The Amateur Financier

If you’ve been reading The Amateur Financier for a while, you’re probably aware that one of my guilty pleasures is Cracked.com.  I’ll admit, much of what they publish doesn’t really count deep journalism, and even the articles that are interesting and well cited (yes, Cracked is surprisingly good at citing relevant and interesting sources for their comedy articles) tend to involve more curse words than you might be comfortable reading.

Still, every so often they publish something that really makes me think.  Such an article was published last week, which discussed the ways that language can control your thoughts.  Some of the examples they include Australian Aboriginal tribesmen being better at oriented themselves (because they use cardinal directions such as North and South when orienting themselves, rather than left and right like us English speakers) and how having a name for a particular color enables you to distinguish it from similar colors.  It’s kind of amazing what various psychological studies have shown about the effects language can have on our perception.

Money, Language, and You

Naturally, being a personal finance blogger, my thoughts went to how the words we use regarding money affect our actions about making, spending, and saving it.  If you talk about investing as being ‘risky’, are you going to put more money into your investments?  If putting money into index mutual funds is ‘boring’, how likely is it that you will seek more speculative investments to ‘spice up’ your investments?  If you tell yourself that saving money or paying off your credit bills is ‘impossible’, are you even going to try?  The language you use to describe your money habits can have a large impact on what actions you take with your money, and as a result, what happens with your finances over time.

When you look at this money, do you think 'A good opportunity to boost my savings' or 'Weekend in Vegas, baby!'?

Given these points, the language we use when we talk about money takes on a new importance.  If what you say affects how you think (and it does), and how think affects how you act (also, quite true), then the importance of using proper language regarding your money becomes even more pronounced.  So, how can we ensure that we use the proper language?   Well…

1. Learn the Language of Money: One of the biggest obstacles people face when trying to be more proactive about their money is the wall of jargon that financial types tend to use.  Even if you have a grasp of the basics, telling the difference between ‘large-cap growth stocks’ and ‘zero-coupon bonds’ can get rather tricky.  That’s before we even get into the issue of how much money to put into each type of investment.  If you want to help learn the language used by investors, one good place to start looking is Investopedia’s Dictionary.  It’s one of the most thorough lists of investing terminology out there, and should provide a good grounding in the phrases you’ll encounter while researching your investments.  And of course, you can take advantage of my Investing 101 posts to give you a background in many of the most commonly encountered investments.

2. Use Optimistic Language…: It’s important to have confidence in your ability to determine proper investments.  If you are constantly doubting yourself, you’re likely to invest in vehicles that don’t provide enough returns to reach your goals.  If you are fairly young and pulled your money out of stocks and other growth investments after the market turmoil of 2008, telling yourself that the stock market was ‘too risky’ or not a ‘safe’ place to keep your money, you could find yourself not getting enough of a return to retire at a reasonably young age (or perhaps at all).  Instead, remind yourself that investments go in cycles, and that if you are diversified and don’t let yourself panic, you’ll come out ahead in the investment game.

3. …But Don’t Be Overconfident: It can be tempting, particularly if you have had some luck with your investments in the past, to chalk up your success to your amazing investment skill.  There’s nothing wrong with that; more power to you if you have had success investing.  The trouble is if you start to invest more and more of your money in increasingly speculative (there’s another of those money terms) investments because you tell yourself that ‘I’m too good to lose money’ or ‘It’s stupid to keep some money in savings, earning nearly nothing’.  It’s important to remind yourself that potential reward doesn’t come without risk, that there is not such thing as a ‘sure thing’ when it comes to investing.

There you have it, several ways to keep the language you use from sabotaging your money goals.  Hopefully, you can now tell yourself that ‘Money management isn’t that hard’ and that ‘If I work at it, I’m sure I’ll increase my net worth over time.’

There was a bit of a shuffle over the comments of Rand Paul (Republican candidate for Senate in Kentucky) and John Stossel (media commentator, now on Fox) regarding the Civil Rights Act.  Rand Paul came out in favor of allowing private businesses to discriminate on the basis of race (only private businesses; he favored continuing to require government to behave in a non-discriminatory manner).  John Stossel then came to Paul’s defense in the this particular case, arguing that ‘The free market, as usual, will address the problem.  It punishes racists.  A business that doesn’t hire blacks will lose customers and good employees.  It will atrophy while its more inclusive competitors thrive.’

Stossel raises an interesting point: could the free market have ended discrimination without government intervention?  Or were the government actions like the Civil Rights Act and its prohibitions on employment discrimination a needed remedy to the segregation era?

