Business Ideas VII: GuideMe

Idea: GuideMe – an automated guidance counselor that helps students make better college and career choices

MVP: Too many students in the US leave college with too much debt and no realistic career path – in part because guidance counseling is a luxury at many American high schools. GuideMe will help fill this void, using students’ interests and strengths to show each student the college or vocational programs that will help them achieve their goals. GuideMe will also help students evaluate admissions offers to determine the best choice in terms of career ROI, taking into account both costs and future income.

Market: US high schools average one guidance counselor per 500 students, leaving most students with no career guidance except what’s available via friends, family, and the internet. In this vacuum there’s a tremendous opportunity to help students and families make better choices, with better careers and less debt the end results.

From a business model perspective, students and high schools have limited resources, but employers have a substantial recruiting need, and a successful app could funnel qualified candidates into positions at a far lower cost than traditional means of recruiting. There are over 150M working Americans, 100M of whom lack a college degree. The vast majority of that 100M employees might benefit from vocational training and placement services – almost 50% of employees change jobs annually. If the value of placing an employee is conservatively estimated at $1000 (versus the 20-25% of salary typically paid in white-collar recruitment), this leads to a total addressable market as large as $50B. [1]

Idea Score (0-10 scale): 8 points

Feasibility of MVP / Market Entry (out of 2): 2

The GuideMe MVP would leverage data on salaries and tuition published by college programs in order to determine career ROI, adjusting each career path for projected future changes. Much of this data is either publicly available or can be licensed, but it may need to be refined newer or non-traditional careers.

GuideMe would then determine the highest ROI programs for a student, based on their GPA, test scores, and interests. Virtually all of the data needed for the MVP is publicly available, though career ROI estimation algorithms vary – given my experience building HiddenLevers, this should be a competitive advantage.

Revenue Market Size (out of 4): 4

As noted above, the total market opportunity in the HR recruitment space, taking into account only the under-served vocational market, is conservatively estimated at $50B  per year.

GuideMe’s principal issue is that the initial platform rollout is devoid of any revenue generation plan – users in the cost-conscious student market are unlikely to adopt a paid guidance product. GuideMe instead intends to roll out a full-featured free product, while developing a placement product for employers requiring specific skillsets. GuideMe will be well positioned to match capable students with employers, enabling higher volume placement at a lower cost to businesses.

The challenge in building a two-sided marketplace style product is well known, but the returns to success can also be extraordinary.

Difficulty, Barriers to Entry, and Competition  (out of 2): 1

Many sites and apps exist to provide guidance in aspects of the college decision process, but none  provide comprehensive career guidance, and none utilize the concept of career ROI.

Existing competitors like MyKlovr are attempting to solve aspects of this problem, but appear to be focused on paid software approaches, which will limit growth potential. There is substantial risk involved in building  a free guidance product, and then working to link it to employment placement, but this approach is likely to capture the largest number of users in a space where massive scale is possible.

Riding Hype or a Trend (out of 2): 1

At present there seems to be little focus on this market – but if scale can be achieved among the 20M students in US high schools, then building a funnel to employers should become relatively straightforward. Very little has been done to improve the functioning of the middle of the US job market in particular – the rewards are too small for traditional HR firms to work hard at placing a plumber. Automation is the key to unlocking the scale potential in this market – and early career guidance is the key to bringing large numbers of candidates to market.

 

[1] Public companies like Randstad, Adecco, Robert Half, and Manpower show that valuations in the $5-10B range are possible in this sector.

The Great GOP Stimulus

The 2018 Trump stimulus exceeds the Obama-era stimulus package in size – will it pay off at the top of the economic cycle?

In 2010, when Barack Obama pushed for a stimulus package to help boost the American economy, it was decided by many in the GOP as wasteful spending. While there are more productive (infrastructure) and less productive (tax rebates) ways to stimulate the economy, any form of spending (or tax cut) is a form of economic stimulus – this is a point agreed by both economists and businessmen like Warren Buffet. In fact, any form of budget deficit is a form of stimulus, as the government borrows (or prints) money that it doesn’t have to spend it into the economy.

The past year has seen the GOP enact not one but two stimulus measures – first a budget which ended Obama-era budget caps and boosted spending by roughly $150B per year, and second the tax cut which reduces taxes by another $150B per year. Taken together these measures are adding roughly $300B per year in stimulus to the US economy, potentially adding 1.5% to GDP for each of the next few years. Adding this stimulus to a core GDP growth rate of 2-2.5% might thus make 4% possible in the near term, with the bill due much later. The total federal (non-central bank) stimulus under President Trump’s first will hit at least $1.2 Trillion, exceeding President Obama’s 2010 stimulus package by $350 Billion [1], but this time at the top of the economic cycle!

