Use economics to make life decisions

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Life insurance

Is life insurance a good deal? Dave Ramsey sells it, and certainly thinks it is a good idea. He is opposed to Whole Life Insurance, and I agree with him there. Life insurance pays out in the case of the death of the policy holder, for the amount you claim. If you don't die in the term, you lose 100% of your money. If you miss a payment, your policy is cancelled, and you lose 100% of your money.

You are literally betting you will die in the term specified by the life insurance. It is truly one of the most cheerful of economic instruments.

With this in mind, here are the numbers for someone with my height and weight in my zip code (your numbers will vary) who doesn't use drugs:

Mid-20s

Age: 26
Term: 30 years
Limit: $1,000,000
Monthly payment: $51.93

Total payments: $18,694

Probability of death: 1:15

ACTUAL VALUE: $66,666

Stock market value (assuming average S&P 500 yield which is 8% annually, compounded monthly): $72,626.82

Local Bond yield (assuming a 6% return annually, compounded monthly): $50,309

Don't buy. The stock market will give you a better return than your expected value weighting for the probability of death. If you don't, then you will fit into the next category for your renewal policy. This life insurance policy is better than local bonds however, but significantly more risky because you have a 100% loss if you don't die, losing the down payment on a house for no benefit.

Middle aged

Age: 56
Term: 30 years
Limit: $1,000,000
Monthly payment: $556
Total payments: $200,160
Probability of death: 50%
ACTUAL VALUE: $500,000
Stock market value: $777,595
Local bond yield: $538,651

Don't buy, the stock market is still a better value for your money. Even municipal bonds are a better investment.

These all assume you are perfectly healthy. In both cases the expected value of life insurance is a worse deal than a standard index fund. Life insurance is an extremely risky bet for a number of reasons:

1. If you don't die you take a 100% loss on every dollar you spent.
2. The return once you factor in risk is not as good as it seems without calculating your probability of death.

My recommendation is to start an investment account with Acorns for the same amount you would put into a life insurance policy, because it is significantly less risky (you would only lose all your money in the case of economic Armageddon, whereas with life insurance it is all but guaranteed) and gives a good return compared to other accounts.

Older Senior

If you are lucky enough to live to be 84 in this case, what is your probability? the calculator does not give rates for people over 85. It also limits me to whole life and $40,000 for this scenario.

Age: 84
Term: Whole Life
Limit: $40,000
Monthly payment: $683
Time until stock market matches limit: 4 years 3 months
Time until municipal bonds match limit: 4 years 5 months

Life insurance makes absolutely no sense for seniors to purchase under any circumstances.

References:
http://www.candidmoney.com/calculators/death-probability-calculator
https://www.policygenius,com/life-insurance

Buy a House

One of the biggest decisions in life you can make is to buy a house, it is a long-term asset, and means you never need to pay rent again. But, is it worth it?

If you were to rent out a room in a house, you should expect to pay between $600 and $1000 per month, to live in a shared living situation. This will cost between $7200 and $12,000 per year.

If you were to buy a $200,000 house, you would first take out a mortgage for that amount. You can expect to pay $946 per month for 30 months with a 3.92% interest rate under this system, for a total payment of $340,427.

The obvious advantage of buying a house is that if you move you can sell your house, or rent it out for income, and this means that you can recover the majority of what you spent.

However, this is still not accurate because a home equity line of credit is a better deal still. A Home Equity Line of Credit is going to save you money by putting all of your income into your line of credit when you receive it and then withdraw the money from the home equity line of credit for your monthly expenses. You can further reduce your monthly payments by purchasing on a credit card and then paying off monthly from your line of credit. Do this for two reasons,

1. Credit cards only charge you on the balance you carry over monthly. If you pay off monthly, you do not pay interest on that card.
2. You get rewards for using a credit card, if you get the right one. In my experience, airline credit cards offer the best value.
3. By only withdrawing from your line of credit at the end of the month you reduce your interest owed on your line of credit, saving you years of your life and tens of thousands of dollars.

If you were to do this, on a $200,000 home equity line of credit, with the same 3.92% interest rate, with $4000 of income per month, withdrawing $2000 for your cost of living (this includes everything) you will pay off your mortgage in 11.5 years and spend $41,582 in interest, for a total payment of $241,582.

The best part of all is that after you are done paying your HELOC off, it continues as a line of credit, increasing your credit score.

Also, by using credit cards to reduce interest owed on your HELOC you have saved thousands of dollars, as long as you pay them off monthly. All of this goes to increase your credit score by having multiple accounts with large balances with constantly reducing your percentage of credit used. This works as long as you pay off your cards monthly and stick to the plan.

On the other hand, if you were to take out a $200,000 mortgage as I outlined above you would have spent $340,427.

