Tuesday, April 15, 2014

Blocking and Taxing

Another tax season has concluded and we can all breathe a sigh of relief until next year.

H&R Block has spent a lot of money this year on an advertising campaign with the tagline "Get Your Billion Back America" that is based on their argument that this is how much money people are leaving on the table by doing their own taxes.

Let's look at that argument a little deeper with some context and perspective--things we enjoy doing at BeeLine.

Federal individual income tax collections for this year are estimated to be $1.4 trillion. Therefore, if $1 billion is being left on the table by taxpayers that did not use H&R Block that represents just .0007 of total tax collections. That seems to be a pretty small error rate.  $1 billion sounds like a lot of money until you put it into context.  $1 billion is chump change for our government.

As it is, well over 50% of tax returns are already prepared by paid preparers at considerable expense. H&R Block already prepares 1 out of every 6 tax returns in the United States with annual revenues of $2.9 billion for doing it. That is about 25 million tax returns.

In total, the tax return preparation industry is estimated to generate $10 billion in annual revenues according to IbisWorld. As far as I can tell this number does not include tax preparation fees paid to CPA's and other higher end tax preparation professionals. It only takes account of firms like H&R Block, Jackson Hewitt and Intuit's Turbo Tax software.

A 2011 study by the Laffer Center put the total estimated cost of direct outlays for tax preparation at $31.5 billion. It also cited research that put the total time spent with complying with the individual tax law annually at over 3 billion hours. Weighting that time by each income group was calculated to cost the U.S. economy an estimated $216 billion. That might be stretching the argument a bit. However, even if you value the time at the minimum wage the Democrats are lobbying for--$10 per hour---you have more than $30 billion in lost productivity in the economy in tax compliance costs by individuals.

Of course, there is also the question of whether a paid tax preparer is going to do the return correctly anyway. USA Today had a recent story citing a GAO undercover study that found many errors in returns done by paid preparers. In fact, the GAO actually found that tax returns prepared by preparers had a higher percentage of errors--60%--than self-prepared returns--50%.

The point here is not to beat up on H&R Block or other paid tax preparers. After all, I was a CPA and put a roof over my head preparing tax returns at one point in my life. It is really to ask if all of the cost, confusion and consternation to comply with the Internal Revenue Code is really necessary?
I might not be the most objective person in the country today having suffered the ravages of the alternative minimum tax and the new Obamacare Medicare tax among other indignities on my tax return this year.

It just seems that our tax system should not be so complex that taxpayers need to pay someone else to properly file their tax returns. It also should not have to be necessary for most everyone else to need a computer program to file their taxes to have any chance of filing it correctly.

All of this complexity is not needed to raise revenue. It is only necessary for government to have the power to legislate, regulate and stipulate what its citizens should and should not do. Picking winners and losers. Redistributing income. Promoting and protecting special interests rather than promoting the public interest. You don't need a massive and complex tax system to protect, defend and serve the general welfare. You do need one to manage, control and serve special interests.

Therefore, if we are to turn America around then the critical first turn of the wheel must come in reforming the tax system.

A good starting point in discussing tax reform would be to start with the underlying principle that our tax system should be used to raise revenue. It should not be a tool for supporting and promoting Big Government policies and philosophies and picking winners (and losers).

Big government derives its power by being able to pick the winners and losers. If government can't pick and choose among special interests it loses immense power.  A flat tax favors the people over the politicians. Therefore, a flat tax should be the centerpiece of any Republican platform in 2016. Making taxes simpler has enormous political appeal and that should be the primary mantra of Republicans on this issue. Herman Cain almost single-handedly propelled his campaign forward on one simple easy to understand issue-his 9-9-9 tax platform--in 2012.  

As I wrote recently, 62% in a recent poll favor changing the tax system to a flat tax where everyone pays the same percentage of his or her income compared to only 33% opposed. Interestingly, a flat tax is favored by every income group by at least 10 points.  I think that shows how the power of the concept with voters.

Source: Reason-Rupe Public Opinion Survey, March 2014

I believe we are entering an era in which simple trumps complex, broad public interest defeats narrow special interests, and united beats divided. Now is the time to go broad, flat and simple in our tax policy as it is on the right side of the three major popular political trends I see in our future.

Sunday, April 13, 2014

Three Interesting Charts From Last Week

From time to time I write about interesting data I come across.  Here are three charts that I saw last week that I thought were worth commenting on.

The first chart is a comparison of U.S. per capita gasoline sales versus price per gallon prepared by Doug Short.  It shows a continuing decline in gasoline sales that began in earnest at the beginning of the Great Recession and shows no sign of reversing.

Source: dshort.com

Here are Short's comments on the data in the chart from an article in Business Insider.

What does this analysis suggest about the state of the economy? From an official standpoint, the Great Recession ended 54 months before the most recent gasoline sales monthly data point. But if we want a simple confirmation that the economy is in recovery, gasoline sales continues to be the wrong place to look.
In addition to improvements in fuel efficiency, the decline in gasoline consumption is attributable in large part to some powerful secular changes in US demographics and cultural in general:
  1. We have an aging population leaving the workforce, which we clearly see in the sustained contraction in the employment-population ratio.
  2. There is growing trend toward a portable workplace and the ability to work from home (I'm a typical example).
  3. Social media have provided powerful alternatives to face-to-face interaction requiring transportation (Internet apps, games, the ubiquitous cell phone for talk and texting).
  4. There has been a general trend in young adults to drive less (related to points two and three above). See this PDF report for details.
  5. The US is experiencing accelerating urban population growth, which reduces the per-capita dependence on gasoline.

The second chart is Gary Shilling's INSIGHT newsletter (via John Mauldin's "Outside The Box" and shows comparative stock and bond performances since the great rally in bonds began in 1981.

An investor in the S&P 500 would have seen $100 invested in that stock index grow to $3,897 and undoubtedly feel very good about the 12.3% annual return since that time.

However, an investor in a 25-year zero coupon bond would have seen their $100 grow to $20,975---an 18.0% annual return! That is incredible.

It also tells me that the next couple decades we are likely to find it very difficult to make a decent return with long-term treasuries.

The third chart is from Robert Folsom of Elliott Wave International that shows that for the first time in over one hundred years the top 10% of U.S. households have more than a 50% share of total income in the country.

