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AMA 107 – Dr. David E. Goldberg talks about changing engineering education with Jason Hartman

 

Dr. David E. Goldberg is a professor, writer, and a civil engineer. David has written several books on the topics of engineering and algorithms. Some of these books include The Design of Innovation, Genetic Algorithms in Search, Optimization, and Machine Learning, and, his latest book, A Whole New Engineer. Jason sits down with David to pick his brains on the latest in AI technology, why there’s a decline in engineers, and we also get to find out a little bit more about David’s most recent book.

 

Key Takeaways:
2:10 – David jumps right in and talks about AI, Artificial Intelligence, technology.
5:20 – To design a kidney by human hands is impractical, but nature has been able to create one for the past 3.5 billion years and more.
9:15 – As better or new technologies arise, so will the ethical questions.
12:45 – What’s happening in engineering education right now?
15:40 – Engineers were seen as heroes and that view reached its apex around World War one and two.
17:55 – Roughly speaking, 6.9 billion of us owe our existence to technology since our agriculture days.
20:30 – It’s not just in the US where engineers feel unwanted; it’s happening in Asia too.
24:10 – Closing thoughts? Students who feel trusted end up doing the most innovative things.

 

Tweetables:
It seems to me that these innovations get baked in to systems in ways that we’re not even aware.

If you go back into the time machine into the 1800s, there’s this period where engineers were rockstars.

It’s remarkable how little we teach about capitalism history.

 

Mentioned In This Episode:
The visible hand by Alfred Chandler

http://bigbeacon.org/

http://www.amazon.com/David-E.-Goldberg/e/B000APHEJU

 

Transcript

Jason Hartman:
It’s my pleasure to welcome Dr. David E. Goldberg to the show. He is emeritus professor of engineering at the university of Illinois and he’s the author of several books starting way back in, I believe, 1989. Just a couple of titles here for you, one we’re going to talk about is A Whole New Engineer; The Coming Revolution in Engineering Education, The Entrepreneurial Engineer and The Design of Innovation: Lessons from and for Competent Genetic Algorithms. This is interesting stuff, folks. So, even if those titles don’t sound super interesting or maybe they sound nerdy, stick with us, because you’re going to like what Dave has to say. Dave, welcome, how are you?

Dr. David E. Goldberg:
I’m great, Jason. It’s really good to be with you.

Jason:
Well, the pleasure is all mine. I had to say that for our non-engineer listeners of which I am one, I guess. So, you know, I don’t know what we should talk about first. We kinda got two broad topics I really want to cover in this interview and I really kind of want to talk about your renown research and expertise in the field of AI or Artificial Intelligence. So may people now are talking about the singularity. Maybe for those who don’t know you can start off by explaining what that is.

David:
Yeah, so there’s this idea that technology is accelerating so rapidly that we’re going to come to a point where it overwhelms us and perhaps takes over from us and that’s the singularity and whether or not we believe in that it’s pretty clear that technology is accelerating and becoming ever more important in our lives. So, people who know my recent work on engineering education reform may not know this background that you alluded to in doing Artificial Intelligence. I’m a trained civil engineering that migrated in computer science and as part of my dissertation work to do some work on something called generic algorithms or evolutionary computation.

You can give a really simple cocktail party of it. It’s the idea of using Darwinian survival of the fittest on the one hand and ideas from genetics like the idea of having a chromosome and the idea of using mutations and cross-over recombinant DNA, if you will, and you take those two things, throw them into a computer, so instead of designing by hand a jet engine, you would create a chromosome that represents different jet engines and mom jet engine and dad engine would get together and have baby jet engine and overtime you would evolve generations of more efficient jet engines and this isn’t science fiction. This is something that has been used by General Electric to evolve jet engines or companies in Japan have evolve production schedules for steel plants and even people have used genetic algorithms to evolve music and art. So, it’s very cool stuff.

Jason:
That is fascinating. Is this considered singularities? Is this bio-engineering? I mean, I’m quite fascinate by the idea of 3D printing of kidneys or whatever else we might need.

David:
So, generic algorithms can be separated from biological applications, so you’re using the idea of genes to create an artificial genetics that helps you to evolve the solution to whatever problem. So, of course, you can turn on biological problems and use genetic algorithms to evolve solutions to the design of all kinds of thing. If you think about things like nanotechnology, for example. Nanotechnology and biotechnology for that matter you’ve got perhaps 1,000 or 10,000 or millions of decisions to make in designing an artificial kidney; to use the example you’re talking about; to do that by hand is impractical, but nature has been doing this for 3.5-4 billion years in this way, so we use nature’s algorithms of choice for evolving and solving hard problems and voila you end up with pretty good solutions and not in billions of years. We’re doing this on computers, we’re doing it real fast, we can do it efficiently. So, some of the work I did was instrumental in helping us understand how quickly we can evolve to solutions to how complex to a problem.

Jason:
How much of this can we do now? I mean, we’re growing ears and body parts in labs, right? When do you call it cloning? When do you call it engineering? I don’t know. There’s this blurry line I don’t exactly understand what to call things anymore. I guess that we means we’re approaching the singularity right?

David:
Well, I’m not sure about that, but I think you can, you know, so when you’re a scientist or an engineer and you’re involved in these kinds of projects..when you’re the outside looking in things look a bit magical and a bit mysterious when you’re on the inside using these algorithms, you know they work for good reasons and these designs come out and you test them and if they function according to plan, they’re doing something good. So, when you’re in the middle of it, you can sign causality or you know why things are working for the most part so it’s not some of the hype around not knowing as is may be a bit overblown.

Jason:
Really, this is just incredibly fascinating stuff. Can you speak at all, this is probably not your area, but I thought I’d ask, you know, what this stuff means to us, what it means to the economy, what it means to the society as a whole, and then I want to ask you about the education side, which is fascinating too.