You can pay more on your HELOC because you can withdraw later if needed, only paying your 3% interest rate as opposed to a 20% credit card interest rate (unless if you have American Express, which is lower). If you had only left the same $946 per month on your Home Equity Line of Credit you would have paid $335,035. This won't save you much money, but it is still better than a mortgage, saving you $5000. Paying off as much as possible every month is the best deal, and you will not receive fees for doing so.

If you were to rent a room however for that thirty year period (at $750 per month), it would cost you $270,000, and you would have no equity.

Buying a house with a home equity line of credit is obviously the best option.

Buy an annuity

The stock market is too risky you say. You don't feel good about real estate investing. Some slick financier comes to you and says "buy an annuity from me."

Should you?

I ran some numbers on Charles Schwab:
If I get myself a $2000 monthly income annuity starting on December 16, 2057, I would have to pay $96,434 in my premium for a guarantee for the rest of my life.

If I have 30 years of retirement than I would receive $720,000 of income in today's money for paying $96,434. This is about the same amount of money as I would receive if I had just taken $2000 per month out of a retirement account where I had deposited the same $206.06 per month for the next 39 years. HOWEVER, when I die at 95 in 2087 after investing in the stock market I would have almost $3 million saved up ON TOP OF the amount that I had already withdrawn for my living expenses, which I could do with as I please.

Or I could just give those three million dollars to a major multinational bank with an annuity. Guaranteed income... for the bank.

Stock market too risky? Then you could also put your money into municipal bonds, but you will not make enough interest to cover your payments to force you to drain your account by the time you are 95, leaving you with only $100,000 at 95 years old. Going only into municipal bonds is foolish.

You will definitely get the money for life in an annuity, but the return is millions of dollars less than you would make by having a diversified stock portfolio.

If you die early, you would need to pay more upfront for the privilege of getting your money back. Otherwise, the bank takes the cake. How nice of you.

Given the medical advancements which continue in today's world, I do not think this is a good idea. It does not beat a diversified portfolio in the long run.

My Uncle Wayne died last April at the age of 101. My Onkel Jurgen died at the age of 104 last year. My Auntie Gloria died two weeks ago at the age of 97, the xlast of my great-great aunts. Getting a 20 year guarantee would cost me a lot for no benefit (in all likelihood) and I would probably lose money (taking into account opportunity cost) with an annuity.

A diversified index fund is a better deal.

Divide between stocks and bonds

50/50 split each year, withdrawal from each account

Is it a better idea to move from stocks to bonds in retirement? Is this going to reduce your risk? It will certainly reduce your standard deviation, but this is NOT THE SAME THING AS RISK!

The attached spreadsheet makes this clear. If you put the money you would have spent on that annuity into a diversified index fund, you will hit $2 million in your 100th year and your municipal bond fund will be in the red, assuming you take half of your withdrawals from each account, and deposit half in each account. Sounds like a deal to you?

For comparison, in a diversified stock fund you will hit $4 million in your 100th year.

Sound like a deal to you?

Move money from stock account to bond account after 65

Everything is the same until your 65th birthday, as in all of your money goes into a diversified stock portfolio

Another "safe" strategy is to move money from your stock account to your bond account after your 65th birthday. Let's say you do this, and you move half of your monthly interest from your stock account to your bond account for "safety".

Keep in mind that you will retire with half a million when you retire at 65 regardless, and this is from paying only $206 per month each year you work, the same amount the annuity required.

When you turn 100 you will be $807,210.36 short of where you would have been if you had just kept your money in the stock market in your retirement.

Does that sound safe to you?

Keep in mind in the case of economic Armageddon, bond yields will drop to nothing as well.

Learn economics

The stock market is the best investment out there today, as long as you have it through a diversified index fund.

But, let's say you want to fully understand how to prevent risk? The best way to do this is to learn economics. In order to do this, make sure you study the following before you start:

1. Calculus 1 and 2
2. College level Statistics

Economic models which are necessary to understand these concepts are built on these three classes more than anything else.

Then, do the following:

1. Microeconomic
2. Macroeconomics

If you are enjoying this so far, continue with these four classes (which I find to be the most useful day in and day out)

1. Intermediate Microeconomics (how the microeconomic model is derived)
2. Intermediate Macroeconomics (Solow model)
3. Economics of Money and Banking
4. Public Finance, understand how government budgets work and interact with the economy.

This is how you understand the market to ensure you can make good decisions. Ensure you know calculus, statistics, and the first two microeconomics and macroeconomics courses. These provide you with the tools you need to be able to at least tell which economists on TV are telling the truth and which are liars.

There are three podcasts I highly recommend to learn, and that people should follow, those are Planet Money and the Indicator by NPR and Freakonomics. Freakonomics is longer than Planet Money in terms of each episode. The Indicator is nice because it is always about 5 minutes long, and covers a different topic every day. They have guests who are PhD economists, and are together with some introductory courses in micro and macroeconomics an excellent way to get started in the field.