As Folsom points out in his article, "income inequality" is very much a hot topic in the news. 

President Obama and the Democrats can be expected to play up this issue a lot this year to make it a political point and to argue the economic system is stacked against the other 90%. They will undoubtedly argue that taxes should be raised to make the system "fairer".

Folsom thinks that it is an indicator that the stock market is ripe for a devastating decline. Large stock market declines all occurred soon after this level of income concentration was reached in 1928, 2000 and 2007.

However, in viewing the chart, I found it interesting that the income levels are not driven just by the stock market and capital gains. It is a function of income excluding capital gains as well.

It is also interesting in looking at the chart that the Great Depression did very little in reducing income inequality despite the large stock market crash. Income inequality only was reduced when World War II started. And income equality then stayed pretty constant for 40 years-from 1942 to 1982.

What does that tell me?

Greater income equality did not result by pulling the rich down. It came about by everybody else being pulled up during the industrialization that occurred in World War II which then continued over the next 40 years as the United States was the manufacturing leader of the world and significant productivity increases were obtained that were then enjoyed across the U.S. economy and its workers.

The middle class started to be squeezed and the Top 10% started to take a large share of income when the manufacturing sector in the country started to come under competitive international pressures in the early 1980's and, at the same time, the technology industry started to take off.

Manufacturing spreads income in a much broader swath in an economy. You need to pay a lot of workers to build an automobile. You only need a couple of computer programmers to develop a video game that might sell millions. For example, Instagram only had 13 employees when it was sold to Facebook for $1 billion.

The information economy has meant there is increased demand for highly skilled and educated workers which has resulted in increased incomes for those in the top 10%. Those with fewer skills and less education find themselves competing in a world economy with workers from China, India and elsewhere. In effect, the supply of labor has increased with this group while many of the jobs have also gone offshore. The chart above tells the tale.

I don't know what this means for the future. However, I do know that you don't build up the poor by pulling down the strong.  

This problem can only be solved with growth---both in the economy as well as in fostering personal growth.  I wrote about how that can be accomplished in my post, "It's All About Growth.".

Wednesday, April 9, 2014

Polling Perspectives

I received a call about ten days ago to participate in a public opinion poll. They asked a few qualifying questions including whether I worked for a political party or was in the media.  They then asked a question that I had never been asked before from a polling outfit, "Do you write a blog that has any political commentary?"

Being a man of integrity I answered "Yes".  At that point, they were no longer interested in my opinions.

Several days later the Reason-Rupe Public Opinion Survey was released.  I don't know that it was the telephone survey that I was called about but I think there is a good chance it was.

I enjoy taking part in polls if I am called.  I enjoy looking at poll results even more, especially digging deep in the data to look at the cross-tabs to get a better sense of the mood of the public on certain issues.

There is usually a wealth of great insights in the data.  However, at times you just want to wonder what is going through people's minds to reach the opinions they do.  What I have concluded over the years is that human beings are complex characters.  They have many different opinions on varying topics. It is not easy to put any one person in a box. Elections are different. When voting, it is an either/or proposition. Are you for or against? Do you like that person or that person?

You may be a fiscal conservative but you also support gay marriage. You may be in a government workers union but you also strongly believe in the 2nd Amendment.  How do you vote when you are unlikely to find a candidate who is totally in sync with you?

I have learned not to question or argue with poll results.  It may may not make sense to me or be logical.  However, in politics, perception is reality.  And that reality is all that matters.

To change that reality you must change perceptions and that is not often very easy.

Let's look at a few interesting things that I came across in the Reason-Rupe telephone poll of March, 2014 of 1,003 adults.

The first question was whether the country is headed in the right direction or in the wrong direction.  In total, 60% stated that they the country is generally heading in the wrong direction compared to 30% who say we are heading in the right direction.  The remaining 10% are not sure which.

However, in looking at the cross-tab data you see very stark differences in opinions.

For example, 74% of white women think the country is heading in the wrong direction compared to only 19% who think it is heading in the right direction.  However, by 47% to 42%, nonwhite women think we are heading in the right direction and nonwhite men think we are heading the right way by 54% to 35%.  Only 22% of white men think we are heading in the right direction versus 68% who think we are heading the wrong way.

Reason-Rupe Public Opinion Survey, March, 2014

Let's put this in perspective.  The unemployment rate for Blacks is currently 12.4% (more than 2x the rate for Whites). 35% of Blacks are in poverty. 72% of African-American babies are born out of wedlock.  We are heading in the right direction?  You see what I mean?

51% of the overall respondents in the poll disapprove of the way Barack Obama is handling his job as president compared to 42% who approve.  The numbers are essentially the same for those who are employed full-time.  However, the unemployed approve of Obama 68%-27% and students 60%-33%. On the other hand, those who are retired disapprove of Obama's job performance 58%-37% and small business owners 68%-31%.

By 67% to 32% people support raising the minimum wage from $7.25 to $10.00 per hour.  However, when asked whether that will reduce the number of jobs, more than twice as many agree that it will decrease the number of jobs rather than increase jobs.  70% also think that companies that raise the minimum wage would primarily pay for it by charging higher prices or laying off workers compared to only 6% that think that companies would take it out of profits.  Why are they for this when they fully seem to understand the adverse effects?

62% of people favor changing the tax system to a flat tax where everyone pays the same percentage of his or her income compared to 33% opposed.  Interestingly, a flat tax is favored by every income group by at least 10 points.

Reason-Rupe Public Opinion Survey, March, 2014

I think this demonstrates the desire people have for more simplicity in their life. The Republicans would be wise to push this issue further.  Herman Cain proved this in the last Presidential cycle with his 9/9/9 tax proposal that almost singe-handedly put him in the front-runner spot until he imploded due to other issues.

When asked whether the amount of money they personally paid in income taxes in 2013 improved society more, less, or about the same compared to if they had instead invested that money in private business, 17% in total said more, 33% said less and 40% responded it was about the same.  Again, every income group believed the money was better spent with a private business as did every ethnic and race group.

In total, 31% identified themselves as Democrats and 23% as Republicans with 40% claiming to be Independents.  However, by contrast, 29% stated they were Conservatives compared to only 15% who claimed they were Liberal.  26% identified themselves as Moderates.  What was interesting in the cross-tabs was that more African-Americans called themselves Conservatives (20%) than Liberals (19%)!  However, 93% of Blacks voted for Barack Obama in the last election.