David:
I think you started off right in saying it’s not my area. When we look back on prognostication in eras that were much more slower moving than ours. That kind of prediction was almost always wrong in profound kinds of ways. That’s one of the things that’s so interesting about human creativity. Now with these kinds of tools and these kinds of leverage that we have, it’s perhaps even more difficult to predict what these things mean to us, but it seems to me that these innovations get baked in to systems in ways that we’re not even aware.

To a certain extent, some of these advances and machine learning and artificial intelligence are already being baked into IT systems that we use on a daily basis and more of that is coming and as you say there are these nano/bio kinds of technological designs that are intractable without using tools like this. So, things like this are either here or on the way and they, I think, they will continue to provide opportunity and there’s also a negative and there’s a potential for doing harm. So there are ethical questions to the degree in which we use these technologies and we know what they’re producing and the side effects that we’re producing and the extent to which those are predictable or not. So, there are very real questions about sustainability and growth and the ethics of using these kinds of technologies and there are no simple answer.

There are no answers like putting your hand up against history and saying stop. That doesn’t work very well and, on the other hand, fully laissez-faire and unregulated of trails of say various kinds of genetics outputs could be very dangerous of us. So, in many ways that could be why we need to boarded the education of scientists of engineers in the century.

Jason:
Yeah, absolutely. Well, one of the areas where I think this has just fascinating, wide-ranging impact is in the field that is…It just seems like it’s booming right now and that’s the area of longevity sciences. We might be on the verge of just cracking the immortality code. I don’t mean immortality in the pure sense, that might be, you know, maybe…it might never happen, but certainly some major, major advances in the field longevity are seemingly pretty close. I study this stuff and I find it fascinating. Think about what it means to the economy. Think about what that means to the social security system. The retirement age. The sustainability. You know, I always like to give environmentalists a hard time when they’re giving everybody else what they should do, but the fact is everybody alive and that they are alive, they’re consuming resources and, you know, Malthusian idea that people are just not a resource they’re a cost only, but people solve a lot of these problems. They do create. So, we’ll see where that balance goes, but just in the area of longevity alone, wow.

David:
I couldn’t. So, I agree. There is a sense sometimes if you listen to people who are speaking strictly from an environmental sustainability perspective that everything is a cost and everything is a resource. It tends to ignore the innervation capability of human beings. I think I agree with you that it’s a huge mistake and it’s one of the ways in which predictions are wrong. Predictions can either overshoot and undershoot and there is often times a tendency to over predict harm. I mean, when was the last time you saw an optimistic science fiction movie where the future looked more interesting and bright than the future that we have and yet, in many ways, if you look back into the 40′s or 50′s and project forward, those were the lives we’re living right now and there are brighter and things are more optimistic than people projected back then.

Jason:
Yeah, they certainly are. Very interesting. Well, what’s going on in the field of engineering education with the exception of many stars in engineering mostly in Silicon Valley, I guess. You hear about the people that got into a start up and made it big and so forth. It doesn’t seem like engineers are very well paid on the whole and I think that’s kind of unfair because everything we look around, everything we use all day is the result of some brilliant engineer. There’s this funny commercial, I wish I could remember what it was for. You’re probably know what I’m going to refer to where it had these rockstars and all the women were tearing their shirts off and then it had the Indian engineer guy that invented USB and it flipped the world around. They should be tearing his shirts off. This is something we use everyday, right? You know, it’s just kind of funny our culture doesn’t seem to allocate the recognition and maybe the pay correctly. Your thoughts?

David:
Well, there is an ebb flow in history to how engineers are viewed. If you go back into the time machine into the 1800s, there’s this period where engineers were rockstars and, I mean, we talk about electric engineers and computer scientists now, but think about the late 1800′s, Maxwell equations have just come out so people are predicting and some of the first results on magnetics and electromagnetics or radio just come out and so there were all kinds of companies started and engineers were really stars and not just electrical engineer, civil engineer has built bridges and buildings and ships were built of enormous unprecedented size.

So, there were this sense of emergence large technology and large scale business, which engineers were at the center of. There’s this terrific history of large scale business in the United States. The visible hand by Alfred Chandler and he talks about, well, who invented modern business enterprise and it was the civil engineers who started the rail roads, because they were the first people to work across vast distances and they needed a difference kind of organizational structure, so they made up modern business enterprise. There was a sense of excitement back then, which then got squelched in World War one and two and there’s phrase that philosopher Steven Goldman, he says, engineers became socially captive in World War one and two. I think that’s a good description.

So, these very large vertical integrated return to scale kinds of companies were built and engineers were working bees in those companies and that continued and was really sort of reached its apex just post World War two and the Cold War. So, what you’re alluding to in Silicon Valley is a phenomenon between the end of World War two and what has happened now. I called them the three missed revolutions. We had the quality revolution where statistical quality control when Japan came back and the Japanese beat us around the ears with it, the entrepreneurial revolution of various garages in Silicon Valley, and the IT revolution from the microchip to the personal computer to the internet.

So, here we are in the opening moments of the 21st century and we live in this really different place that where once after World War two, we wanted obedient engineers to shut up and sit down and do what they were told and now we want the next Steve Jobs who wasn’t an engineer, but we want our engineers be that guy or that gal whose starts the next great tech company and many of our young people, the students, going into engineering have those aspiration, because they see these role models out there.

Jason:
So, why is engineering education so important to our economy?

David:
Well, so again, there are roughly 2 million or so in the US who call themselves engineers. There are about 4 million or so that are in mathematical and computer science. I mean, it’s a pretty big part of the work force, but if you stand back from it and say, look, we’re on this planet. We’ve got 7 billion people on this planet and more coming. If you just do a fundamental analysis of the situation and say, alright, well, what would happen if we did like some people would have us do and turn off the technology. Where would be? It’s hard to know exactly, but if you dial back to the days when there was only crude technology like agriculture, if you go back before crude agriculture.

