The NCAA BB Tournament-Size and Age Do Not Matter

You have to love the NCAA Division 1 Basketball Championship.  It does not matter how much the BCS schools try to stack the rules and money to favor the big boys in football, playing it off on the court is a great equalizer.

Butler has made the Final Four for the second consecutive year.  It has just over 4,000 undergraduate students.  It plays in the Horizon League.  They lost 5 games this year in league play.  Wright State, Wisconsin-Milwaukee (twice), Valparaiso and Youngstown State.  In the NCAA tournament they have beaten Old Dominion, Pittsburgh, Wisconsin and Florida.

Virginia Commonwealth plays in the Colonial Athletic Association conference against teams like William & Mary, Georgia State and James Madison. They are 27-11 for the year but have beaten Southern Cal (PAC 10), Georgetown (Big East), Purdue (Big Ten), Florida State (ACC) and Kansas (Big 12) in the tournament.

Size does not matter.

Butler is coached by 34 year old Brad Stevens.  Watching Butler over the last two years in a number of close games I have been impressed with how unflappable Stevens in.  His cool, calm demeanor is reflected in his team.  3 or their 4 NCAA tournament wins were nail biters where they did not quit and they did not choke.  Who can forget last year's NCAA Championship game against Duke where the game winning shot   bounced off the rim as time expired.

Shaka Smart is 33 years old and has had the head job at VCU for two years.  He played his college basketball at Kenyon College in Gambier, Ohio.  It is better known for producing Div III swimming championships than basketball coaches.  Stevens also graduated from a Div III school- DePauw College.

It is interesting to note that you could combine the ages of Stevens and Smart (67) and you still be short of Jim Calhoun, the head guy at Connecticut, who is age 68.  Calhoun might be coaching against one of the two in the NCAA Championship game.

Age does not matter.

The success of these two mid-major programs will hopefully push the NCAA to consider its selection criteria.  VCU actually had to play themselves into the 64-game full field in the so-called "First Four" games this year as they were considered one the four lowest at-large qualifying teams.  If a First Four team can make the Final Four does that suggest that there are more deserving teams?  I think it would make sense to expand the current 68 team field to 80 teams.

I will have a tough time deciding who to root for when Butler and VCU tip off next Saturday.  I will have no such problem the following Monday when one of these two mid-major teams tip off against Connecticut or Kentucky.  It will truly as if Cinderella has shown up at the King's Ball.  I can only hope the glass slipper doesn't break against these basketball blue bloods.

 

Inflation Watch

We keep hearing that inflation is not a concern to the Federal Reserve and Administration officials.  However, I am starting to see some troubling signs.  If you are buying gasoline or groceries you probably have noticed that prices are rising.  What is happening?

• U.S. consumers prices for the month of February, 2011 were up 2.11% on a year over year basis compared with February, 2010.  This is not terribly concerning but it still is above the Fed's informal inflation target of 1.5% to 2.0%.
• However, the CPI rose 0.5% in February on a month-to-month basis.  That is 6% on an annualized basis.
• Many believe that the CPI understates inflation.  For example, around 40% of the index is based on housing costs which have been falling recently.  However, most people are not enjoying reduced costs from housing because they are locked into a mortgage payment that does not change.  Similarly, utility costs and property taxes are not going down.  To see how the CPI calculation can distort the index consider that between 1994 and 2006 the increase in housing in the index was up just 36% even though the average cost of housing doubled.
• At the end of February, corn and wheat prices were up 80% from a year ago.  Soybeans were up 40%.  Hog and cattle prices are at all time highs.  All in all, food prices had the largest one month increase since 1974.
• Cotton prices are at $2.05/lb. compared to less than .80/lb. a year ago.   The average price over the last decade has been about .60/lb.  It takes about six months for cotton to go from the mill to the retail rack.  What you are buying today was made when cotton was less than half of what it is costing the apparel maker today.  Look for higher prices later this year.

Underlying all of this incipient inflation is the near-zero short term interest rates and the massive increase in the money supply engineered by the Federal Reserve.  See my post, Robbing Savers To Pay Goldman, Chase and Citi et al? 