As regards Obamacare, 53% view it unfavorably compared to 36% who have a favorable view.  All age groups have an unfavorable view of the law.  Even more interesting, the unemployed view it almost as unfavorably as those that are employed full time.  Students are the only "employment" group who view it favorably.  Why not?  They can stay on their parents plan and have them pay until they are age 25!

In looking at the data I continue to see the theme I wrote about shortly after the 2012 Presidential election.  Obama and the Democrats' support comes primarily from younger voters, minorities and single women.  Their support is weakest among white men, voters 55+ and married women.

Obama won in 2008 and 2012 because his people turned out at the polls.  Obama and the Democrats lost big in the 2010 mid-terms because many of these same people did not vote.

A big part of this was the youth vote.  They showed up to vote for Obama in 2008 and 2012.  They did not defend the Democrats in 2010.

Look at this comparison of voter demographics by age in the 2008, 2010 and 2012 elections.

Consider the age breakdown of the electorate. Voters age 45 and over made up 53% of the total in 2008 and 54% in 2012. However, in 2010, motivated by the Obamacare issue, they made up 67% of all voters!

It is even more interesting looking at the total number of young voters (ages 18-29) compared to older voters (age 60+) for the last three elections. 30 million older voters showed up consistently at the polls in each of 2008, 2010 and 2012. However, 24 million young voters came out in 2008 to help elect Obama, only 10 million showed up in 2010, and 23 million reappeared in 2012 to save Obama.

The same turnout dynamics can be seen in looking at a comparison of the demographics of the voters in 2008, 2010 and 2012 by race.

Minority voters as a percent of the electorate declined from 26% when Obama was on the ticket to 22% when Obamacare was not on the ticket in 2010 and then increased to 28% when Obama was on the ticket again. This shows a lot of enthusiasm for Obama the symbol. Not so much for the substance behind Obama.

These percentage changes amount to millions of voters. Overall, minority voters increased by 82% between 2010 and 2012. However, these numbers were essentially unchanged from 2008 to 2012. On the other hand, white voters only increased by 27% from 2010 to 2012. There were also 9% fewer white voters in overall numbers in 2012 compared to 2008.

What happens in the 2014 mid-term elections will largely be determined by who shows up at the polls.

The Democrats need to get the young adults, minorities and single women (the Democrats like to call this group the "Rising American Electorate") energized and motivated to vote or they will have problems similar to 2010.

A recent Democratic poll shows the "enthusiasm gap" between the "Rising American Electorate" (young adults, minorities and single women) and others and its spells trouble for the Democrats as things now stand.

Less than 2/3 of RAE voters are "almost certain" they will vote in 2014. However, almost 80% of everyone else say they will be going to the polls. Those are the people that are fed up with Obama, Obamacare and countless other issues from the last five years.

You can expect to see a lot of activity by President Obama and the Democrats to try to get these groups worked up over the next few months. We will definitely hear about the minimum wage, women's rights and countless stories of how the Republicans want to cut your federal benefits, ban you from taking your birth control pills and countless other heartless, horrible results if they control Congress.

The Democrats are in trouble right now but it is a long time to November. Voters vote on emotion more than on an issue by issue analysis when they are in the voting booth. What buttons they push in November will depend on how their buttons are pushed over the next six months or how they get strung along with the same, old political rhetoric.

Credit: Roz Chast

Monday, April 7, 2014

If It Doesn't End, Is It The End Of US?

April 15 is just about upon us. It's tax time once again. As you prepare and file your tax return consider these facts.

I recently read that in the first five months of the 2014 fiscal year (October 1-February 28) the federal government brought in a record $1,104,947,000,000 in tax revenues.

What is even more interesting is that this is a record even in inflation-adjusted (real) dollars.

Check out the chart below to see federal revenues over the last 30 years in constant dollar terms for the first five months of each fiscal year.

Credit: CNSnews.com

This should come as a surprise to liberal Democrats who seem to think that all of our problems stem from the fact that we are not taxing people enough (especially those evil rich people).

The fact is that tax revenues today are almost double what they were in 1985 in constant dollar terms!

Despite all of this tax revenue, the federal government still ran a deficit of $378 billion for the first five months of the 2014 fiscal year. That means that we are borrowing (printing) about one out of every four dollars that we are spending at the federal level.

What I found even more interesting is if you also adjusted spending for inflation, the amount of federal receipts projected for the full year in 2014 would have generated a federal government surplus in every year of the republic before fiscal year 2006!

Here is a chart I prepared using historical full year numbers ( 2014 projected) for outlays from historical data of the Office of Management and Budget of The White House back to 1940 using 2014 constant dollars that shows this in graphic form.

Source: Office of Management and Budget

You get a real appreciation for how much federal government spending has increased in real terms when you realize that in today's dollars we were only spending about $1 trillion per year during the height of World War II.  Compare that to the $3.6 trillion we are spending today.

To put this in better perspective, in "real" terms we are spending 5 times what we spent when Kennedy took office, 2.3 times more than when Reagan took office and 1.5 times what we spent when Clinton was President just 15 years ago.

What is incredible is that if spending since 1989 had merely increased at the level of inflation we would now be running a federal surplus of almost $1 trillion at current levels of federal receipts.

Why do I bring up 1989?

When President George H.W. Bush took office in early 1989 he pushed hard to implement what he called a "flexible freeze".  This was Bush's response to those who decried his famous (and later infamous) line in his acceptance speech at the 1988 Republican Convention in which he exclaimed, "Read my lips, NO NEW TAXES".

This is how economist Martin Feldstein described the mechanics and rationale for a flexible freeze back in the Fall of 1988 in the Los Angeles Times.

George Bush describes his plan for shrinking the federal deficit as a flexible freeze. What exactly does that phrase mean? And does it represent a plan that can really work?
The flexible freeze is a specific plan for limiting the growth of government spending. The basic concept is that total federal spending should not grow faster than inflation until government spending and revenue are brought back into balance. Tax revenues increase in a growing economy even when there are no increases in tax rates and no new taxes. So as long as the economy continues to grow, a freeze on the inflation-adjusted level of spending would eventually eliminate the deficit.
The difficulty of using a freeze plan to deal with the deficit is political rather than economic. The Bush plan recognizes that an across-the-board freeze on all spending programs would be politically impossible. That's why the plan includes flexibility, or the option for some programs to grow more rapidly than others as long as total spending just keeps pace with inflation. The flexible freeze, then, balances faster growth of spending in some areas with slower growth in others.