Say, dial back 7,000-8,000 years or so, what do you got? You’ve got about 100 million people on the planet. So, roughly speaking to 6.9 billion of us owe our existence to the technology that’s been developed since agriculture. So, turning off technology isn’t an option. Keeping it going and having it function well and better and serve us better as human beings is even more important than ever. So, in that very fundamental sense, having the next generation of engineers be chosen from amongst our best and brightest is really important.

Jason:
It certainly is. So, I’ve always thought that engineering was a very, very important career choice. I appreciate engineers like crazy and you look at it compared to the, you know, how they’re getting sucked away into the game of Wall Street in that, what was that movie called, Margin or..I can’t remember the name of the movie, but it was a couple of years ago and the founder of this huge brokerage firm depicted in the movie as probably Lehman Brothers, they were probably predicting; I’m not sure; comes in at midnight asking this young kid, you know, who was a quant who just figured out this whole situation they had that no body else saw in the company managing the risk and the billion head of the company says, so, you know, what’s your background kid? And he says, I have a PhD in blah, blah, blah, he says, basically what that means is I’m a rocket scientists. He says, well, what you’re doing here? And he says, well, Wall Street pays a lot better than engineering. I think that’s a sad commentary. I really do.

David:
If you talk to the kids today, the students today, the motivations aren’t entirely financial, but if you factor in the fact that engineering is itself fairly uninviting and there’s this possibly of a larger paycheck, it’s hard to fault people. It’s not just an American problem. One of the interesting things we found out in researching the book and I had the pleasure in working on engineering education change in Singapore. We often think of Asia, okay, if we don’t generate enough engineers in America, well, at least we can always turn to China and India and they’ll give us the millions of engineers that we need, but even in Singapore is a the canary in the Asian coal mind for engineers.

I was working at the National University of Singapore and one of the things the engineering dean told me was that it used to be that engineering was the number one choice of young people accepted at NUS. That’s what where you went and many of the people in government were engineers, many of the people in the top jobs were engineers. Engineering was respected, but they too have fallen on this kind of sense that almost anything, but an engineer. It seems as though when countries become sufficiently affluent, kids wanna do something other than become engineers. So, one of the things that…

Jason:
The distinction though, the Wall Street example I gave is that, you know, the financial in engineers and the financial innovators on Wall Street are really just leaches on the economy in almost every case in my humble opinion, disagree with me if you like, but all they’re doing is find ways to move things around and relabel things and, you know, cut things up and make derivatives out of them. They don’t actually create anything anymore. Okay, granted, companies need capital to grow and thrive, and so forth. So, conception ally, I don’t have a disagreement with the idea of capital formation of the stock market, of course, but it has just become such a corrupt…as I always say, the modern version of organized crime. You know.

David:
I would agree there are excess. I guess I’d disagree to the extent that all of that activity, you know, so efficiently and capital is important and I personally know hedge fund managers and people who work with business to help restructure them more efficient so…

Jason:
Yeah, I get it. I have investment banker friends too and hedge fund friends too, but the real value creation is when you create something new out of thin air and it changes everybody’s life. That’s like actual value. Of course you need capital to do that many times, so I get it. There’s a middle ground.

David:
I think if you go back..So, again, if you go back in our time machine to the invention of securities back with the Dutch example and I think the early trading companies. So, the whole capitalism is a fair early invention and remarkably..It’s actually remarkable how little we teach about capitalism and its history and many of the objections to capitalism are objections that were held back in the 1500 and 1600s when it was first emerging and we seem to be in the same argument over the course of centuries, but..

Jason:
I am a complete capitalist. So, don’t worry about that.

David:
Those things be it the idea of the invention of shares and selling shares and having markets and the efficiently that brought to capital and the way that allowed business to scale was the kind of innovation that you were talking about.

Jason:
Okay, we don’t need to debate that one, but I get it. Okay, so I want you to give out your website and then ask you for some closing thoughts.

David:
The website for our work on changing engineering education is www.bigbeacon.org and there’s a movement to transform engineering education to help bring about engineers that can face..we’ve been talking about the ways which our times have changed and how do we education..how do we unleash the courageous engineers we need for this century is what the Big Beacon is all about and the book is called A Whole New Engineer.

Jason:
I hope that has an impact on things and we see a lot more people getting into the field, because, as I mentioned, I think it’s just incredibly important. So, yeah, good stuff. So, any closing thoughts? Anything I didn’t ask you, you didn’t happen to say, you know, just to wrap it all up for our audience?

David:
I think, in terms of the key, and one of the big surprises in what we found in working on education today was the sense that of empowerment that we give students and it really comes from three things. Trusted students; when students are trusted by faculty or other students, they end up finding the courage to take an initiative, which leads to real learning and that’s the emotional equation that lends to the kind of learning that we need in this century and that’s a message that doesn’t apply to engineers. It applies to all kinds of entrepreneurial thinking, it applies to kinds of opportunities that we face in this century. So, that equation from trust to courage to initiative seems to be the kind of unleashing reaction that we are missing in education generally and we need to get into it.

Jason:
Good, good stuff. Well, Dave, thank you so much for joining us today and talking about some of these issues and I always say, it is an amazing time to be alive. I think the next 5, certainly the next 10 years, it’s going to blow our minds, quite literally. We’re going to have amazing stuff coming down the pike. It’s really exciting, it really is.

David:
I couldn’t agree more. Thanks Jason for having me on the show.