Where does this all lead?  No one really knows as we are in uncharted territory.  However, it appears to be an extraordinarily RISKY policy.  I might add that the risk is mostly yours.  Inflation could actually be the government's best friend.  See my post, The Money Illusion.

Consider these comments by hedge-fund manager Paul Singer in this article in last weekend's Wall Street Journal.  Singer correctly called the sub-prime mortgage meltdown in 2007.  He fears another credit meltdown triggered by current monetary policy.

Monetary policy "is extremely risky," he says, "the risk being massive inflation."

Central bankers, particularly at the Fed but also in Europe, "seem to be acting as if they have unlimited flexibility to ease monetary policy," he says. 

He specifically targets the Fed's "unprecedented" policy of sustaining near-zero interest rates and its exercise in money-printing, "Quantitative Easing 2," that has it buying medium- and longer-term securities from the Treasury. "In effect they're treating confidence in fiat money—in paper money—as inexhaustible, that it's a tool that's able to be used not just in the throes of crisis," but also as "a virtually complete substitute for sound fiscal, regulatory and taxing policy."

Fed officials, he adds, "really seem to think that inflation is something they can deal with very easily and very quickly. I don't believe they're right." He notes that, in the late 1970s, inflation was only in the high single digits yet curing it required interest rates of 20% and a collapse of the bond market.

What can yo do to protect yourself? Gold, silver, oil, the Brazilian real, emerging markets, TIPS? These are on some lists. For the near term, the safest advice I can give you is to load up on Wheaties, cotton goods and toilet paper. Little downside. Upside looks pretty good right now.  They all look like they could be heading higher in price.

How Progressive Do We Want To Be?

I came across this interesting data (via Powerline) compiled by the Tax Foundation that the United States has the most progressive tax system among all industrialized nations.  Simply stated, the highest 10% of income earners in the United States pay 45.1% of the tax burden in this country.  Their share of total income is 33.5%.  Therefore, a pure flat rate tax system would mean they should pay 33.5% of the  tax burden.  A flat tax would produce a 1.00 average dividing their share of taxes by their share of income.  In the U.S. the actual ratio of taxes paid to income earned is 1.35.  The OECD average is 1.11.

This provides a little context to the continual cries from the liberal left that the rich are not paying their fair share.  What is fair?  How is that determined?  The chart below shows how this question is viewed in other countries.

Table 4.5. Alternative measures of progressivity of taxes in selected OECD countries, mid-2000s
	B. Percentage share of richest decile
	1. Share of taxes of richest decile	2. Share of market income of richest decile	3. Ratio of shares for richest decile (Column1/2)
Australia	36.8	28.6	1.29
Austria	28.5	26.1	1.10
Belgium	25.4	27.1	0.94
Canada	35.8	29.3	1.22
Czech Republic	34.3	29.4	1.17
Denmark	26.2	25.7	1.02
Finland	32.3	26.9	1.20
France	28.0	25.5	1.10
Germany	31.2	29.2	1.07
Iceland	21.6	24.0	0.90
Ireland	39.1	30.9	1.26
Italy	42.2	35.8	1.18
Japan	28.5	28.1	1.01
Korea	27.4	23.4	1.17
Luxembourg	30.3	26.4	1.15
Netherlands	35.2	27.5	1.28
New Zealand	35.9	30.3	1.19
Norway	27.4	28.9	0.95
Poland	28.3	33.9	0.84
Slovak Republic	32.0	28.0	1.14
Sweden	26.7	26.6	1.00
Switzerland	20.9	23.5	0.89
United Kingdom	38.6	32.3	1.20
United States	45.1	33.5	1.35
OECD-24	31.6	28.4	1.11
Source: Computations based on OECD income distribution questionnaire.

It is often argued by the left that there is a higher concentration of income at the top levels in the U.S and this justifies our progressive income tax system.  This is true.  The United States has a higher proportion of income in the top decile than most other industrialized countries.  However, the concentration of income in the top decile is actually higher in Italy and Poland (Yes, that is the former Communist Poland) than in the U.S.  In Poland, the rich don't even carry their own weight in taxes. Rich Poles come in at .84 on the ratio of taxes to income.  It is much better to be wealthy in Warsaw than in Washington, Wisconsin or Waukegan.