(As an aside, Paul has said that he supports nine of the ten total titles in the Civil Rights Act while opposing one of them.  A perusal of the titles of said act seems to indicate that the one that gives him trouble is Title II, which prohibits ‘discrimination in hotels, motels, restaurants, theaters, and all other public accommodations engaged in interstate commerce’; being the only title in the act that affects privately owned businesses, that would seem to be the part of the bill in question.)

The Free Market Alternative

First, a few words to defend Mssrs. Paul and Stossel: they do raise a decent point.  Assuming all other things being equal, businesses that voluntarily restrict their clientele will find themselves at a disadvantage economically.  In business, the only color that really matters is green (money, that is), and refusing to accept the money of a certain group on the basis of skin color is a poor business decision, putting you at a disadvantage to your competitors.

Let’s have an example.  We have two diners in a particular town, White’s and Gray’s.  White’s only serves Caucasians, while Gray’s serves any race.  Let’s say further that the area where these two competing diners are located has a population that is 90% white and 10% black.  White’s, by voluntarily restricting the type of people they allow to be served there, should receive less money than Gray’s, which will get all of the black diner patrons as well as a sizable portion of the white patrons.  (To say nothing of ALL the white diner patrons who, like Paul and Stossel, personally oppose discrimination and would not support a restaurant that discriminates against other races.)  All other things being equal, Gray’s will get more business, take in more money, and prosper, while White’s will sputter along, and eventually fade away.  The free market has done its job again.

The Reality of the World

In the real world, things aren’t quite that simple; there are many ways that White’s (or any businesses that opt to discriminate) could prove successful, even without black (or other minority) patrons.  For example, let’s suppose that a sizable portion of the population opposes integration (certainly reasonable in some areas of the country, even now; back when the Civil Rights Act was passed, that was rule, not the exception, in large parts of the country).  This group visits White’s exclusively, providing them with a dedicated, committed clientele who help to keep White’s in the black, even without any minority patronage.

There are also other ways to discriminate, of course, besides refusal of service.  A business that served black patrons, but charged them a higher price (or simply forced them to sit in a particular area, much as diners in the Jim Crow era kept black patrons from sitting at the counter) would enable a business such as White’s to have its money and discriminate, too.  Think of Rosa Parks on the bus; while charging her the same amount as the white passengers, the bus driver (and the bus company that set the policy the driver was following) was doing his best to provide her with inferior service.

None of this discussion so far even gets into the fact of employment.  If companies are able to hire only whites for their businesses, or to pay black employees less than white ones (both possible if we take a strictly hands off policy when it comes to any business owned privately), we can end up in a situation where black (and other minority) workers are less well off than whites, have less opportunity to use work as a way of building up wealth for themselves, and less chance to help their children get ahead, helping to perpetuate the cycle for another generation.

The Conclusion

It’d be nice to live in a world where discrimination is a relic of a by-gone era, where everyone looks back on racism as a completely and wholly alien idea, where discussions over repealing civil rights laws are purely academic.  Alas, we’re not there yet (although, I like to think that we’re getting closer); there are segments of the society, in some places powerful and influential segments, who want to use economic and legal means to keep the people they dislike from attaining power, on the basis of race, creed, gender, or some other personal trait.

Listen, Rand Paul and John Stossel, I understand the desire to get government off your back; nobody wants to be looking over their shoulder constantly, worrying that the government will levy huge fines or shut down their business because they missed a hiring quota or were otherwise unfairly judged to be discriminatory.  But the problem is that without that fear of government intervention, there’s a sizable number of businesses, particularly small businesses, that would have no problem discriminating against minorities in hiring and service.

We as a society have decided that laws like the Civil Rights Act should exist, in spite of any infringement on individual rights that might result.  Perhaps Mssrs. Paul and Stossel are correct, and we’ve advanced enough as a society that repealing the Civil Rights Act will have no (or incredibly minor) ill effects on society at large.  But I don’t think we’re ready to take that chance (and given Paul’s backing away from his statement and repeated support for the act as a whole, he apparently feels the same).  For now, I’m happy with civil rights legislation as it stands, and until I see an overwhelming swell of support for its repeal (with a sizable amount of that support coming from traditionally discriminated against groups; getting a majority of white people to support the right to discriminate could just mean they want to discriminate), I’m fine with keeping the status quo.

Tomorrow, I’m going to be starting a new job.  That’s the good news.  The bad news is that it’s not in my chosen field of biochemistry, or even a related physical science position.  No, I’m going to be working part time at Wal-Mart for the foreseeable future.

Don’t get me wrong, I am glad that I am getting back to work.  Besides getting more money, which is always a good thing, it’ll give me something to do to occupy my time (although, I’m sure I could come up with other things I’d rather be doing).  It’s just sort of bittersweet to end up working a job for little more than minimum wage (I’ll be earning less per hour, I’m sad to say, than I earned at McDonald’s when I worked there during high school) after years of schooling and further years of work experience.

