if you ran a business and you could sell a product for $10 or $20 what would you do? I think most of you would probably charge what the market would bear.

What I don't understand is that many of the same people who complain that athletes make too much money are those clamoring to get more money for either themselves or working class America. If average Joe American has the right to make as much money as possible how come the same can't be said for athletes? I realize that $25,000 is quite different than $25,000,000 but the principle is the same.

Everyone should be paid what they are worth. Sports just happens to be very big business in America and it makes lots of money. How can you begrudge a man his money which he rightfully deserves. I mean a star athlete, more than any other employee, has a direct impact on the revenue of his company. He plays well, fans come to see games, fans buy more merchandise, etc.


If you like this post you may like these other post:
List of Overpaid Athletes
Athletes
Overpaid
sports

Are Teachers Underpaid?

A recent study suggest that teachers are paid better than the average american, even better than accountants and many engineers. The study is based on the fact that teachers make an average of $44,000 (I don't know how accurate that is but it is coming from a teacher's union) but work only 9 months in the year. Doing the Math you would see that that would be the equivilant of almost $60,000 a year which is a pretty good salary.

Now teachers will argue that they put in a lot of hours outside of their normal school hours. They have to grade papers and they often participate in after school programs. However, I am going to take a controversial stand (what's new) and agree with the study (I hope my teacher friends like Christina and Michelle forgive me). How can I say this?

Well first let me take the first point, working extra hours. Some teachers argue they work 3000 hours a year. Spread over 40 weeks that means 12 hours a day 6 days a week resting only on Sundays. My point is yeah? When I was a consultant I worked WAY more than that. 72 hour weeks were good weeks. Working 100 hour weeks were not unheard of. My Investment Banking friends AVERAGED 100 hour weeks sometimes "sleeping" (if you can call 2 hours sleep) at the office several days in a row. Even now, I probably work on average 60 hours a week. Its just part of the job. Additionally, teachers receive compensation outside of their actual pay. I know in California there is a box on tax forms that give teachers a tax break on mortgages and other consumer type loans. This could add thousands to a teachers income.

But none of this is my point. My point is that I believe people get paid what they are worth. We live in a free society. People are free to move jobs if they want to. Now do I think I should be paid more? Like every other American of course I do but if it is really the case I should go get a different job (and I probably will if I continue to get underpaid). If I'm worth more I could easily prove it to my company by getting an offer somewhere else. Teachers have the same freedom.

The real problem is Economics. It's simple suppy and demand. There is a strong demand for teachers but an even larger supply of capable teachers. The key word is capable. The reason I say that is because one of the underlying problems is that we have very low standards for teachers. We tend to think that anybody with a a pulse is capable of teaching. We as a society don't really care if they are capable of teaching as long as they stand in front of the students and watch them a few hours a day. The DEMAND is for anybody who is basically willing to babysit the students. Since a lot of people are qualified for this there is the large supply.

Now this creates a problem for teachers who actually teach. Since we as a society don't put a premium on actual teaching skills great teachers are dragged down by their less capable brethren. We as a society therefore refuse to pay more taxes to increase teacher salary because we don't feel that it is a difficult job and that anyone off the street can do it. Do I agree with this? NO. But it is the sad state of affairs. So given our expectations and criteria for teachers I do not beileve teachers are underpaid. I believe the actual problem is that our expectations and criteria for teachers is much too low.