Belgium, Iceland, Norway and Switzerland are other countries where the top decile in earners are paying less than they would in a flat rate tax system.  In those countries the bottom 90% is redistributing their income upwards to those with even more income at the top of the scale. Austria, Denmark, Germany, France, Japan and Sweden are at 1.10 or below.  Most of these countries are normally considered to be far more socialist than the U.S. However, it is the United States that is redistributing more income than any of them.  Is it any wonder we have become The United States of Redistribution? (See my earlier post) February 19, 2011.

Happy Anniversary Obamacare?

Today marks the first anniversary of the Obamacare. President Obama signed it into law on this date last year.  As Nancy Pelosi famously stated right before its passage, "We have to pass it so that you can find what is in it".  So how is it working out one year later now that we know more about what is in it?

• We were told that once people knew what was in it that public opinion would turn sharply in favor of the legislation.   Since then, the Democrats who provided all of the votes for passage have lost 63 seats in the House and 6 seats in the Senate in the 2010 mid-term elections.  Republicans regained control of the House and have their largest majority in the House since the 1940's.
• The two most recent polls on Obamacare show strong majorities against the law.  CNN has it 59% oppose and 37% in favor.  Rasmussen has it at 53% against and 42% for.  This is a average spread of over 16 percentage points against the law.  These are higher unfavorables than last year at this time.
• A group that was put together last year with much fanfare that was going to educate the public about Obamacare (the Health Information Campaign) and spend $125 million in doing so has all but disappeared. 
• Over 1,000 waivers to Obamacare have been granted by HHS so that they do not have to comply with the new law currently.  Included in this number are a number of labor unions including the Teamsters, electrical workers, plumbers, carpenters and food and commercial workers.
• Two federal judges have ruled the individual insurance mandate in the law unconstitutional.
• At last count, 27 states have started or joined in a lawsuit against Obamacare.  The action is based on their concerns about its constitutionality as well as the massive costs to the states from Medicaid expansion that the states will have to pay for.
• A big argument for Obamacare was providing access to coverage for individuals with pre-existing conditions who were unable to obtain coverage through the health insurance market.  A worthy goal. In the justification for the bill, it was projected that 375,000 individuals would sign up for coverage in the first year. As of Febuary, 2011, a grand total of 12,000 had done so.  
• The experts are befuddled by the numbers.  I am not.  The health care crisis is not driven by accessibility as much as affordability.  People want a free lunch (or close to it) from health insurance.  Even people with pre-existing conditions and chronic conditions do not spend large sums all the time.  Given a choice between paying a certain $1,000/month for a health insurance policy against the chance they may be hospitalized, most will gamble.
• A real life example of what I speak was reported in The Washington Post on a gentleman named Will Wilson of Chicago who has AIDS.

After he was diagnosed with AIDS in 2002, he discovered that his insurance at the time paid only $1,500 for medicine each year. His AIDS drugs cost $3,000 a month. Paying for the rest, he ended up in bankruptcy. Now Mr. Wilson, a tourist trolley guide, gets help from the federal AIDS Drug Assistance Program. 

But with no coverage for other kinds of care, Mr. Wilson remembers tears streaming down his face in February 2009, the night that he watched Mr. Obama vow to Congress, "Health care reform cannot wait, it must not wait, and it will not wait another year!" Mr. Wilson became an activist for health reform, circulating petitions, going to demonstrations. And the day after the president signed the bill into law, he was featured in a Chicago Sun-Times column quoted as saying, "I've had a grin on my face all day" at the prospect of the high-risk pool he could join. That was before the rates were announced in July, and Mr. Wilson discovered that the premium -- nearly $600 per month -- "was almost as much as my rent. It was like, no way! I was floored."

I understand his situation.  However, if your life is on the line you would think that a $600/month premium would be a bargain when your AIDS drugs cost $3,000/month.  Of course, it sounds like he is getting most of that for free.  No wonder the $600/month for everything else seems expensive to him.