Of course, Bush broke his pledge in a deal he cut with the Democrats in an attempt to get a bipartisan budget reduction package to prevent a feared government shutdown that he thought he would be blamed for. Nothing much has changed on that front, has it?

A little over a week ago I also saw this news item that I thought was also interesting.

The John F. Kennedy Presidential Library and Museum today named Former President George H. W. Bush this year’s recipient of the John F. Kennedy Profile in Courage Award "in recognition of the political courage he demonstrated as President when he agreed to a 1990 budget compromise which reversed his 1988 campaign pledge not to raise taxes and put his re-election prospects at risk."

I greatly respect President Bush but there is no way he should get a Profile in Courage Award for reneging on a campaign promise and raising taxes.  He deserves it for his determination to free Kuwait from Saddam Hussein but not for taking the easy road out on trying to balance the budget.

Let's save the Profile in Courage Award to the first person in Washington who will actually implement a flexible freeze and stick to it. It is the only realistic way to get to a balanced budget. George Bush had the formula but lacked the faith and fortitude to follow through.

The numbers above tell the story. It is not magic.  It is math.  Spending has to be constrained to increases below the level of revenue growth in order for the budget to eventually be balanced.

Over time, there has always been plenty of money coming in. Innovation, ingenuity and productivity advances in the private sector has provided that. At the same time, Government has always had a problem of living within its our means no matter the amount of money flowing in.

Look again at the chart above that shows the steady, inexorable growth in federal outlays in constant dollars.  Where does it end?  If it doesn't, is it the end of US?

Tuesday, April 1, 2014

Slivers of Sustenance

Writing this blog is hard work and it has seemed to get harder lately.

There is too much depressing news about our debt, our decline as a world power, deaths of great men (Jeremiah Denton to name one recently), the depreciation of our currency, demographic challenges and the Democrat we have in The White House.

It has been increasingly difficult to face these facts and write compelling copy that is worth your time to read what I have to say.

It also difficult when I see how few do read what I am writing.

Since I started writing BeeLine 3 years and month ago I have published 463 blog posts.  To date, BeeLine has about 45,000 views meaning that the average post is lucky to get read by fewer than 100 people.  That is still pretty amazing considering that there is no marketing done for the site.  All of those reader views have come about from word-of-mouth endorsements from you who have passed a post or a link on to someone.  My sincere thanks for all that you have done to support BeeLine.

However, when I visit other popular blog sites and I see an average of 100 comments on a post it is easy to question my sanity in writing at all.  On the other hand, when I consider that there are an estimated 152 million total blogs on the internet, my readership is probably better than most.

The bottom line is that a lot of the reward for writing this blog has to come from within.  It has to come from the self-satisfaction that I get from realizing that I was ahead of the curve on something, or put something in a perspective or context that was unique, or took a piece of data and told a bigger story about what it really means.  It may just come from connecting some dots that others may have missed.

I came across a couple items in the news today that gave me that small sense of satisfaction.  Mere slivers of sustenance for my self-esteem.

Credit: blueivy.blogpsot.com

The first came in a story about Obamacare and a recent survey by Bankrate.com that found that 41 percent of those did not have health insurance said they planned to stay uninsured because they think that health insurance is too costly.

This is what I wrote about Obamacare's fundamental flaw on getting the uninsured to buy health care insurance last year.

It is incredibly difficult to get people to pay the full cost of healthcare coverage.  In fact, study after study shows that most people will only pay up to 20% of the real cost of the coverage.  That is the price at which people believe it is a "fair value". That is why many employer plans charge employees around 20% of the full cost and employer pays the rest.  That is why Medicare Part B premium costs are set at 20% of the full cost and the taxpayers pay the rest.
Why is this?
The reality is that most people will have very little in healthcare costs in a given year. A handful of people will have enormous costs. A few will have very large costs. The majority will have almost no costs.
The bottom half of the entire population only consumed 2.9% of all personal health care spending in 2009. The top half consumed the other 97.1%.
Out of almost $1.3 trillion in personal health care spending, only $36 billion was spent on those below the 50th percentile. The rest was spent on those above the 50th percentile.
The top 1% of healthcare spenders accounted for over 20% of all spending.
The top 5% accounted for almost half of all spending.
That is why most people will gamble on healthcare insurance if left to their own devices. Especially if they have lower incomes or have very little in assets. Most people do not have much in health care costs (particularly the young) and they know it. They will simply not part with their money today for the chance that they might get sick tomorrow. That is basic human nature. Live for today and think about that other stuff tomorrow.  Especially if you know that if you walk into an emergency room it is the law of the land that you must be treated without regard to your ability to pay.
Sure, there are subsidies in Obamacare to buy coverage but for most people they are not anywhere close to paying 80% of the cost.

The Obamacare model is further flawed by setting the individual mandate penalty  tax at such a miniscule amount (the higher of 1% of pay or $95) to be laughable.  Even worse, that tax is not even collected (except for those who pay estimated taxes) until next year.

If they were really serious about incentivizing people to sign up for Obamacare, the tax should be collected in full on April 15, 2014!  The March 31 deadline would have meant something then.  We can already see it means nothing.  And I believe it is unlikely that many who did not enroll for health insurance coverage will ever pay a tax or penalty for failing to do so.

I don't like anything about the way Obamacare was developed or passed into law.  However, if you are going to pass a law, you should at least establish a framework that insures that it will work.

The second sliver of sustenance came in the story I read today about Kwasi Enin, a high school student on Long Island, who applied to and was accepted at all eight Ivy League schools for admission this Fall.

Kwasi is obviously a smart and talented young man to be accepted at all eight schools. Considering the vagaries of the admission process at these competitive schools that is akin to winning Warren Buffett's NCAA Basketball Bracket Challenge.

Wait, did I say talented?

What did I say was the surer path to success in my first post of this year? Possessing great talent or having a great work ethic?

Remember the story about Laszlo Polgar and his three daughters, Susan, Sofia and Judit?  Each became Chess Grandmasters because Polgar set them on the path and they got there through persistence, practice and hard work.