This is one investment which will definitely be good for your financial future. High-quality education is always worthwhile.

After you learn these introductory concepts, you will be prepared to do the calculations I did above, saving yourself millions of dollars.

Non-contradicotry proposals

Economists usually say this:

• Don't bail out the banks, that's bad. Let them survive in a free market as they demand.
• Please don't bail out big companies.
• Please make it easier to start a business.
• Everyone should have the right to own their work.
• Please don't collectivize everything, that's happened before, it didn't work. 
• Private industry is good.

But we also usually say:

• We hate Comcast, they over charge and provide lackluster service. ISPs should be run by the public sector.
• Nationalize the railways!
• Public parks are wonderful!
• Health care must be available to all! 

These follow a few basic values which most of us hold dear, and those are that quality of life is the ultimate goal of society. Make a more equitable and wealthier society without compromising the environment. Holding these three goals in tangent creates these basic ideas as generally accepted ideas. Studying over two centuries has made these 10 points understandable. The 4 places where I list things we think the government should have a large role are natural monopolies, or have monopolistic tendencies (such as medicine), and hence in order to increase quantity provided only a government can provide those 4 services.

More importantly, looking at the economy through a monoscopic lens of "government good, private industry bad" or "government bad, private industry good" misses the point entirely. the ultimate goal, to increase the quality of life for everybody doesn't fit neatly into such one dimensional boxes. But a more detailed understanding of political theory and morality which is truly multidimensional (rich, equitable, sustainable) suggests policies which if fully implemented would truly make the world a better place.

Proposal to expand Schengen

The Schengen Treaty is without a doubt one of the most important treaties in the world. It comprises 26 states, most of which are members of the European Union, have a GDP of $15 trillion and a population of 419 million people. People are free to move within this area, they can live and work in any other member state, as there are no customs whatsoever between any of these countries. Most members are EU members, with a few exceptions, Iceland, Liechstenstein, Monaco, Norway, San Marino, Switzerland, and Vatican City.

This is the pure liberal dream. The idea is that without trade barriers between these countries that people will have less of a desire to go to war with others. And it has worked along with the free trade area which has grown out of the European Coal and Steel Community which was founded in the 1950s. Bulgaria, Croatia, Cyprus, and Romania are currently pending the next council meeting.

The question now is, should Schengen be expanded, and if it is, how? As the title of this article suggests, I am in favor of expansion. The Schengen Treaty, as a legal document presents very clear rules on what is to move in between borders. The bulk of the laws are included in section 1, under the 14 June 1985 convention. The rules are laid out in the following titles as follows in this convention:

1. Definitions
2. Abolition of Checks at Internal Borders and Movement of Persons
1. Crossing Internal Borders
2. Crossing External Borders
3. Visas
1. Short-Stay Visas
2. Long-Stay Visas
4. Conditions Governing the Movement of Aliens
5. Residence Permits and Alerts for the Purposes of Refusing Entry
6. Accompanying Measures
7. Responsibility for Processing Applications for Asylum
3. Police and Security
1. Police Cooperation
2. Mutual Assistance in Criminal Matters
3. Application of the Ne Bis In Idem Principle (No double jeopardy)
4. Extradition
5. Transfer of the Enforcement of Criminal Judgements
6. Narcotic Drugs
7. Firearms and Ammunition
4. Schengen Information System
1. Establishment of the Schengen Information System
2. Operation and Use of the Schengen Information System
3. Protection of Personal Data and Security of Data in the Schengen Information System
4. Apportionment of the Costs of the Schengen Information System
5. Transport and Movement of Goods
6. Protection of Personal Data
7. Executive Committee
8. Final Provisions

All of the laws and regulations are already in existence already, and the rules for Schengen are really straight forward and reasonable. Basically, control the borders, Mutual recognition of each other's visas, police need to cooperate and respect the laws and decisions of other countries in the area, sharing of information between countries when it comes to visa relevant information, a common tariff policy, don't leak data, and each member has a seat in the executive committee. That's the entire agreement in a nutshell.

There is also, notably, no requirement of a country to be in the European Union or even Europe to join the Schengen Area in the original document. This means, theoretically, that the Schengen Area could be expanded to outside Europe if I am not missing another law which regards Schengen membership. This seems to be the case because Switzerland joined in 2008, and it is not a member of the EU, and Liechtenstein joined in 2011 after the Treaty of Lisbon, the last major amendment to European law. This means that non-member states can indeed join the Schengen area.