John Goodman sums it up pretty well in his Health Policy Blog.

Alert readers will remember the White House summer of 2009 invitation to all Americans to send in their horror stories describing health insurance industry abuses. Although the complaints were many, the vast majority were about pre-existing condition limitations. Then, on the eve of the ObamaCare vote, every member of Congress who appeared on television to defend the legislation was able to cite by name an individual or family in his or her state or Congressional district with a heart wrenching story.

Gone was any interest in “universal coverage” or “insuring the uninsured” or “helping poor people get health care.” The case for change was focused almost exclusively on protecting the middle class from miserly insurance companies.

However, Goodman points out it was like giving a party to which no one comes and he asks the obvious question in light of the concerted efforts by the Administration to find more people with pre-existing conditions that want to buy coverage but have been denied.

Don’t you think it is a bit odd for the White House to send out an appeal to victims so they can identify themselves? That’s not normally how the political system works.

The more usual scenario is: victims unite and form interest groups; they lobby Congress, write letters, testify, etc; and eventually the pressure become so great that Congress legislates.

When have you ever heard of that entire process in reverse? When has Congress ever before decided it wants to do something and then conducted a nationwide search to find people who will benefit?

The bottom line on Obamacare is that those that benefit are very few and far between.  However, the cost of Obamacare is falling on everybody that already has coverage which is the vast, vast majority of Americans. Actuaries that I have talked to put the extra cost this year at 3-4% over and above normal health care cost trends.

Most people are reasonably satisfied with what they have but for the cost and issues regarding portability of coverage and continuity of coverage when there is a preexisting condition.   Issues that do not require a 2,400 page bill.

More costs will fall on those with employer coverage over the next year or so as more rules take effect.  In my opinion, this issue will not go away until after the 2012 elections.  In part, that election will be a vote on whether Obamacare has more anniversaries or ends up as an historical footnote.  In our system, the people's will always prevails.  Sometimes it takes longer than others to be revealed.  Time will tell.

Does Government Have The Ability To Manage Disability?

An article in today's Wall Street Journal provides a glimpse at the some of the difficult policy issues that face us in dealing with our massive federal deficit.  The focus of the article is on the impending insolvency of the Social Security Disability Insurance program that was first enacted in 1956.  This program is funded with a portion of a worker's (and the employer's) FICA taxes. The current rate is 6.2% on both the employee and employer with .9% (1.8% in total) funding the Disability Insurance program fund.

In 2010, the disability insurance trust fund received $109.3 billion but disability payments totaled $121.5 billion.  Considering the "pay as you go" nature of social security this is a serious issue and payments are being made from the "fund reserves".  However, even these reserves will run dry up in four to seven years if nothing is done.

How did we get here?  The number of beneficiaries has risen from 6.6 million in 2000 to 10.2 million in 2010.

How do you qualify for social security disability payments?  It is supposed to be very difficult.  Much harder than a typical private long term disability insurance program.

To be eligible for disability benefits, the Social Security law says that the applicant must be “unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or is expected to last for a continuous period of at least 12 months.” Furthermore, the impairment or combination of impairments must be of such severity that the applicant is not only unable to do his or her previous work but cannot, considering his or her age, education, and work experience, engage in any other kind of substantial gainful work which exists in the national economy (Social Security Act, section 223(d)).

Where do you find the most disabled workers?  9 of the top 10 U.S. zip codes for disabled workers receiving benefits can be found in Puerto Rico.  In several of those zip codes about 15% of all residents are receiving SSDI payments.  It is little coincidence that the unemployment rate in Puerto Rico was 15.7% in December, 2010.  It should be of little surprise that as people find it harder to find a job they are more willing to file for disability benefits.  However, where is the oversight and control?

Make no mistake that we need disability programs to provide for those that truly cannot work.  However, if we allow these programs to be abused then we risk hurting those that really need the support.  Are we to believe that an additional 3.4 million Americans became disabled such that they could not "engage in any other kind of substantial gainful work" over the last ten years?

A big part of the problem is the manner in which Social Security disability is administered according to the WSJ article.