What most people call talent is really just hard work.  It is about toiling and training for long hours. Practice, practice, practice. Nothing more.
Extensive studies have shown that the difference between an expert and you is nothing more than a life-long persistence of deliberate effort and purposeful practice to improve performance.  
What caught my eye in the story about Kwasi was the fact that his father, a nurse, said that he had raised Kwasi (and his sister) to strive for excellence.

"We are very proud of him," he said. "He's an amazing kid. He's very humble. He's been trained to be a high achiever right from when he was a kid. We have been encouraging him to be an all-around student. So far, he has proved himself." (my emphasis)
I think he has.  He has also has further proved Laszlo Polgar's theory that children have extraordinary potential if we take the trouble to encourage them, set high expectations and support them in their efforts.

He has also motivated me to write a post that allows me to end on a high note for once.  Thank you, Kwasi!

Thursday, March 27, 2014

Railing On About Keystone XL

I don't believe that I can think of any public policy decision in my lifetime that should be easier to make than approval of the Keystone XL pipeline project.

And yet it has been debated, deferred, delayed and deliberated on by the Obama administration for more than five years.

Let's review a list of just a few of the advantages of building the pipeline.

1. It would create thousands of new jobs.
2. It would provide enhance energy security for the United States.
3. It would promote economic growth.
4. It would ensure a continuing supply of low cost energy to the United States.
5. It would enhance our national security through enhanced energy security
6. It would benefit us from a geopolitical perspective (Russia, Ukraine, the Middle East).
7. It would benefit us environmentally.

The environment?  How could that be? I am sure you have heard that is why President Obama has held up the pipeline.

However, the oil that would flow through that pipeline is already being shipped into the United States from the oil rich sands of Western Canada and to other regions of the country from the Bakken formation in North Dakota. It just is being transported in rail cars rather than through a pipeline.

Consider the growth in oil being transported in the United States by rail carloads over the last few years.

What is troubling about this from an environmental perspective is that only 15% of the 92,000 DOT-111 tank cars in use meet current federal safety standards according to Business Insurance magazine.

The chances of an oil spill occurring through a train derailment also are much higher than having a similar incident with a pipeline.  The Manhattan Institute analyzed years of data and found that incidents involving trains occurred about three times as often as pipeline per billion ton miles shipped per year.

The Manhattan Institute study also found that there are fewer fatalities and injuries for operators and the general public when transporting oil and other hazardous materials via pipeline as compared to rail.  Therefore, it is difficult to see the environmental concerns with the pipeline.

Lac-Magantic, Quebec Oil Train Derailment and Explosion, July, 2013
The reality is that President Obama's indecision on the Keystone XL Pipeline is really a decision for increased oil shipments by rail as well as a decision to ignore North American sources of energy to the detriment of the American economy.  The oil will flow--one way or the other.  It will move by truck or rail if it does not flow by pipleine.  It will also power the economies of  China, Japan or Europe if it is diverted away from the United States.  To believe otherwise is putting one's head firmly in the tar sands of Western Canada.

I am continually amazed at how short-sighted and narrow minded the minds of liberals are.

This seems to be another example of what I wrote about in Seen and Unseen.

Democrats and liberals favor policy solutions based on how they think the world should work in theory. Republicans and conservatives support policies based on how the world really works in practice.

Liberals don't like oil and coal because they think they are dirty and they defile the environment. However, they also like their hair dryers, iPads and electric cars and they all need energy to make them work.  Solar and wind farms can't do the job.  And they are ugly as well if they are in your backyard.

Liberals also generally confine themselves solely to visible effects when they consider issues.  They seem to consider only first-level effects and ignore everything else that might flow from that.   They live in a simple, superficial, single dimension universe. All of their focus is on what they see right in front of them. They ignore the unseen issues.

Therefore, they oppose a pipeline for environmental reasons even though the environment will be at far greater risk when oil is being transported by rail than it would be from the pipeline they oppose.  They also totally ignore all the other positive benefits to their country, the economy and their fellow citizens from that pipeline.

I could rail on but I won't.  There is enough railing going on.  When will President Obama realize it? At some point he needs to start Putin putting the best interests of the United States of America first and forget appeasing the liberal loons who oppose Keystone XL.  How long do we have to wait? Will Putin force him to finally do it?

Sunday, March 23, 2014

Public Sector Unions, Politicians and the Public Interest

If you want to see a simple graphical image of the influence of public sector unions, and their significant impact on state and local government spending (and the taxes you pay), cast your eyes (if you can bear to look) on the chart below.

I came across this data in a recent issue of Employee Benefit News which was comparing the hourly cost of various employee benefit programs.

Several observations from the data.

Total compensation for the public sector is 36% higher than in the private sector.

Health insurance costs for the public sector are 87% higher than in the private sector.

Retirement costs for the public sector are 159% higher than in the private sector.

Cash compensation for the public sector is is 23% higher than in the private sector. This runs counter to the argument that we often hear that public sector employee benefits are better than the private sector benefits to compensate for lower salaries and hourly wages.

It is simply not sustainable to have public sector employees receive this much more in wages and benefits than the private sector workers who pay the taxes who foot the bill for these government workers.

We saw an extreme case of what happens when all balance is lost in the case of the city of Detroit.  The public sector can never seem to adjust to circumstances as it needs to.  However, it becomes almost impossible in any local or state government controlled by Democrats who are beholden to public sector unions due to the political contributions they receive from those union dues.

If we are going to restore fiscal sanity in this country the huge disparity between private and public sector benefits programs is going to have to be at the top of the list.  The immense power that the public unions hold will not be easily reversed.  However, it must occur if there is any hope for many city, county and state budgets.

Democrats are in the best position to effect this reform since they control most of the political offices in the big cities and states (Illinois, California, etc) that have the biggest budget problems (that is surely just a coincidence!).

It is important to remember that there is no real legal or economic reason for the very existence of a public sector union in the first place.  In fact, liberal luminaries in the 1930's such as Franklin D.Roosevelt and Fiorello LaGuardia were opposed to public sector unionism for the simple reason that it threatened the broad needs of the citizenry.  That is why it was illegal for most government employees to unionize until well into the 1970's.  