What does this tell us? A few key takeaways emerge:
  • While most economists agree that it’s better to do fiscal stimulus when the economy is at or near recession, democracies don’t work this way, and there’s little correlation between economic need and actual governance.
  • When either party has complete control of government, they take the opportunity to spend on favored initiatives – in Trump’s case the DoD received most of the benefit, while in Obama’s case a variety of energy efficiency, infrastructure, and other initiatives were funded.
  • Budget deficits haven’t been a major issue over the last decade, but the tax cuts in particular will layer on top of Social Security and healthcare spending trends to drive debt-to-gdp well past 100% [2].
  • The best stabilizers in the US economy (unemployment insurance) are effectively automated – extending this sort of stabilizer to infrastructure spending (spending more on transportation funding etc as unemployment rises) would not just help buffer downturns – it would also get taxpayers a better deal.

Time will tell whether the GOP’s late-cycle spending will extend the business cycle substantially, but in the long run US policy will improve if more of these decisions are put on auto-pilot, removing the uncertainty of the political winds and the desire to spend at the least opportune times.

 

[1] The Obama administration stimulus plan cost around $850B in the end, including only the 2010 Stimulus measure and its implementation. Extension of Bush-era tax cuts and similar are not counted here, as these were extensions of existing measures, rather than new tax cuts or new spending as in the Trump administration’s recent moves.

[2] Many charts and news reports on the debt refer only to the publicly-held portion of the US debt, but when debts to the Social Security trust fund are included as in this data from the Federal Reserve, the US debt-to-gdp ratio already exceeds 100%.

A Better Estate Tax Reform

Replacing the estate tax with fair (no step-up) capital gains taxation at death could raise revenue for tax reform, and get rid of complex tax avoidance schemes

Among the many changes proposed among the Trump and GOP tax plans is the end of the estate tax – long a cherished Republican goal. Today’s Republicans decry the estate tax as a form of double taxation, while proponents (including Republican President Teddy Roosevelt) view it as a means to prevent an aristocracy formed through inter-generational wealth transfer.

What’s overlooked in the estate tax debate is that there’s a simple solution at hand, if we just look north, to Canada. This may be surprising to many Americans, but in the early 1970s Canada repealed its estate tax, replacing it with a simple application of capital gains taxes.

Canada applies its capital gains tax to an estate by assuming that the assets have been sold on the date of the owner’s death. Instead of taxing an estate in a special way, a consistent application of the existing capital gains tax serves to eliminate loopholes (in particular by eliminating step-up basis) and raise revenue while also substantially lowering the top rate of tax on estates. If transfers of ownership are treated as taxable for capital gains purposes, this eliminates the use of trusts and step-up basis as a multi-generational tax avoidance scheme, since tax would be paid on any change of ownership, including when assets are transferred into the trust.

Instead of exempting substantially all estates (as with current law), a capital gains tax-based approach could simply apply current capital gains brackets. The top rate of 23.8% would represent a reduction of over 50% from current rates. This change could generate substantial revenue to enable other aspects of tax reform – in the year 2000, when the estate tax exemption was $1.3M for a couple, it generated $25B per year in revenue (after substantial exclusions, credits, and deductions). With the economy today 90% larger than in 2000, it’s likely that a similar tax would generate nearly $50B today. Elimination of step-up basis could double this figure by adding another $50B – and $100B per year would pay for a huge chunk of current Republican plans on business tax reform, without penalizing most individuals.

Unfortunately, Republicans are fixated on ending the “death” tax and ramming through their current plan, while Democrats are interested in keeping top estate tax rates in place – when a broader capital-gains based approach would be fairer and would generate more revenue. Hardly the last time a good moderate approach is left to die in our polarized political climate!

The GOP Civil War on Taxes

Republicans love tax cuts, and both President Trump and Speaker Ryan have set their sights on lowering both personal and corporate income tax rates. But some Republicans also like controlling the budget deficit, while others favor defense spending or immigration control. How can the GOP cut tax rates, raise defense spending and immigration enforcement, and control the budget deficit? Here’s the heart of the problem: the federal government gets roughly $1.4T from income taxes, $440B from corporate income taxes and capital gains, $1.1T from payroll taxes, and smaller amounts from other sources [1]. The tax plan under consideration will substantially cut the first two sources, without raising the other categories. How can such a tax plan be implemented without blowing up the budget deficit?