Jason:
Everybody, that’s David E. Goldberg, an emeritus professor of engineering at the university of Illinois and the author of the several books that we mentioned.

US Banks Hit By Swiss Franc Fallout

AMA1-22-15In the tightly knit world of global finance, what happens halfway around the world can have devastating effects at home. Case in point: the fallout from the recent Swiss bank decision to drop its cap on the franc, which is hitting even US banks and the sturdy dollar.

The Swiss National Bank’s move to let the franc float against the euro went largely unnoticed outside of financial industry ad business news. But the move was widely viewed as another salvo in what’s being called a modern currency war – and that meant it had wider implications for currencies all over the world.

In mid January 2015, the Swiss National Bank removed its three-year-old cap on the franc;s exchange rate against the euro. The move had been intended to keep the franc from appreciating too much against the euro.

The European Central Bank was planning its own version of quantitative easing, a plan to stimulate the euro zone’s economy by buying up large amounts of securities. The plan would put more euros into circulation – and that by extension would increase demand for the Swiss franc, a favored “safe” currency for chancy times.

In order to pave the way for the ECB’s plan, the Swiss had to bow out, relinquishing the capon exchange rates for the franc and letting it “float” against the euro. It was a costly maneuver, to be sure. Some investment firms crashed and the Swiss National Bank was compelled to buy up massive amounts of foreign currencies to keep pace.

Though the immediate fallout from the Swiss decision was felt in adjacent Ares such as Eastern Europe, where much national debt is denominated in Swiss francs, it also rippled around the world, hitting even US megabanks such as Citigroup.

In addition to its place as one of the largest banking institutions in the US, Citigroup is also the world’s largest currency trader. In the wake of the Swiss National; Banks decision. Citigroup lost more than $150 million, according to a recent article from Bloomberg Business.

Though that isn’t much money in the high stakes, high volume world of international currency trading, financial insiders point out that the issue isn’t so much money lost, as it is trust lost. Citigroup’s losses as a result of the Swiss decision point to risky positions on global trading issues – and that might raise red flags for investors.

Citigroup isn’t the only one feeling the heat from the SNB’s move, either. Hedge fund management companies, brokers and smaller banks whose transactions involved the franc are also facing losses. And on the international front, major international banks such as Germany’s Deutsche Bank have also faced struggles.

Interestingly enough, Swiss banks themselves haven’t suffered significantly – yet. But some industry watchers point out that the long-term effects on Swiss institutions – and the economy a whole – could be severe, as the flow of assets into and out of the country could slow. What’s more, the credit ratings of Swiss banks could suffer, along with their existing accounts with other European banks.

With Citigroup and other US banks feeling he impact of the Swiss National Bank’s decision, what does the “currency war” mean for US investors – and the health of the US dollar at home and abroad?

European import and export initiatives dealing in euros and francs could suffer. But like the Swiss franc, the dollar is still a go-to currency in most parts of the world, valued for its stability and security. And as the currency wars heat up, vulnerable investors and citizens concerned with safeguarding their assets may well keep turning to the dollar, not the franc, as a safety net in a world of volatile currency trading.

Those conditions also make investments on US soil more appealing. International investment in Us real estate, for example, is reaching historic highs, thanks to its reputation as a highly stable asset that can keep investment funds safe from turmoil at home. And as the front lines of the currency wars expand to other areas such as Asia, demand may be even greater for a stable, safe haven for assets and savings.

Historically, that was the promise made by the bankers of Switzerland, who offered international investors a discreet, secure home for their assets in a tumultuous world. Now, as the Swiss franc floats in free fall against the euro and the global currency world struggles to adjust, new players – and old – may step up to claim victory in the world’s latest currency wars. (Top image: Flickr/PINEAPPLEXVI)

Sources:
Eno, Aureloa. “The Swiss National Bank is the First Casualty of the Modern Global Currency War.” Business Insider. businessinsider.com. 18 Jan 2015.

Logutenkovo, Elena. “Bank Losses from Swiss Currency Surprise Seen Mounting.” Bloomberg Business. bloomberg.com 19 Jan 2015.

Read more from The American Monetary Association:

Who’s Winning the Currency Wars?

Interest Rates:TRends for 2015?

The American Monetary Association Team

Final_AMA_Logo-150x1502

 

Who’s Winning the Currency Wars?

AMA1-18-15It sounds like the plot of a bad science fiction movie. A mysterious, invisible war is going on behind the scenes of the world’s major banks, with cutthroat brinkmanship and dirty strategies to get the upper hand in the global currency markets. It’s not the plot of a grade B flick, but by many accounts, a reality. Just ask the Swiss, whose recent power play with their franc brought the “global currency wars” to public attention.

Hardball money maneuvering might seem commonplace among the hard-charging emerging powers of Asia and other areas of the world, but it’s little Switzerland, that historically neutral country that’s known for its elegance and discretion in money matters that’s standing on the front lines of this new financial battlefield. And the outcome could ripple through the rest of the world’s major currencies – including the US dollar.

In 2012, the Swiss National Bank imposed an exchange rate “floor” for the Swiss franc against the euro. The plan was to keep the franc from appreciating too much against the euro. But, according to a recent article from Business Insider, by mid-January 2015, the SNB had abandoned that floor, allowing the franc to float freely.

The world’s money markets run on a complex system of constantly shifting rates and conversions that keep national banks largely stable and hold the line against runaway exchange rates that put local economies and international trade in jeopardy. International exchange rate boards such as Libor and a variety of banking commissions and consortiums monitor and adjust the flow of currencies and prevailing exchange rates.

But the behavior of individual banks, along with changes in local and global economies, can shift the balance dramatically. That’s why the Swiss national Bank’s decision to capitulate and abandon its floor for the franc against the euro sent shock waves through the global financial community.