Unlike Medicare or the Social Security retirement fund, which provide benefits mostly based on age, SSDI decisions are based in large part on medical opinions, which can vary from doctor to doctor, state to state.

Because someone else pays the bills, local officials have little incentive to keep the numbers low. The feds have tried to enforce consistency, but the process relies heavily on the judgment of doctors and administrative law judges who hear appeals.

Benefits can be modest: In 2009, they averaged $1,064 a month. But the program opens up access for recipients to other government programs, multiplying the ultimate cost to taxpayers.

Anyone who spends two years on SSDI qualifies for the Medicare health program, which usually is available only for those 65 years old and older. SSDI recipients tend to remain tethered to the program for years, and the government's lifetime financial commitment averages $300,000 per person, estimates David Autor, an SSDI expert who teaches at the Massachusetts Institute of Technology. "The system has profound problems," Mr. Autor said.

If you think there is any control over the program consider a couple of these findings from a 2010 Government Accountability Office investigation of federal employees and commercial drivers who were receiving disability payments by the Social Security Administration.  This from JUSTFACTS.  Check the section under Disability Payments for the full story and citations to the GAO Report.

• Roughly 7,000 federal employees received disability payments while also receiving wages from federal jobs. (They are working for the federal government and are also getting full disability? Nice gig!)
• 62,000 individuals received or renewed commercial driver's licenses after the SSA determined they were eligible for full disability benefits. (If you cannot be gainfully employed why would you need a commercial driver's license which is only necessary if you are driving someone for hire?)
• Out of all these suspicious cases, the GAO looked into only 20 in detail.  All 20 were found to be improperly receiving disability payments.  (Is that a surprise?  Why didn't they look at all 69,000? There is probably more money here than in many IRS audits.)
• One of the 20 was actually working for the Social Security Administration as a legal secretary!
• Another of the 20 had received $108,000 in improper disability payments and was working as a TSA screener.  That individual was also living in a house listed for sale for $1.8 million. ( I am not making this up.)
• What is the penalty when someone gets caught?  SSA has the authority to charge interest and penalties on top of the need for repayment of the ill-gotten gains.  This was not done in any of the 20 cases investigated.  In one case they worked out a repayment plan (interest-free of course) of $20 monthly installments.  This will only take 130 years to repay.

Our country has serious financial challenges.  There are many people in need. For our system to survive we have to make sure there is the utmost integrity in everything that government does.  Like so many of our social programs, the Social Security Disability Insurance Program is well-intentioned and well-meaning. However, it is not well managed.  It has to change.  Our whole approach to government programs has to change.  If it does not, many will lose all hope.  And that is something we really cannot afford to lose.

Three Things I Learned Last Week

• Americans' equity in their homes was cut in half from 2006 to 2010.  Owners' equity was $6.3 trillion at the end of 2010 and was $12.6 trillion in the first quarter of 2006.  That was a loss in value of over $6 trillion.  Homeowners' share of equity was 59.7% in 2005 but dropped to 38.5% at the end of last year.  To put that in perspective, the total US stock market is valued at about $13.5 trillion so the loss in value in homes is equal to about half of the value of all US stocks.
• Source: Wall Street Journal and gurufocus.com
• 36% of workers expect to retire after age 65.  In 1991, only 11% of workers expected to retire after age 65.  It was also11% in 1996 but increased to 20% in 2001 and 25% in 2006.
• Source: 2011 Retirement Confidence Survey, Employee Benefit Research Institute
• The unemployment rate is approximately 9.0% nationally.  However, there are big differences based on education, ethnicity and age.  Compare best and worst unemployment rates to the average of 9.0%
• College grad 4.3% vs. no high school diploma 13.9%
• Asian 6.8% vs. African American 15.3%
• Age 55+ 6.4% vs. Age 25-34 9.4%
• Female 8.5% vs. Male 9.3%

Full Moon Rising

A full moon will be in the sky tonight and it will be the fullest full moon we have seen since 1993.

At 3pm EDT the moon will be at its closest point to earth in 2011 and the closest it has been to earth since March,1993.  That distance will be 221,565 miles.

This supermoon will be 14 percent larger and 30 brighter than when the moon is further from earth.