The historical basis for unions in the private sector is based on insuring a balance of power to insure that workers receive a reasonable share of profits and work in safe and sanitary conditions. Governments don't make profits to share. They only levy taxes. In addition, has anyone ever heard of a government worker working in a sweat shop? They also work in a monopoly situation meaning that if they provide poor service, no service or strike there is no corresponding power by the consumer to go elsewhere as there is with a private sector business that is unionized.

In addition, in the private sector, unions are balanced against managers who have a natural incentive to push back on union demands. In the public sector no such tensions exists. More often than not the elected officials on the other side of the bargaining table are incentivized to give in to the unions for their own political survival,  Those politicians often know that they would not have been elected (nor will they be reelected) without that public sector union money flowing into their campaign coffers.

Why did the Democrats change their views about public sector unions? In a word, MONEY.

Beginning in the early 1960's the Democrats decided that the political advantage of having the political and fundraising power of these unions behind them outweighed any concerns about taxpayers and the broader citizenry.

Since the Democrats got us into this mess they are in the best position to get us out of it. Much like it was easier for Nixon to open up relations with China, Reagan to begin nuclear disarmament talks with the Russians or Clinton to sign welfare reform legislation.

However, if the Democrats are unwilling or unable to do initiate the change, the voters may increasingly look to the Republicans to do it.  We have already seen this in Wisconsin, Indiana and some other states.

An interesting test of this idea looks to be coming up in Illinois this Fall where wealthy, former private equity executive Bruce Rauner won the Republican nomination for Governor.

The centerpiece of Rauner's campaign was a vow to take on the "government union bosses".  Labor groups spent heavily against him during the primary and will be going after him with millions more in the Fall.  There is no state in the union where the public sector unions hold more sway than in Illinois.
It will be interesting to see how this plays out.

I don't know how the needed balance will be restored to the system.  All I know is that it will occur.  A system in which the takers end up with more than the makers will eventually fail. We can control the consequences or we can face the chaos when it crumbles. The choice is ours. 

Thursday, March 20, 2014

Assessing The SAT Changes

I know a little about standardized tests.  Over the years I have taken the PSAT, the SAT, the ACT, the LSAT, a Bar Exam (including the multi-state portion) and the CPA exam.  I can't say it was ever an enjoyable experience but I understand the necessity of standardized examinations.  Some objective method is necessary to put everyone on the same plane to determine the relative capability and preparedness of people from various locations and locales.

It is a bit like the NCAA basketball tournament or the U.S Open golf tournament.  You might think you    are hot stuff in your own world but how do you stack up on the same court or the same course with others that are outside your immediate orbit?

All of this came to mind as I saw that the College Board announced last week that it is introducing a new SAT due in the spring of 2016.  The stated reason for the change in the test's components is to more accurately track what students learn in school and to focus more tightly on a few key concepts.

David Coleman, the President of the College Board, explained it this way.

"It is time to admit that the SAT and ACT have become far too disconnected from the work of our high schools.  We aim to offer worthy challenge, not artificial obstacles".

Part of the change also clearly relates to concern by the College Board on the growing business in expensive test-prep courses that some say provides an advantage to students from more affluent backgrounds.  They argue that the SAT has outlived its usefulness and it no longer can be relied on to predict future college success (if it ever did).

I thought that was an interesting comment especially considering what I know about the history of the SAT.

The SAT gained real credence beginning in the early 1930's when James B. Conant (interesting tidbit-when I was in the 6th grade in Bloomfield Hills, Michigan, I attended James B. Conant Elementary School), the President of Harvard, initiated a new scholarship program for academically gifted boys who did not attend the Eastern boarding schools which were the traditional pipeline to the Ivy League. He wanted to reach out for overlooked talent who did not have the advantages of the well-heeled prepsters.

Conant was looking for those students in places such as Nebraska or Mississippi or Idaho who had the raw ability to compete at Harvard even though they might not have had access to a quality high school education.  He liked the SAT because he thought it measured pure intelligence rather than what was taught (or not taught) in a particular high school.  That is why the SAT originally was the acronym for "Scholastic Aptitude Test".  It later became the Scholastic Assessment Test and it now is marketed simply as the SAT with no indication whether it is testing for aptitude or assessment.

Of course, the only reason the SAT (or any other standardized test) should be given consideration is if it  can assist in separating the wheat from the chaff.  How do I determine which student is better prepared for college and beyond-the "A" student from the Choate School, Chillicothe, Ohio or South Central LA?  Can it reliably predict college success?

The SAT seems to be making the changes in its testing concepts because more and more colleges (and students and parents) question that underlying principle. In fact, the SAT has consistently lost ground compared to the ACT in the college admissions testing space where the ACT now is the more popular test.  I would like to think that all the SAT changes are about getting a better answer to my question above but I can't help but wonder if this chart ( and the money from all those potential test takers) is also a major motivating factor in the College Board's decision.

In doing my research on the SAT issue I also came across what I thought was a most  interesting factoid involving the question of college preparedness.

U.S. Department of Education statistics show that between 1972 and 2009 low-income high school graduates who immediately enrolled in college increased from 23% to 55%.  However, their overall college graduation rate (by age 24) only increased from 7% to 8%.

This tells me that there are many high school students today who are ill-prepared for college but are attending anyway.  A large part of the reason is much greater access to grants, scholarships and student loans.  Especially, student loans.  However, as I have written before, is all of this money being thrown at these kids in their best long-term interest?  See "Student Debt Disaster" and "Degrees in Debt" and "Will History Be Kind To Millennials?"

If the SAT changes will assist in improving the ability of colleges (and students) to better assess the potential of someone to be successful in college it will be a very positive change.  If it is being changed due to the competitive pressures of the ACT and the almighty dollar we should be concerned.  Along these lines I found this comment from Villanova University professor Edward Fierros on the changes to the SAT to be a little troubling where he cites the coming demographic shift in college-age students over the next few years.

"Colleges and universities are mindful of this demographic shift in college-going students, and are expanding and adapting their admissions requirements to accept students that may not have the 'required' SAT or ACT scores,” he says.

This map shows the projected change in high school graduates between 2008-9 and 2019-20.  Most states will be experiencing a decline in high school graduates thereby putting increased pressure on colleges to put people in their seats to pay tuition.

Credit:Western Interstate Commission for Higher Education

Is the new SAT test change we can believe in or is it just another example of the dumbing down of America?  I hope for the former but I fear the latter.