Without the artificial imposition of the SNB’s floor, the frank immediately gained 30 percent against the euro. Stocks in export dependent Swiss companies plummeted. Eastern European countries whose mortgage debt is carried in francs were also hard it. And the situation raised fears around the globe that other currencies might follow suit.

Some financial experts speculate that the SNB caved because of expectations that the European Central Bank might embark on a new program of “quantitative easing” – an initiative to buy massive amounts of bonds that would get more euros circulating in the market. That in turn, the ECB expected, would actually increase demand for the Swiss franc, which has a reputation as a “safe” currency.

In the face of these developments the Swiss had no real option but to retreat and pull the floor out from under its own currency.

Quantitative easing is an term that’s become familiar in US financial circles of late, thanks to the Federal Reserve’s foray into manipulating the behavior of interest rates and currency values through bond- buying. The latest round, termed QE3, was a massive intervention designed to prop up the country’s struggling economy in the aftermath of the financial collapse of a few years ago.

With improving economic signals, the Fed’s version of quantitative easing is tapering down. But the same strategy of buying up large numbers of bonds and other kinds of securities as a financial prop for a shaky economy has been applied in other countries as well, with mixed results.

While the Fed’s program came under fire for its scope and aggressiveness, variations tried in European countries such as Spain and Greece have been equally criticized for not being aggressive enough to have a lasting impact on the currency crisis facing the country.

Now, as the European Central Bank contemplates its own version of bond buying, the Swiss reluctance to abandon the floor on the franc’s exchange rates appeared to be a politically hostile move. Capitulating in the face of the ECB’s plans might have been a politically savvy move – but it was certainly costly. The Swiss National Bank ended up buying massive amounts of foreign currency – an amount equivalent to 85 percent of the country’s gross domestic product.

The effects of this latest skirmish in the global currency wars aren’t limited to just the euro and the franc. The turmoil could spread to other markets such as those in Asia and Latin America. And the US dollar isn’t immune, either.

Because the Federal Reserve expects interest rates to surge as its own quantitative easing plans taper down, those rising rates, and the dollar’s performance against the euro and other leading currencies, could play a role I heating up the currency wars. For now, new Fed chair Janet Yelllen has taken a largely hands off approach to manipulating the dollar, but as the front lines of the currency war move closer to home, that could change. (Top image:Flickr/ju-x)

Source:
Eno, Aurelia. “The Seis Natioal Bank Is the First Casualty of the Modern Global Currency War. Business Insider. businessinsider.com 18 JN 2015

Read more from The American Monetary Association:

AMA 106: New York STate Tax with Ashlea Ebeling

Bond Rates Plunge- But Where’s the Crisis?

The American Monetary Association Team

Final_AMA_Logo-150x1502

 

 

AMA 106 – New York’s State Tax with Ashlea Ebeling

 

Ashlea Ebeling appears as Jason’s AMA guest. She is a Forbes editor and talks about the different estate taxes you might face all across the United States. She also touches on federal and income tax on the show. She tells the audience every year she develops an interactive map on Forbes of where you should not die in the United States that you can check out in the show links.

 

Key Takeaways:
2:50 – How does New York’s state tax have a 164% marginal tax rate?
7:20 – Can you avoid estate taxes? Ashlea breaks down four way you can do this.
11:30 – You have to be careful of inheritance taxes and need to look carefully into that before you give your properties away.
14:20 – Ashlea likes the idea of Roth IRA. Jason thinks there’s nothing stopping the government from changing the rules.
18:10 – There are a lot of new tax rules and regulations happening for 2015 that people need to be aware of.

 

Tweetables:
The lesson is people need to know about state to state taxes.

Everyone says Florida, but there’s 7 of these no income tax states.

Good luck calling the IRS ‘cus they’re predicting 34m wait times for the 53% of people that wait on the line.

 

Mentioned In This Episode:

http://www.businessinsider.com/bond-market-panic-phase-of-financial-crisis-2015-1

http://www.forbes.com/sites/ashleaebeling/2014/09/11/where-not-to-die-in-2015/

http://taxfoundation.org/

https://twitter.com/ashleaebeling

 

Transcript

Jason Hartman
It’s my pleasure to welcome Ashlea Ebeling to the show. She is an associate editor with Forbes magazine and Forbes.com. She wrote an interesting piece recently about the New York state tax and how we should be aware of a 164%, yes you heard that right, marginal tax rate and profiles different states around the country and their tax situation and a whole bunch of interesting things. So, it’s a pleasure to have her on today. Ashlea, welcome, how are you?

Ashlea Ebeling:
I’m just fine. Thanks for having me on the show.

Jason:
Well, it’s good to have you. First, let’s dive into this article. I mean, this is insane! I can not believe it. How do we get to more than 100% tax.? As if 100% isn’t bad enough.

Ashlea:
So, New York state tax has this provision called a cliff and people are trying to change it. It’s obviously a problem, but the one thing is New York made sweeping changes to its state tax law just this year and they doubled the amount that is exempt. So, if you had over 1 million dollars before, you would owe a state tax on that amount and they doubled it now to 2.625 million, but the cliff problem is if you die with 5% than that new 2 million dollar number, you face this cliff and that’s where the crazy marginal tax rate would come in.

I can give an example. So, Sharon Klein with Wilmington Trust, she kind of gave me an exact example, because the New York state department of taxation, they did a summary memorandum on the new law, but they neglected to spell out of the affects of the cliffs. So, her example was a taxable state of $2.625,000 would pay no tax, but if you had $2.1 million dollars, you’d have a tax liability of $49,000, so that’s more than the $30,000 of an increase of the value of the state. So, your state has gone up by $37,000, but your taxes would go up by $49,000. So, that’s the affect of the cliff.

Jason:
Boy, this is crazy.