The evolving Trump-Ryan plan bridges this gap by introducing a new category: a border adjustment tax on imports. If all 2.7T in US imports were taxed at 20%, this could raise over $500B per year, providing a source for big tax cuts (though still not enough to pay for the tax cuts proposed). But there’s a problem with this idea – will 50 Republican senators vote for it?

The National Retail Federation has come out strongly against the plan, as have the Koch brothers, whose companies participate heavily in international trade. The Kochs are focusing their battle charge in 15 states where they may be able to sway Senate votes. Meanwhile, with retail giant WalMart strongly opposed, will the senators from Wal-Mart… err Arkansas be on board?

Hence we have a GOP civil war, pitting major exporters like Boeing, Oracle, and GE against retailers and other importers, and pitting nationalist Republicans versus traditional free-trade Republicans.

Trump and Ryan can only spare two votes in the Senate – will they be able to keep everyone on board? While the plan could stimulate US growth through tax cuts and favoring US production, it may also trigger a trade war that nullifies much of its benefit. There’s also the essential nature of the import tax – it is effectively introducing a new US consumption tax for the first time. Consumption taxes have been on the GOP radar for some time, as they tend to shift tax burdens down the income scale, and to reduce taxes on the wealthy. But is Trump’s base ready to pay an extra 40 cents at the pump every day, when many of them won’t see a huge tax cut [2]? Let the Republican tax civil war begin.

[1] The CBO provides a detailed breakdown of revenues here. I have combined corporate taxes and capital gains into one category, as both are taxes on capital.

[2] Roughly 50% of oil is still imported into the US, so a border adjustment tax could disproportionately increase oil prices.

The Simple Arithmetic of High Capacity Gun Magazines

In the wake of yet another mass shooting tragedy today, let’s examine the costs and benefits of high capacity gun magazines. I previously examined the cost-benefit of private gun ownership in the US, and noted at that time that the extraordinarily negative cost-benefit ratio might eventually become an issue for the pro-gun lobby (the industry generates economy-wide economic losses of over $15B/year) [1].

High capacity magazines [2] seem to have become a feature of virtually every recent mass-shooting in the US [3]. How many lives might have been saved by eliminating high-capacity magazines? Let us conservatively assume 10 deaths per year might be reduced through this policy (a rounding error compared to the roughly 10,000 annual gun homicides in the US). The economic value of 10 lives can be estimated at $80 million, while the annual sales revenue of high-capacity magazines might be less than $20 million (since gun magazine sales are a tiny fraction of gun sales, and magazines can be had for as little as $15) [4].

Measuring tragedy on an economic basis might seem crass, but it helps establish a key point: not only are high capacity magazines empowering individuals in mass shootings – but they are also provably hurting America as a whole, as they subtract value from our nation! An outright ban on possession of high capacity magazines is thus a reasonable step to limit further damage to America’s citizens and economy.

Let me address a number of potential criticisms here:

  • Would-be mass shooters will acquire weapons and high-capacity magazines illegally, so you are only affecting law abiding citizens. Actually, 75% of weapons used in mass shootings were acquired legally, and recent shooters acquired their weapons legally. Most of these shooters had no previous criminal record, so in the event high-capacity magazines were illegal, it’s unlikely that they would even know how to find them illegally.
  • Banning high-capacity magazines would have no effect on death rates, as shooters would simply reload. In the Gabrielle Giffords shooting, the gunman was stopped in his rampage once he stopped to reload. Reducing magazine capacity to 10 rounds reduces total firing capacity – this is simple arithmetic. In both of these shootings and many other incidents, lives would have been saved. For that matter, lives might be saved in incidents like drive-by shootings where the rapid fire of multiple rounds makes victims of innocent bystanders.
  • High capacity magazines are needed for self-defense. Even the police rarely find need to fire large numbers of rounds. Is there even one documented case of self defense where the potential victim needed more than 10 rounds to deter his attackers? There are outliers in everything, but I’d be surprised to hear of such a case.
  • I have a 2nd-Amendment right to whatever capacity magazine I like. The recent Supreme Court case upholding an individual right to a firearm also upheld the right to ban American citizens’ access to fully automatic weapons, grenades, tanks, and all other manner of military weapons. Even Justice Scalia admits that there are restrictions on the 2nd Amendment. Your right to purchase whatever weapon you like has long since been curtailed, and the government retains the right to enact reasonable restrictions on access to arms.