The question then becomes... who should be included? Prospective countries to join the Schengen treaty could be established by fitting the following criteria in my mind:

1. Adopt the European Charter of Rights and Freedoms as law, or have comparable laws on the books already.
2. Have a Corruption Perceptions Index at least as high as the Schengen member with the lowest score.
3. Have a better Press Freedom Index then the member state with the lowest score. This is a useful proxy for how well the Charter of Rights and Freedoms are respected.
4. Have an economic system which makes it easy for businesses to flourish, using the Ease of Doing Business Index. We want the member country to be fully engaged in the common market.
5. Have no significant domestic terrorism. This can be measured by homicide rate.

These are 5 things which can easily be implemented.

Corruption Perceptions Index

Press Freedom Index

The Schengen member with the highest (worst) Corruptions Perception Index currently is Greece, at 44. they ranked #69 in the world as of 2017, which leaves 43 potential members by that metric.

The Schengen member with the highest press freedom score currently is still Greece, though Bulgaria will likely acede soon and it has the worst score, but they will likely not be chosen due to the factors which cause them to fare so poorly on the press freedom index, so that leaves Greece as the lowest score. They rank #70 in the world as of 2018 (yes, these are significantly correlated indexes) and that again leaves 44 potential members by this metric.

The obvious choices for membership by these two metrics combined are:

1. New Zealand
2. Canada
3. United Kingdom
4. Australia
5. United States
6. Ireland
7. Japan
8. Uruguay
9. Chile
10. Taiwan
11. Botswana
12. Cape Verde
13. Costa Rica
14. Georgia
15. Cyprus
16. Mauritius
17. South Korea
18. Namibia
19. Croatia
20. Romania
21. Senegal
22. South Africa
23. Suriname

This map is interesting for many reasons. Following this logic there are countries which are qualified to join the Schengen Area using my first two criteria on every continent. Some countries which have expressed interest are missing from the map, Israel is blank because their press isn't free enough, Bulgaria is blank despite being considered to join the Schengen area because they are too corrupt,  Ukraine is both too corrupt and their press is not free enough.

The one other variable which could be useful in determining whether a country would be able to join the Schengen Area would be the Ease of Doing Business Indicator. The reason for this one is the acquis on the free movement of capital, and if a country doesn't allow ease of movement of capital within its own borders it will not be able to join Schengen. This significantly reduces the number of countries which are eligible to join down to 17 prime candidates. The economies of Botswana, Cape Verde, Namibia, Senegal, Suriname, and Uruguay are less free than that of Malta, the Schengen member with the least free economy, which means that the best candidates for joining the Schengen map looks like this:

Every country shaded in red on this list has a Corruptions Perceptions Index, Press Freedom Index, and Ease of Doing Business Index ranking better than the worst performer currently in the Schengen region.

The top performer not currently in Schengen currently is New Zealand when you multiply the CPI, DBI and divide by the PFI. The order of this ranking follows as Canada, Australia, Ireland, United Kingdom, Costa Rica, United States, Taiwan, Chile, Cyprus, Japan, South Korea, Georgia, Mauritius, Romania, South Africa, and then Croatia. If the current member states of the Schengen Area and these 17 countries chose to unify their customs into the Schengen area this would be mutually beneficial.

The countries which would most benefit from joining would honestly be the United States and Canada. With the world's longest border, highly developed economies and being among the most free in the world, we could benefit in joining.

Another factor when it comes to opening up your borders to another country is safety. This is easily measured using homicide rate as a rough approximation of the relative safety of one country or another. Three countries unfortunately have homicide rates which the European Union will likely find unacceptable, and those are Costa Rica, South Africa, and my home, the USA. The country with the highest murder rate in the Schengen area is Lithuania with a homicide rate of 5.25 people per 100,000. The United States unfortunately has a homicide rate of 5.35 meaning if the Schengen Area would not allow new members due to an intentional homicide rate we are just above the threshold.

This problem deserves special attention because we are so close to having a low enough murder rate to qualify for Schengen Membership, if this was a qualifier. Looking at murder rates by states and territories, the ones which have a higher murder rate than Lithuania are in descending murder rate (by latest available data): Louisiana, Missouri, Nevada, Maryland, Arkansas, Alaska, Alabama, Mississippi, Illinois, South Carolina, Tennessee, New Mexico, Georgia, Oklahoma, Ohio, Indiana, Arizona, Kentucky, North Carolina, Pennsylvania, and Michigan. Reference

This deserves an article of its own, and we need to focus on reducing our murder rate as a country.

This still leaves 14 countries around the world which have the proper statistics to join the Schengen travel area, from every continent. These 14 have low corruption, and are safe. Schengen is estimated to boost the trade and economics of the member states, and there is overwhelming economic evidence that increasing trade reduces the likelihood of war. For these reasons I believe it would be wise for the Schengen Treaty to be expanded outside of Europe, the UK and Ireland should join Schengen (which I know is unlikely due to the whole Brexit debacle) because it is the logical next step to fostering peace in the world we live in.

Countries which could theoretically join Schengen.