Ashlea:
So, the lesson is people need to know about state to state taxes. The federal estate tax is almost..that’s been changed, so there’s a big, big exemption. The federal exemption of $5 million per person indexed for inflation is now permanent and that is indexed for inflation, so next year the exemption it’ll be $5.43 million. So, obviously most people don’t have to worry about federal estate taxes as all. In the meantime, the state estate taxes can be as long on inheritance taxes it starts at the first dollar and the states with state taxes, New Jersey is the lowest exemption with $675,000. So, people with a nice house, they’re in a state tax territory.

Jason:
Right, they certainly are. So, what do you think, what change do you think will come to this law?

Ashlea:
Well, there are people trying to change that cliff, so it’ll be more gradual. So, that’s a possibility that could get tweaked in the next legislative session and the good news in New York is the law that’s been put in place is it’s eventually going to match the federal exemption in two year. In 2017 the New York state exemption will match the Federal exemption. For most people it’s not going to be an issue.

Jason:
So, when one looks at a state to consider a move, they need to consider what life stage they’re in. If they’re in their career stage and are earning a lot of money, you obviously want a state with no or very low income tax. If you’re retired as mom retired many years ago and she, you know, I told her she should move to Texas and she said, no way, the property taxes are too high and she didn’t care as much as income tax. Texas has no state income tax. So, it really depends. It’s like, where to live during your career years, where to retire, and then where to die. Where to retire and die may be two different things, right?

Ashlea:
They’re very different. It’s going to depend on each family’s specific situation, but you’re right you’re going to have to look at the whole tax picture. You want to look at income tax, sales tax, property tax, there’s a state tax, gift tax. It’s a little crazy that there’s that much to look at, but it makes a huge difference and then for retirees, there’s state pension tax breaks that come into play. So, that’s another. That even goes into the category of income tax, but you have to see whether your state tax is social security or whether it doesn’t. My mom just moved from Virginia to Connecticut, so now her social security is being taxed when it wasn’t in Virginia.

Jason:
Wow, okay, so you’re in Connecticut, I believe, right? And that’s the only state with a gift tax?

Ashlea:
That’s right, Minnesota had one, Tennessee got rid of theirs, I think that was 2012 and Minnesota put one in in 2013 and then last year..earlier this year they finally got rid of it again, so gift taxes are a bit controversial, but the idea with the gift taxes is that the state don’t want people giving big amounts to their heir in a way to avoid the state to state tax. So, Connecticut, for example, has a 2 million dollar limit that you can’t give more than that without having to pay a tax that would go to 12%.

Jason:
So, do we see a lot of people in these states where you have a high state tax, you know, especially in New York, what do they do to get around it? Do they use a charitable remainder trust or what is the vehicle they’re using or do they just try and spend all their money before? I’m spending my children’s money…

Ashlea:
There are probably four big ways that people avoid or get around the state estate taxes. One would be moving, so you could be in New York and then also have a home in Florida and you’d make Florida your residence, but you’d have to really do it, you’d have to be there more than a 183 days a year, you’d have to change bank accounts, drivers licenses, there are all kinds of residency rules to make sure New York doesn’t pull the estate back into their territory. So, moving is the big one. Everyone says Florida all the time, but there’s 7 of these no income tax states.

The second big move that people do is setting up a traditional credit shelter or bypass trust when the first spouse dies and that puts the money that goes into that trust would then be exempt from a state tax, but the tricky thing is is on the federal level you don’t have to worry about, because there’s something called portability and you have all of this..So someone who has $5 million dollars when at the federal level they can send the money over to their spouse and the it’s protected even without a trust, but the state level there’s still more of a need to a trust and estate planning.

Jason:
Very interesting. Anything more you wanna say about different taxes in different jurisdictions, because I want to just wanna touch on some of the other stuff that you’re following and writing about.

Ashlea:
Well, if we look at the, for the state estate taxes, it’s 19 states plus the district of Colombia that have these taxes and why you need to keep track of it, we have an interactive map that we keep on Forbes.com called where not to die and every year it’s updated. There were 8 states that were ensuring changes for 2015, so that’s one place to look. The tax foundation has great maps on tax climate on income tax, taxes on all these other states, so that’s another place for people to look.

Jason:
I’ve seen some very complex charts as you were talking about the comparisons a few minutes ago. I’ve seen very complex charts in terms of all 50 states or maybe 51 one with district of Colombia, 52 with Puerto Rico, which has got some very desirable income and capital gains tax opportunities right now. It’s just a really complicated metrics of all these different issues one needs to consider.

Ashlea:
Well, when you’re thinking of capital gains tax, that’s another thing that people completely don’t think about and that can be taxed in California. I think it’s up to 10.3 there is the top rate for income tax. So, if you’re selling real estate that you know that when you’re going to into it with the capital gains rates are going to be. Not just the federal rate, which has been increased now to 20% to higher income earners, plus there’s another net investment income tax and then there’s the state capital gains tax. You have to add all of those together to really know what your tax rates are going to be.

Jason:
So, I’m looking at the where not to die map now. I found that while you were speaking just a moment ago and I guess the red states, are those the undesirable ones?

Ashlea:
Those are the estate tax states. The blue states are also undesirable in their inheritance tax state and again that’s something a lot of people don’t know. The difference in New Jersey and Maryland, they have both the state and inheritance taxes are a little different, because it’s who gets the money, who pays the tax, whether or not you pay the tax, so Pennsylvanian is a good example. It used to be the spouses paid Pennsylvanian inheritance taxes of 6% tax rate and then people complained about that, because generally for state taxes, spouses don’t pay state taxes at all.