 

[1] Using more recent numbers on the economic value of human life at $8M per life, the gun industry may actually cause annual economic losses in the US of $200B per year (8M * 30k lives lost – economic value of gun trade). I republished the more conservative estimate above to remain consistent with the original analysis that I referenced.

[2] I am defining high-capacity magazines as those holding more than 10 rounds, as defined in the original assault weapons ban.

[3] Limiting gun capacity would have reduced casualties in a number of recent tragedies:

[4] Gun sales are estimated to have reached an annual rate around 12 million this year. If separate high-capacity magazine sales are in the neighborhood of 10% of all gun sales, and magazines cost around $15, then total annual revenue from this business might be 1.2M * 15 = $18M. This is an imprecise estimate, since gun sales are not tracked, but conveys the order of magnitude, and illustrates the tiny economic benefit supplied by this particular product relative to its cost in human life.

How Much Will Insurance Cost Under Obamacare?

May 28, 2013 Update: California’s just-released prices for ACA coverage are close to my 2012 estimates, with an unsubsidized bronze plan (for a 25 year-old) available for $142/month in Los Angeles.

Health insurance premiums for minimum coverage will likely be around $150/month for 27 year-olds under the ACA, since the ACA includes relatively high-deductible plans under the Bronze plan option.

Now that the dust has settled on the Supreme Court ruling, let’s attempt to answer a simpler question – how much will health insurance cost under the ACA (Obamacare)? Individuals purchasing health insurance via the new health insurance exchanges will be able to select from four plan levels: bronze, silver, gold, and platinum. The law dictates that plans falling into these categories must have 60%, 70%, 80%, and 90% “actuarial value”, respectively. The concept of “actuarial value” dictates that the plan must cover the specified percentage of health care costs for enrolled individuals. Individuals enrolled in a bronze plan can expect their insurance to cover 60% of their health costs, for instance [1].

The Kaiser Family Foundation commissioned a study to determine the structure of plans that might meet the 60% actuarial value standard for the Bronze plan.  The study found that the following individual health care plans might qualify (all plans have a cap of around $6350):

  • A plan with a $6350 deductible and 0% coinsurance
  • A $4350 deductible with 20% coinsurance
  • A $2750 deductible with 30% coinsurance

How much would plans like these cost in 2014? We will focus on adults aged 27 in this example, since young adults more frequently go without insurance, and since young adults can now stay on their parents’ plans until 26. We can shop online for similar plans and get some results for comparison [2]:

  • $67.26 for a $2750 deductible / 30% coinsurance plan in Atlanta for a 27 year-old male
  • $98.21 for a $2750 deductible / 30% coinsurance plan in Atlanta for a 27 year-old female [3]
  • $129 for a $2750 deductible / 30% coinsurance plan in Silicon Valley for 27 year-old men and women
  • $73.22 and $95.07 for a $2500 deductible / 20% coinsurance plan in Chicagoland for a 27 year-old man and woman, respectively
  • $95 for a $2750 deductible / 20% coinsurance plan in Houston, TX for a 27 year-old man
  • $132 for a $2500 deductible / 10% coinsurance plan in Houston, TX for a 27 year-old woman
  • $70.75 and $90.46 for $2500 deductible / 20% coinsurance plan in Hartford, CT for a 27 year-old man and woman, respectively

Here are two market quotes for 63-year old females in relatively expensive markets:

  • $302 for $1200 deductible / 10% coinsurance HMO plan in New York, NY for a 63-year old woman
  • $516 for $3500 deductible / 10% coinsurance PPO plan in Santa Clara, CA for a 63-year old woman

The ACA stipulates that the most expensive policies for older individuals can be no more than 3 times the price of policies for younger adults. The data above show that a 27-year old can get a plan similar to the exchange bronze plan for around $100 per month today, but this is less than 1/3 the cost for older Americans. Using 1/3 of the cost of the plans for older women as a price floor, we get an estimate of $150 per month as the lower limit for plan prices [4].

This estimate is lower than the commonly-cited CBO estimate of $4500 per individual for bronze plans via the ACA exchanges. The CBO estimate is for 2016, and so it builds in two additional years of premium inflation (roughly 15%). The CBO number is also an average across all age groups – since young adults’ plans can cost 1/3 as much as the oldest (non Medicare-age) Americans, 27 year-olds’ plans will be much cheaper than the average. While the ACA should have allowed for more high deductible plans, it’s good to know that the bronze plans do provide for some affordable coverage options within the new health insurance exchanges.