The Philosophy of Work

Of course, it goes a bit deeper than that.  Working at Wal-Mart doesn’t just hurt because of the salary or similar tangible issues, but because it seems like a step backwards in my life in general.  There is a tendency to conflate people with their jobs.  We assume that people in particular professions have particular personalities (the boring accountant, the pompous director, etc.).  When we meet new people, one of our first questions is ‘What do you do?’; how they answer determines much about what we think of them.  Heck, I continue to refer to myself as a biochemist, as a short hand for my education and previous careers.

Is it sad that I envy the guy with the overflowing desk?

In a very real way, it seems that you are what you do.  When you are unemployed, it not only affects your pocket book, it affects how you view yourself and how others view you.  In the same way, your job is you, in a very real and solid way.  This can be a good thing (as when you have a good job that’s well respected and well-paying) or a bad thing (again, when you are unemployed).

All of this gets me to thinking, as you might have guessed.  There are several questions that come to mind when thinking of work and employment.  Here’s hoping I can get a good conversation going.

Question 1: Do you think people’s personalities cause them to gravitate to particular jobs, or that working in a job tends to generate certain personality traits?  Or is there no link between employment and personality?

If you had asked me back in college, I would have said that there was no link, but now that I’m out in the real world, I don’t think that’s the case anymore.  I lean towards the second option; I think that working in the quality control field has helped to boost my attentiveness and made me more meticulous (‘picky’, if you want a more negative word), but perhaps there’s something in my nature that makes such work more attractive to me.  I’d like to hear what other people think on this subject.

Question 2: Why do we put so much emphasis on our jobs, anyway?

Is it a remnant of tribal culture when everyone had a role in ensuring the tribe survives?  Does it date to the middle ages and inherited jobs (leading to such last names as Baker and Chapman (shopkeeper), for instance)? Is it a thoroughly modern invention, coinciding with the rise of the suburbs and the middle class?  I’m curious as to when what you did for a living became, well, your entire life and identity.

Question 3: Is the idea of a career starting to disappear?

With downsizing, mergers, and mid-life crises making the idea of staying with the same company for your entire working life (and that company staying the same, as well) a thing of the past, I have to wonder what the work world of the future will look like.  The number of people who expect to finish their career in the same position where they start (or even at the same company where start their career) is practically non-existent.

Given the massive shifts in the working world in the past several decades, it’s intriguing to imagine what work will look like in the future.  Will the average American’s work schedule in ten or twenty years in the future look like the Four Hour Work Week, short periods of work supplemented by passive income, broken up by frequent mini-retirements?  Or will people be working longer, harder, and more diligently than ever, desperate to generate any sizable amount of income?  It’s kind of fun (and a bit frightening) to think about where the state of work will be in the next few years.

Bonus Question: If you didn’t HAVE to work, would you?

The $64,000 question (or probably twenty times that amount, if you want enough to retire and generate a reasonable income); if you had enough money to never need to work another day in your life, would you anyway?  Would you do the same thing you’re doing now, quit your day job and start your dream career, or stop work entirely and have fun with your life for the rest of your days?  I’m leaning toward the second option, but then, it takes different strokes for different folks, after all; perhaps there are other people out there who love their jobs (after all, there are plenty of senior citizens who continue to work, even though they don’t need the money), and still others who are ready for a lifetime of lounging around the pool with drinks that have umbrellas in them (some of whom reach that point before they even graduate high school).  Where do most of my readers end up going?

So there are some of the things that have been dancing around in my head with my new job currently upcoming.  Thanks for indulging me, and please let me know what you think about jobs and work and people in general; hopefully, it will help me stay sane through hours of training…

There is a growing consensus here in the United States that we need to get our budget in order, and soon.  The deficit is rising higher and higher, the national debt is steadily building, and there’s not much agreement on what to do.  Rather, there’s not much political will to do what most people readily agree should be done: some combination of cutting public spending and raising taxes that will be painful in the short term (to say nothing of harmful to some politicians’ careers) but ultimately in the best interest of the country as a whole.

But what if there were a tax that, if put into place, would be gladly paid by those being taxed, could conceivably generate large profits, and would decrease government spending?  Impossible, you say?  The ravings of a deranged madman intent on world domination, you claim?

Part of my plan to dominate the world using giant hamsters

Perhaps.  But those are some of the claims being made about legalizing marijuana for recreational use.  The argument goes like this: in spite of the US government’s best efforts, marijuana use has been fairly widely used, even back to when it was first outlawed in the 1930′s.  Much like Prohibition of alcohol during the 1920′s (which, interestingly enough, was repealed at about the time marijuana was outlawed), the laws against marijuana use have only criminalized a personal act that harms nobody but the user, made criminals out of otherwise law-abiding citizens, and allowed the criminal element to make use of marijuana sales as a source of illicit funds.  By legalizing marijuana, we can not only eliminate these issues but also generate a rather sizable new source of income for the government, to boot.