You can give anything when you die to your spouse and it’s state tax free, so this inheritance tax, they were paying 6% in Pennsylvanian, they cut it to 3% in 1994 and then the next year they cut it to 0% and then they get similar to other states, but there’s still..in Pennsylvanian, if you have an estate going to children, grand children, or parents, it’s a 4.5% tax and if it goes to a bother or a sister, it’s a 12% tax, if it goes to a nephew or a niece, it’s 15% tax. So, New Jersey has a similar law to that too and there’s people changing it there too where they think it’s not fair if you’re single and giving your estate to your sister, you’re taxed, but if you have children and you’re going it to them, you’re not taxed.

Jason:
Yeah, very interesting. We should mention the red and blue on this map are not political red and blues, so..

Ashlea:
No, but to some extent to it is if you see like the north east as this big chunk of estate tax states. Washington has the highest rate. Washington state has the highest rate of 20%.

Jason:
Wow, that’s something else.

Ashlea:
Then, the interesting thing, there is prescient for repeal. If you look at this map a few years ago it had a lot more estate tax states. North Carolina and Indiana repealed their taxes in 2013 and Kansas, Ohio, and Oklahoma all repealed theirs in 2010.

Jason:
It is interesting that it follows the political map to some extent and that doesn’t surprise me, but tell us about some of the other stories you’re working on. I know you cover some real estate stuff. I’m kind of looking at your portfolio here on Forbes.com.

Ashlea:
One of my favorite topics is philanthropy and you mentioned charitable remainder trusts, that’s something that’s another great tax move for people who are charitably inclined and I had a nice example of a son who inherited a vacation house in the family and they put it in a charitable remainder trust and then it’s a way to give, to give real estate to charity that works.

Jason:
What do you think of the Roth IRA versus the traditional?

Ashlea:
Well, we at Forbes are huge fans of Roth IRA, but again, it’s a tax place, so if you’re going to be in a higher bracket in retirement, it’s a total no-brainier, you definitely should do it, but some people who should be doing, but aren’t thinking about it are actually in a low tax bracket now and they’re young, so they should be putting money in a Roth, because they don’t get any advantage of the pre-tax that you would for a regular traditional IRA.

Jason:
So, just to explain to the listeners who don’t know, a Roth basically says, pay the tax now, but let it grow tax free. So, you can take it out and the idea is that the tax rate would be much higher later in the future as the country is more fiscally insolvent and looking for money and you’ll just have that money that’s compounded for you over the years tax free because you paid the tax earlier. My fear and why I…maybe I’m just being too paranoid, but the reason why I’m not a big Roth proponent is I just think the government is going to become more and more hungry in years to come and they might just change the law. I mean, what is to stop them from doing that?

Ashlea:
Some people do have that fear and I can’t say that’s implausible, that it could never happen, but I think that’ll be such a outcry that it wouldn’t happen and then another point, you’ve got this two buckets. You automatically, if you’re at a work place plan, any employer money that goes into a plan and earning pre-tax, so some people like doing some Roth, some pre-tax to hedge their bets and whether you actually take money and pay taxes on it to do a Roth conversion, which you can do to try and get more money into a Roth that that’s would be more of a heads in a basket way of what you’re saying.

Jason:
I think these retirement plans are going to become the low hanging fruit in a hopefully not, but a very likely, unfortunately, I think, desperate where the government will say, you know, they wanna nationalize them or, you know, it’s just so easy to attack the retirement plans.

Ashlea:
Well, they’re already proposals out there in the administration that you can only put a certain amount in your retirement plans and after that point then once it’s a, I think, it’s at 2million dollars, once it’s at a certain balance, they’re different numbers depending on the different proposal that you wouldn’t be able to add anymore. So, when you say the proposals out there there’s a reason to be somewhat scared.

Jason:
It seems like the guard against that might be to have a retirement plan whether it be a Roth or traditional that’s one issue that we’ve already discussed, but have it be self-directed, because if it’s self-directed and the assets aren’t just with big brokerage firms and really simple electronic transactions, that’s not going to be low hanging fruit for the government. You know, the self-directed plans if you’ve got, if you own some notes or mortgages, you own some real estate…

Ashlea:
Self-directed plans are great for people who are…you have to really research what you’re putting in with them and make sure you’re not worried about the self-dealing rules, but there are definitely is a place for those for folks. I think though if the government puts in limits, they’re going to apply across the board whether it’s self-directed or through a regular brokerage. Theoretically if you have Roth money in there, you have more money in if they’re just putting limits on and not making a difference between Roth and pre-tax, you can basically have a bigger retirement pot with Roth money.

Jason:
Very interesting. Any other stories that you’re working on or have recently covered that you wanna talk about? Just thought I’d open it up for you.

Ashlea:
Well, I guess the biggest one I finished that got a lot of attention was about the upcoming 2015 tax filing season, which you wanna think about fourth quarter, but the IRS commissioners are warning that it’s going to be the worst season ever and congress is now back in lame duck session and they have 50+ tax extenders that expired, tax clause that expired at the end of last year they still haven’t they decided what they’re doing with. So, there’s a lot of tax news by year end that people should pay attention to, because what happens on those bills is going to affect your tax that you’re paying when you write your check in April or when you’re getting a refund, you’ll get less of refund.

Jason:
Ashlea, so, when you say it’s going to be a really difficult season, what do you mean by that? Law changes, audit risk, what?

Ashlea:
So, law changes, because of these tax extenders, whether some of them..and it’s everything from taking the reduction for sales taxes to teaches to buying $250 worth of supplies to $4,000 college tax breaks, commuter tax benefits, it’s a big list. So, chances are one of the things on that list will affect you and if they don’t, if congress doesn’t get around to figuring out what they’re going to do with those laws by early December, then the IRS commissioner that’ll delay the whole processing of returns, they might have to delay the start of the tax season and that might potentially delay refunds.