Should we expect lunacy?  Notice the root word here-luna. In Roman mythology, the goddess of the moon.  Check out this Scientific American article which says it is much to do about nothing.  However, I am still wondering.

UPDATE:  Check out these pictures of the "Super Moon" from London's Daily Mail.

Policies, Politics and Power in 2012

A new Rasmussen poll shows that 62% of voters favor repeal of the health care reform law.  51% strongly favor repeal.  Only 33% of voters oppose repeal.  If this was an election it would be called a landslide.  To put that in perspective, there has been only one President in our history (since popular vote totals were first tabulated in 1824) that received more than 61% of the vote.  Lyndon Johnson in 1964 with 61.05%   Recall that Barack Obama only had 52.9% of the popular vote in 2008.  Ronald Reagan only got 58.8% in 1984.

Underlying the opposition seems to be concerns about three main issues-61% believe the law will cause health care costs to go up, 54% think the law will be bad for the country and 59% believe the plan will increase the federal deficit.

My view is that the 2012 election will be, among other things, a referendum on the health care reform law.  President Obama and the Democrats will defend the law.  Republicans will continue to oppose the law. Most major elements of the law do not become effective until 2014.  Therefore, the voters will most likely decide the  fate of the law regardless of how the Supreme Court might ultimately rule on its constitutionality.  That being said, a Supreme Court decision before the 2012 election will have major influence.  Even a limited ruling against the law by the Court could spell the complete demise of support for the law with the voters.  If the Court upholds the law that also could provide legitimacy to Obamacare that could provide more support for the law.

The other big factor that will affect the "referendum" will be the Republican Presidential Primary season.  While the House Republicans have been able to successfully pursue an agenda focused only on repeal, the Republicans will eventually need to develop an alternative vision of reform that addresses the concerns above.  This burden will most particularly fall on the Republican Presidential candidates where voters are looking for vision, ideas and problem solving skills.  They don't want to hear so much of what you are against but what you are going to do.  Voters are not against reform.  They know something needs to be done to heal health care.  They just don't like the prescription the Democrats have written.

Election do have consequences.  This is most particularly true when the policy options are clearly laid out and the voters understand the choices.  In 1980, Ronald Reagan articulated a vision that was vastly different than Jimmy Carter.  When he won, despite large Democratic majorities in Congress, he was able to move his agenda on tax cuts and a stronger national defense.

Barack Obama did not run on such a defined platform.  In fact, he won the Democratic primary by arguing against implementing an individual health insurance mandate and what he sold was a much more benign health care reform proposal than Hillary Clinton was known to favor.   Voters seem to view it as a classic bait and switch.

Politics is about power.  True power in our system only comes from the people's support.  If you have it, you can do anything.  If you don't have it, you can't do anything for very long.  However, you can't accrue the power unless you put your policy proposals out there in clear and uncertain terms and let the voters decide.  You can't speak in code.  Scott Walker in Wisconsin laid out a pretty clear agenda but if he had been even more specific about the need to rein in the public sector unions he would have a much stronger hand right now.

The 2012 election provides the opportunity for Republicans to develop the policies to accrue that power if they want to end Obamacare.  If they do this and win, Obamacare will never survive until 2014.  The same goes for all of the other big issues facing the country.  I would like to think it can be done differently but we are unlikely to get the entitlement and federal spending reform we need until we get a President and a majority of Congress that runs and is elected to clean up the mess.

Japanese Earthquake Aftershocks

The death and damage from the earthquake in Japan is horrific.  My guess is that we will see the extent of the damage to be even greater than early estimates suggest.  The magnitude of the earthquake has already been upgraded from 8.9 to 9.0.  To put this in perspective, this earthquake was 8,000 times stronger than the quake that recently devastated New Zealand.  It is a testament to the engineering skills and construction practices of the Japanese that the damage was not much, much greater.

Early estimates are that there have been about $10 billion in insured losses.  This seems very low to me but only about 10% of Japanese homes are covered by earthquake insurance.  The 1995 Kobe earthquake resulted in $100 billion in losses but only $3 billion were insured. By contrast, the 1994 Northridge, California earthquake (6.8 on the Richter scale) cost $23 billion in insurance losses in today's dollars.  I don't know what the final financial tab is going to be but it is going to be huge.