So, the question, as posed in an oddly phrased way in the inspiration for this blog entry, becomes ‘Is it worth legalizing and taxing marijuana as a method of reducing the debt?’

The Economics of Legalization

If we focus on the economics of legalization as opposed to other issues like morals, ethics, and possible addictions, it seems like it should be pretty easy to figure out how much income the government could derive from legalization.  Alas, the illicit nature of marijuana currently makes it difficult to get accurate numbers; the Justice Department itself notes that it’s nigh impossible to get accurate estimates of how much marijuana is sold in the US due to the clandestine nature of the business.

There are various ways to make reasonable guesses at the total amount of marijuana both grown and imported; if we extrapolate from amount of marijuana seized yearly (around 1100 metric tons) and assume that represents about 10% of the marijuana in the US, we can estimate about 11,000 metric tons of marijuana imported or produced domestically in the US each year.  (That’s 11.0 billion grams of marijuana, a figure that we’ll need in just a minute.)

That’s all well and good (and a sign of just how popular marijuana use has become), but the real question is how much revenue could be derived.  This is another tricky one; we can’t tell for certain how much the use of marijuana will change if legalized.  We might see a huge increase, the levels could stay steady, or use might even decrease (perhaps it won’t be ‘cool’ anymore).  A 2005 report by Jeffrey Miron of the Harvard School of Economics suggests that the government could generate tax revenue between $2.4 billion (if marijuana was taxed at rates comparable to most normal goods) to $6.7 billion (if taxed at similar rates to alcohol and tobacco).

A much more optimistic estimate suggests using the entire premium currently commanded by drug dealers (the amount above the actual cost of production and distribution) as the tax rate, a nearly 400% rate of return for the government.  This tax rate would be around $7 per half gram of marijuana, yielding a potential total tax revenue of $154 billion on the 11 billion grams of marijuana we estimated being sold in the US.  (Assuming that (a) our assumptions about the amount of marijuana sold in the US currently are accurate, (b) that there is negligible effects on the amount of marijuana sold after legalization and taxation, and (c) that we can impose and collect taxes at that high of a level.)

But wait, that’s not all; there are also costs associated with keeping nonviolent marijuana users incarcerated and spending money for police and other services to capture them in the first place.  Again, it’s hard to say for certain how much these costs would change if marijuana was legalized (would these resources no longer be needed at all, or simply end up shifted to other uses, fighting different drugs, for instance), but our friend Miron claims that we could save $7.7 billion on enforcement costs ($2.4 billion at the national level, $5.3 billion at the state and local levels).

As To Balancing the Budget…

We now know how much we can expect to generate by legalizing and taxing marijuana , around $13 billion total (from Miron’s highest figures; about $5 billion if we use his low figures and just look at the federal government income) or as much as $154 billion (with a much more aggressive tax); is that enough to cover the budget deficit?  Not even close.  The US budget deficit for 2010 was 1.17 trillion (that’s Trillion with a T-R); even if the $154 billion figure is accurate (and it seems quite high from where I sit, especially compared with our other estimate), it won’t even be enough to get the deficit under $1 trillion, let alone provide a silver bullet to balance the budget without spending cuts or other taxes.

This doesn’t mean that we shouldn’t consider legalizing marijuana; a potential boost to federal, state and local pocketbooks to the tune of $5-13 billion dollars (perhaps much, much more) is certainly a help.  There’s also plenty of non-income related reasons to seriously consider legalization (as several states have or might in the future); from providing more freedom from government intrusion in our private lives to decreasing street crime, the advantages of legalizing marijuana seem to pretty handily outweigh the disadvantages.

Disclaimer: As you can probably guess, I’m pretty steadfastly in favor of legalizing marijuana (and most drugs, for that matter), for reasons of economics, personal freedom, and minimizing government where possible.  I do not partake in any illegal drugs (or much of legal intoxicants like alcohol, for that matter), so this column is based entirely on my thoughts and feelings rather than potential personal gain if legalization becomes law.  If you are looking for a good rebuttal to the arguments for legalization, including the ones I’ve presented here, this article is a good place to start.

Should the US legalize and tax marijuana, even if it’s unlikely to be a major factor in balancing the federal budget?  Are the benefits worth the problems that could arise?  Should the potential economics of legalization be a major consideration when discussing legalization, or should money issues be trumped by health, safety and moral concerns?