Jason:
Wow, what a mess. You know, I remember I was talking to Steven Forbes and then he gave a speech to our group and he just, you know, as a proponent of flat tax, he is so right. You know, he just said, let’s just drive a stake to the school system and start fresh, because this is so overly complex. I mean, I can’t believe it, Ashlea, you know, I am scared to death to sign my tax returns every year, there’s no possible way I can understand the hundreds and hundreds of pages that I’m putting my name on every year. I mean, I don’t even think one highly qualified CPA can understand all of that.

Ashlea:
Well, there are always people say three people get three different answers if they file your taxes for you, which is unfortunately is right and if you call the IRS hotline, you might get two different answers if you call two times and then good luck calling because they’re predicting 34 wait times for the 53% of the people that actually hang on till they get a live person there. So, I wished I had better news on that front, but that’s kind of the way it is. You do the right thing and try and understand the tax laws and get the right kind of advise and one of the reasons they also said about the delay is they’re putting..they’re going to have on the website, on the IRS website a list of tax prepares and obviously if you go to a CPA or an enrolled HN, they’re high standards they have to hold too, but there’s never been a problem with unregulated tax prepares, so we always have to warn people of that. They are going to put up, the IRS is going to start putting up on their website a database of qualified tax preparers.

Jason:
Very, very interesting. We will see how it’ll turns out. Ashlea, give out whatever website you’d like, is it just Forbes.com or something specific?

Ashlea:
Oh, so Forbes.com. The where not to die you can type in if you’re interested to learn more about estate state taxing and my name is Ashlea. So, that’s an easy why to find my articles too and I’d love you to follow me on Forbes or Twitter.

Jason:
What is your Twitter?

Ashlea:
Just Ashlea Ebeling.

Jason:
Okay, Fantastic. Well, thank you so much for joining us, Ashlea. Very informative.

Ashlea:
Thank you, me too. Take care.

Bond Rates Plunge – But Where’s the Crisis?

AMA1-16-15Ever since the financial collapse and recession of a few years ago, financial experts have been watching the sky or signs of falling. They’ve scrutinized the behavior o US assets at home and on the world stage for sings of another collapse and recession. Currently topping the list of assets to worry about: the plunging yield rates of US Treasury bonds and other assets in world trading.

According to a recent article from Business Insider, the rate of G3 government bond yields in the global marketplace has averaged lower than 1%. That’s a historic plunge, not seen even in the 1930s, when the Great Depression paralyzed the US.

The G3 is a currency group consisting of the US dollar, the euro and the yen. Its one of a number of designations describing currencies with similar characteristics, such as clout in global trading or political significance. It’s a variation on the more familiar G7, a group of 7 countries associated in terms of their outlook and behavior in international money markets.

The drop in 10-year yield rates affects all three of those currencies, not just the US dollar. As reported by Business Insider, in early 2015, the US yield of 1.959% was trumped by the yen’s drop to 0.288. In the Eurozone, the German yield hit 0.443.

Those kinds of rates are raising concerns about another widespread financial crisis. In the past, plunging rates have signaled a lack of confidence in the markets – the “panic phase” before the crash, as in the run-up to the Great Depression, when currency rates and values fell and so did devastated bankers.

But, say global financial experts, that’s not the case right now. The US economy is by many indicators on the road back from its downturn of 2008. The housing collapse that came about from years of reckless lending to unqualified borrowers led to the discovery of widespread bank malfeasance and forced a cleanup of lending standards.

The Federal Reserve stepped in to prop up the struggling economy with a string of stimulus plans, collectively called Quantitative Easing, which pushed lending interest rates historically low. The last version the Fed’s plan, known as QE3, is now winding down – and that’s fueling worries that the US economy might retreat again, hamstrung by rising rates ad a decline in borrowing.

Similar scenarios are plaguing other countries with major stakes in the global financial market, too. In the Eurozone, Greece continues to struggle with its own major debt default. And turmoil continues in countries on the fringes of that zone, including Russia and Ukraine, that are facing their own difficulties with devalued currencies and the specter of deflation o inflation.

Still those very scenarios are keeping the dollar robust. It’s the currency of choice for worried savers in countries like Russia and Argentina, and it continues to trade solidly against the euro and other leading monies.

If that’s true, then what’s behind the plunge in asset prices – and what do the mean for the future? Should investors worry that another panic is just around the corner?

Not necessarily, say advisers for the G10, a group made up of the G7 (the US, Germany, Japan, France, the UK<, Canada and Italy), plus Belgium, Netherlands and Sweden.

While those 10-year averaged yields are in fact at historically low levels and apparently inclined to hover there for the foreseeable future, those low rates in themselves don’t constitutive a run up to a serious global economic downturn.

The global economy can be fragile, vulnerable to sudden shifts and crises with both local and worldwide reach. But it’s also stubbornly though, riding out natural disasters, economic collapse ad political turmoil to remain on a largely even keel.

In the G3, for example, the Eurozone’s struggles are countered by the relatively strong performance of the dollar, which is in some ways driven by the money worries of Russia and others.

Though today’s low bond yield rates are unprecedented, they’re only one indicator of the world’s financial health. And, say market watchers, they may be a symptom of a panic that’s unlikely to materialize – a vote of no confidence that things will make a dramatize improvement.

The drop in bond yield rates offers a glimpse into the complex workings of the global money markets – but for worried investors, the sky may not be falling just yet. (Top image:Flickr/rutio)
Source:

Ro, Bam, “It’s Like We’re In the Panbic Phase of a Financial Crisis.” Busines Insider. businessinsider.com 6 Jan 2015

Read more from The American Monetary Association:

Interest Rates: Trends for 2015?

The Bitcoin Bounces Back

The American Monetary Association Team

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