Where does the money come to rebuild?  As bad as our economic and financial picture is in the U.S., Japan  is in even worse shape.  Japan has a debt a load that is in excess of 200% of GDP.  This is far in excess of any other country.  It's population is aging faster than any other country in the world.  By 2015, one in four Japanese will be 65 or older.  This is double the U.S. percentage.  The Japanese stock market stands at about the same level it was in 1983.  It is down over 75% from its 1990 high.  Japan's benchmark interest rate has been 0% since late last year.  Yes, zero!  They have been fighting deflationary sources for much of the last 20 years with low interest rates and huge deficit spending to little effect.

They now have to pay all the debt they have accumulated and also pay for rebuilding in the aftermath of the earthquake.  The good news is that the Japanese have not relied on foreigners to finance their profligate spending.  Only 12% of their debt is held abroad. Compare that to other countries in this chart from zerohedge.com..

The Japanese also hold about $900 billion of our government debt in their reserves.  This could be a source of funds for rebuilding. However, if they sell our bonds to raise cash that will put pressure on the dollar and   our bonds.  There is only so much capital in the world and a very large need is out there.   Aftershocks will continue for some time in Japan until the fault lines stabilize.  However, the financial aftershocks could reverberate closer to home.  Yet another reason that we need to get our federal and state government deficits under control.  There is only so much money to go around.

Where Americans Are Moving

I came across this super-cool map tool today on Forbes.com.  10 million Americans moved from one place to another in 2008.  This map visually shows these moves.  You can click on any county to see move inward and outward migration.  Black lines show inward moves.  Red lines show people moving away.  You get a good sense of what is happening to the migration of population in the country and the most common migration patterns.

A couple observations from looking at a few maps:

• Is there anyone left in Detroit?  The only people moving in appear to be from the Tidewater area of Virginia.
• Los Angeles has seen a mass exodus to Northern California, Oregon, Washington, Utah and Texas.  Atlanta and North Carolina are also getting Angelinos.
• Miami is still attracting a lot of people from the New York metro area.  However, a lot of Miamians have headed to Atlanta, Texas and the DC area.
• Washington, DC is getting a lot of inflows from the Northeast and Midwest.  Not a lot from the rest of the country.
• My home in Cincinnati is seeing moves to all parts of Florida, DC, NY and points West.  People moving to Cincinnati are most prominently from Northeast Ohio.  I guess Cincinnati bests Cleveland yet again!

Check it out.

Michael Moore Is Not 'MMMMM Good

I don't know if I am aware of anyone that seems to be more misguided, misinformed, mistaken or misleading that Michael Moore.  I am not sure what he is missing but he is missing something.

He is at again in appearances in Wisconsin where he is supposedly speaking out on behalf of the union workers and other working Americans.

His latest missive is "America Is Not Broke".  According to Moore, everything would be fine if we just went out and appropriated all of the wealth of the 400 richest Americans that he has determined are obscenely rich.  People like Bill Gates of Microsoft, Warren Buffett and Larry Ellison of Oracle.  Larry Page and Sergey Brin of Google, Michael Dell of Dell Computer and Phil Knight of Nike.  He argues that most of the Forbes 400 stole this money from us and are hoarding the bulk of wealth that runs our economy.

What is he talking about?  Bill Gates didn't steal anything from me.  He gave me some fantastic tools like Word, Excel and PowerPoint that I use every day.  The same for Page and Brin.  I use Google and it has made my life richer and easier than it ever was before.  Phil Knight?  He sold sneakers out of the trunk of his car when he was just starting out.  He glued waffled soles to athletic shoes in his garage.  That kind  of effort used to be called hard work.  Michael Moore calls it theft.