Monday, March 17, 2014

Millennial Madness

From time to time I speak to groups of young people about the importance of financial planning and investing for their futures.

I spend a good deal of time on the power of compound returns in these talks and I include historical background data so that they can fully understand that power.

For example, I point out that $1,000 invested in the S&P 500 in 1980 would have grown to over $84,000 by 2013.  An investment in small cap stocks would be worth around $150,000 by now.

My point to the young is that time is their greatest asset.  However, in order to take advantage of that time advantage they need to be focused on their future.  They need to believe that the future will be bright and present many new opportunities.

However, as I give my talks I am increasingly finding that many young people don't seem to believe it. They seem to think that the best times are behind them.  They don't seem to think that the future holds the same potential for innovation, invention and investment for wealth creation as we have seen in the past.

I explained to them that they could not be further offbase. History has shown that innovation accelerates over time.  The first innovation in a new area is very hard.  For example, look at how long it took for man to figure out to fly.  However, once the Wright Brothers made the essential breakthrough on powered flight, things evolved very quickly.  For example, could Orville and Wilbur have imagined jet flight within a mere 50 years and a man on the moon within 70 years of their invention?

I have absolutely no doubt that human beings that are free to imagine and innovate will continually astound and amaze us.  However, that will only happen if people have the freedom to achieve.  How much innovation is occurring in Venezuela right now?  Or in North Korea?

Thus, the only doubts that the young in this country should have about the future is the extent that government might interfere with the freedom we have traditionally enjoyed in the private sector and the share of the nation's future wealth the public sector may require to meet its future spending requirements.

It is with this perspective that I wrote the blog post, "Will History Be Kind To Millennials" a little over a year ago.  With my experiences in speaking to young people recently I thought I would let you read it again.  The reality is that the policies of the Obama administration are in direct conflict with the self-interest of the Millennial generation.  However, in two consecutive elections this generational cohort voted against their self-interest. This voting behavior is unprecedented as groups never vote against their self-interest.  It looks like Millennial Madness to me.

Since Obamacare was implemented the madness should be even more apparent to Millennials. The reality is that they have done this to themselves.  Obama would not be in office without them.  Will they ever figure it out?  The clock is ticking.  Time will not be on their side much longer.

Will History Be Kind To Millennials? (originally posted 1/31/13)

When the history of the Obama era is written, I think one of the ironies that historians will focus on will be the level of support that younger voters provided for Obama that will clearly be seen as having been against their self-interest when viewed in the fullness of time.

Voters do not typically vote against their self-interests.  That is why the unions and government workers who believe in big government and big spending typically vote for Democrats.  It is also the reason that small business owners and investors who are concerned about high taxes and government regulations vote for Republicans.  It is why young voters in the Vietnam era voted for Eugene McCarthy and George McGovern and why generations of African-Americans voted for Republicans after the Civil War.

Obama carried two-thirds of voters aged 18-29 in 2008.  He carried this demographic with about 60 percent of the vote in 2012.  When you consider the following it is hard to understand why.

We know the obvious.  Over $4 trillion in national debt has been added in the Obama years.  The President's budgets over the next four years looks to be more of the same.  When Obama leaves office it looks as if these young voters will be inheriting at least $20 trillion in federal debt that they will have to pay for from future taxes.

The overall unemployment rate for 18-29 year olds in December, 2012 was 11.5%.  This is far worse than the 7.8% national rate.  The African-American unemployment rate was 22.1%.  12.2% of young Hispanics were unemployed.  These are all worse than four years ago when President Obama took office.

One of the more troubling graphs I have seen in a long time is this beauty that I found on dshort.com.  This chart shows the growth in federal loans to students from 1995 to 3Q, 2012.  Since President Obama has taken office these loans have increased by over 4-fold in four short years.

Please note that this is not the total of all student loans.  These are only the loans that the federal government has made.  Another $600 billion of loans are owed to private financial institutions.  Of course, a big reason that the federal loans to students have grown so rapidly is that in 2010 the federal government took over the guaranteed college loan program.

What I found even more incredible is that student loans are now the largest financial asset on the federal government's balance sheet as this chart from the Federal Reserve's "Flow of Funds" balance sheet shows.

Of course, the federal government does not have much in financial assets--only about $1.4 trillion--compared to its massive $16 trillion in direct balance sheet liabilities as measured by the current debt limit ceiling.

How good are these "assets" that the federal government is holding?  Take a look at these charts via Zero Hedge that show the percentage of 90+Day Delinquent Loans and the New Delinquent Student Loans from 2003 to 3Q2012.  Delinquencies are climbing even faster than the number of loans.

This is understandable considering the unemployment rate for younger people as well as the fact that so many college graduates (with large student loans) are underemployed.  In fact, a recent study by the Center for College Affordability and Productivity, says that out of 41.7 million working college graduates, 48% of them-more than 20 million people, held jobs in 2010 that required less than a bachelor's degree.  37% of the college graduates were actually performing jobs that required no more than a high school diploma!

What kind of jobs are we talking about?

15% of taxi drivers were college graduates.  In 1970, only 1% of cab drivers were college grads.

25% of retail clerks were college graduates,  Less than 5% of clerks were in 1970.

5% of janitors have college degrees as do 18% of firemen.

You begin to see how those student loans can be difficult to repay with large numbers of young people unemployed and underemployed.

At the same time, President Obama seems to think that the answer to every economic problem we have centers solely around education.  Don't get me wrong, education is critically important.  However, education is an investment.  For that investment to produce a return it has to result in a good paying job.  An underperforming economy will quickly overwhelm a good education.  The last few years have proven that.

President Obama has always seemed to be challenged by economics.  He has spent a lot of time talking about increasing the supply of college students and providing more and more student loans.  However, he has done little in improving our economy and the supply of jobs.  The result is an over supply of college graduates when there is little demand for many of their skills.  This overbalance depresses wages for those that get jobs but it also means that college graduates ultimately take jobs from less-educated workers who then end up on the unemployment line. It is an ugly cycle of underemployment and unemployment.