[1] The 60% bronze plan threshold and other thresholds are applied to each plan considering the average expenditures for plan members. Given the deductible and copay structure of a particular plan, it’s possible that the plan spends a higher (or lower) percentage on a particular individual’s care. For instance, if you don’t use your plan at all in a given year, then your plan spent 0% on your care. At the other extreme, if you are diagnosed with cancer, and incur $100k in costs in a year, even a bronze plan would cover  perhaps 90% of that amount.

[2] All plans were found on ehealthinsurance.com on 8/2/2012.

[3] The wide discrepancy between plan prices for men and women will be eliminated by the ACA. For these purposes, averaging men and women’s prices enables us to get closer to a representative price under the ACA.

[4] Since health insurance is more expensive for women, and more expensive for older Americans, we used a 63 year-old woman as the prototype for an expensive risk in the existing private health insurance market. At age 65 virtually all Americans gain entry into Medicare (or Medicaid for seniors), and so 63 is the oldest age for which insurance quotes can reliably be obtained (some insurers won’t write short-dated policies, and no insurer writes non-Medicare policies for 65+ Americans). The average price from the two expensive quotes thus obtained was $409. After adding in 10% in premium inflation between now and January 2014, we get a premium estimate right around $450 per month. By law, one-third of this is the minimum that the exchanges can charge for any adult – and this equals $150 per month.

How High a Budget Deficit Can We Sustain?

The US can sustain a budget deficit of 5%, not 3% as commonly assumed, because 2.5% inflation and 2.5% real growth combine to keep the total debt/gdp ratio stable.

With both the financial crisis and European debt crisis having a root in excess borrowing, the American political debate has turned toward deficit reduction as well. If current budget deficits (averaging 10% of GDP since the financial crisis) are recognized as unsustainable over the long term, then what level of budget deficit is sustainable? At one extreme, politicians call for a balanced budget, and at the other extreme the budget deficit is considered a distant issue. Meanwhile, many economists set the sustainable deficit threshold at 3% of GDP, and EU rules formally set the budget deficit threshold at 3% as well. What is the basis for the idea of a “sustainable” budget deficit, and is the 3% figure too high or too low?

What is a sustainable budget?

Unlike individuals or families, a nation has an indefinite lifespan, and can therefore continually roll over its debt as long as markets deem it a worthy creditor. As long as a nation’s economy is growing, its capacity for borrowing grows as well. But if the debt grows at a rate faster than the economy, then it will eventually exceed the nation’s ability to repay it. The idea of a sustainable budget deficit is summarized by the chief economist of the Concord Seo Company Coalition, “President Obama’s fiscal commission set a goal of getting deficits down to about 3 percent of GDP within five years – 3 percent being the average annual growth rate of the US economy since World War II.”

The Real Sustainable Deficit Target

There’s just one problem with the 3% target for a sustainable budget deficit – it’s too low! While GDP growth is measured in real terms, inflation also eats away at the value of the US debt over time. For instance, assume that the US has no future economic growth, but continues to have 2% inflation. Assume that we also manage to (magically?) balance the US budget. With no economic growth, does this mean that debt/gdp stays constant? Actually, inflation would cause the numerical value of GDP to continue rising, while the debt stays constant. This would cause the debt/gdp ratio to fall by around 2% per year.

In practical terms, this means that we have to look at the rate of nominal GDP growth to determine a sustainable budget deficit level [1]. To be conservative, let’s assume 2.5% real GDP growth (less than the 3% post-war average) and 2.5% inflation (within Americans’ comfort zone, and less than the 90’s and 2000’s average). Taken together, this means that if nominal GDP grows at 5% per year, a budget deficit of 5% can be sustained long term. The difference between 3% and 5% of GDP is big, over $300 Billion in 2012. As the federal budget and spending again enter serious debate after the November elections, it’s important that politicians understand the government’s true borrowing capacity – and neither the populist “balanced budget” nor the typical economist’s 3% magic number stand up to examination.

[1] Here’s the actual nominal GDP data from the Fed: http://research.stlouisfed.org/fred2/howtobcome/data/GDP.txt

Using this data, we see that nominal GDP has grown at a compound annual rate of 6.6% over the post-war period (since 1947, when the data series begins). Over the past 30 years, nominal GDP has grown at a compound annual rate of 5.4% – and this period excludes most of the late 70’s and early 80’s inflation spike. Even over the past 20 years, which are skewed downward due to the financial crisis, the nominal GDP growth rate is 4.7%.