I don't envy the future of our young people.  They are on the hook for $16 trillion and counting in federal debt.  They are the hook for many more trillions in public sector pension costs for state and local  workers.  They are on the hook for over $1 trillion in student loans that are not dischargeable in bankruptcy.  More than 1 in 10 of them is unemployed and 1 in 2 is underemployed.  The poor economy and low interest rates are keeping millions of Baby Boomers in the workforce and blocking their career advancement.  They almost certainly will pay much more into Social Security and Medicare than they will ever get out of it or they will end up caring for Mom and Dad somewhere down the line.

However, almost 2 out of every 3 of them has no one to blame but themselves.  They had a choice to make for their future but were more enthralled with "cool" than with "competent".

It is something I don't understand.  It is something that I don't think history will understand.  For the sake of their own future, I hope the so-called Millennial Generation will soon understand what is happening to them and demand real change.  It is their only real hope to create their own history. If not, they will just pay for ours.

Thursday, March 13, 2014

Presidential Prevarications

It seems that to be a good politician one needs to be a master of prevarication.

It is difficult to become President of the United States without some distortions, equivocations, deceptions, fabrications or outright lies along the way.

A BeeLine reader recently sent me this in an email on Famous Presidential Prevarications which I thought was pretty telling.

Famous Presidential Lies 
Written by, To The Point News

·  We were attacked (in the Gulf of Tonkin )

·  I am not a crook

GHW Bush:
·  Read my lips - No New Taxes

·  I did not have sex with that woman... Miss Lewinski

GW Bush:
·  Iraq has weapons of mass destruction

·  I will have the most transparent administration in history.
·  The stimulus will fund shovel-ready jobs.
·  I am focused like a laser on creating jobs.
·  The IRS is not targeting anyone.
·  It was a spontaneous riot about a movie.
·  If I had a son.
·  I will put an end to the type of politics that "breeds division, conflict and cynicism".
·  You didn't build that!
·  I will restore trust in Government.
·  The Cambridge cops acted stupidly.
·  The public will have 5 days to look at every bill that lands on my desk
·  It's not my red line - it is the world's red line.
·  Whistle blowers will be protected in my administration. 
·  We got back every dime we used to rescue the banks and auto companies, with interest.
·  I am not spying on American citizens.
·  Obama Care will be good for America .
·  You can keep your family doctor.
·  Premiums will be lowered by $2500.
·  If you like it, you can keep your current healthcare plan.
·  It's just like shopping at Amazon.
·  I knew nothing about "Fast and Furious" gunrunning to Mexican drug cartels.
·  I knew nothing about IRS targeting conservative groups.
·  I knew nothing about what happened in Benghazi .
·  I have never known my uncle from Kenya who is in the country illegally and that was arrested and told to leave the country over 20 years ago.
·  And, I have never lived with that uncle.  He finally admitted (12-05-2013) that he DID know his uncle and that he DID live with him.

And the biggest one of all:
·  "I, Barrack Hussein Obama, pledge to preserve, protect and defend the Constitution of the United States of America ."

I believe we have a winner!

Speaking of the last item on the list, I found it interesting that President Obama recently stated that he will veto the House bill passed today ("Enforce the Law Act") that is designed to push back against President's Obama unilateral acts intended to selectively enforce and circumvent the law.  We have seen this time and again by President Obama on issues such as immigration, marriage, and welfare rules, not to mention his signature legislative "achievement", Obamacare.  That law itself has been ignored, delayed or deferred over 20 times.

I must say that it takes an extraordinary amount of chutzpah for the President of the United States to state that he will veto a bill that merely seeks to get him to do his job.   If the law were to pass the Senate (highly unlikely with Harry Reid in charge right now but who knows comes January, 2015?) and the President actually vetoed the law we may find ourselves face to face with a real life constitutional crisis.

And all of this brought to us by a former "Professor of Constitutional Law" at the University of Chicago?  That is pretty scary indeed.

Another liberal constitutional professor of law, Jonathan Turley of George Washington University, recently related his concerns to the House Judiciary Committee and urged Congress to reign in the power grab from the Executive Branch.  It does seem that there are few liberals left who believe in the Constitution and the rule of law.

“I believe we are now at a constitutional tipping point in our system,” Turley, who teaches law at George Washington University, said. “It’s a dangerous point for our system to be in, and I believe that your response has to begin before this president leaves office. No one in our system goes it alone.”
Turley noted that while he agrees with the president on most of his policies, it still “does not alter the fact that I believe the means he is doing is wrong” and that the continued acceleration of executive power can be “a dangerous change in our system.”
Turley flatly rejected the Obama administration’s reason for using more executive powers, which the president claims is a gridlocked Congress. “It is simply untrue that we’re living in very different or unprecedented times. The framers lived in these times,” Turley said, noting that back then Congress used the Alien and Sedition Act to arrest opponents and Thomas Jefferson referred to his opponents as the “reign of witches.”
“This is not a different political time, and it shouldn’t be used as an excuse for extra-constitutional action,” Turley warned.

If you have not looked at the Constitution of the United States in awhile let me remind you of what it says.

Article I, Section 1. (the very first thing mentioned after the preamble)

All legislative Powers herein granted shall be vested in a Congress of the United States, which shall consist of a Senate and House of Representatives. 

What about the President?  His duties are outlined in Article II (that comes after I) and his dealings with Congress are more specifically referred to in Section 3 of that Article.

Article II, Section 3.

He shall from time to time give to the Congress information of the state of the union, and recommend to their consideration such measures as he shall judge necessary and expedient; he may, on extraordinary occasions, convene both Houses, or either of them, and in case of disagreement between them, with respect to the time of adjournment, he may adjourn them to such time as he shall think proper; he shall receive ambassadors and other public ministers; he shall take care that the laws be faithfully executed, and shall commission all the officers of the United States. (my emphasis)

It is pretty simple.

The President can report information to Congress. He may convene and adjourn the legislative bodies. And he can recommend measures that he judges to be necessary and expedient that should be passed into law. That's it.  He has no authority or discretion to write his own laws or ignore laws on the books.

Once a law is passed he must faithfully execute the laws. That is his duty under the Constitution.

Which brings us to ...

Article II, Section 4.

The President, Vice President and all civil officers of the United States, shall be removed from office on impeachment for, and conviction of, treason, bribery, or other high crimes and misdemeanors.

Is this where we are heading with this President? I certainly hope not. However, who knows when you look at everything else that he has said and done ( or not done) over the last five years.