Beyond Moore's misguided logic is his misinformed view of the depths of America's financial situation.  He thinks that all we have to do to solve our problem is get that money from the rich.  Let's put that argument in perspective.  The Forbes 400 has total wealth equal to $1.3 trillion.  The federal budget deficit this year is projected to be $1.6 trillion.  Therefore, we could take everything this group of Americans has accumulated over their entire lifetimes and it would not even cover all of the debt that we are creating this year.  We would still need to find another $300 billion to balance the budget in 2011.  We also would still  have $14 trillion in total accumulated federal debt still outstanding.   Where does that money come from after we wipe out all of the country's billionaires?  More importantly, where does the next billionaire come from if their hard work is deemed to be a national resource rather than their own?   We know how this ends.  Visit Cuba or North Korea to see how those economies are doing.  Of course, Moore is still insisting that Cuba has a better health care system than we do.  

My favorite Michael Moore story is in the book, Do As I Say (Not As I Do) by Peter Schweitzer.  Schweitzer found in his research for the book that Moore conducts his own business affairs much differently than he wants everyone else to conduct theirs.

Moore loves unions and paying union wages if it's on someone else's dime.  But when it affects his own bottom line, you'd better hope he doesn't outsource you.

During the production of TV Nation for NBC, Moore called two of the show's writers into his office.  They were not members of the Writer's Guild and were not receiving health care benefits or a portion of the profits from video sales of reruns.  They were planning on joining the union, but said that Moore tried to dissuade them.  Eric Zicklin, an associate producer of the show, recalls, "Michael said, 'I'm getting a lot of heat from the union to call you guys writers and pay you under the union rules.  I don't have the budget for that.  But if they keep coming down on me that'll mean I'll only be able to afford one of you and the other one's gotta go.  

"He wanted to let us know that this would hurt us if it continued", says Zicklin.  " We were scared out of our minds.  It was like a theme from Roger & Me." 

That sounds a lot like Scott Walker's predicament in Wisconsin.   The big difference is that Scott Walker has not taken the actions he has for his own enrichment.  He is merely trying to close a gaping budget deficit in Wisconsin and try to protect hard working taxpayers in the process.  Moore was protecting his own pocketbook.  His own wealth that he is not willing to share although he wants others to do it.

Misguided? Misinformed? Mistaken? Misleading? Miserable?  You be the judge.  Whatever it is, it is not good.

Atlas Shrugged

Mark April 15th on your calendars.  This is not a tax return filing reminder.  The actual federal tax deadline this year is April 18th.  Another 3 days to procrastinate!  Click here for an explanation that involves a D.C local holiday, Emancipation Day, that is celebrated this year on April 15.

The real reason I want you to look forward to April 15 is this is the day that the movie "Atlas Shrugged" will premiere.  The film is based on Ayn Rand's 1957 novel about the collapse of society as the most productive citizens go on strike, led by the mysterious John Galt, rather than continue to be exploited by a controlling government.

I have never read "Atlas Shrugged" although it has long been on my reading list.  1,368 page books are a little intimidating to me.  The Cliff's Notes version is even beyond my attention span. That is why I am looking forward to this film even though it is actually Part I of a planned trilogy.   Ayn Rand grew up in Russia and saw the flaws of communism, socialism, statism and the welfare state firsthand in the aftermath of the Russian Revolution of 1917.

In this time when so much is being made of collective bargaining "rights" for public sector employees, it is worth pausing to think about what would happen to this society if the most productive, entrepreneurial and creative minds "stopped the motor of the world".  This point was driven home to me more than once by my father.  He used to tell me that nothing occurs until something is produced.   It might be an idea or a product but something has to be created and produced for the economic engine to run.  The service sector would not exist without this initial effort.  Most particularly, the public sector could not exist without the producers in the economy.  These producers make the society work.

It is much too easy to forget this lesson.  Or to simply ignore it.   You need to really stop and think about it.  I don't do it enough myself.  Walk into a factory or a business that has been built from the ground up by an entrepreneur.  Take a look around.  The people that are working.  The equipment that is in use.  The cars of the employees in the parking lot.  Then think about the spouse and children of the workers.  What is in their homes?  How come all of this is possible?  Who made it possible?  Who had the idea?  Who put their money at risk to make it happen?  I work at a company that was built by an entrepreneur.  When I look around me at company functions or walk through the parking lot and think about it in these terms it is awe-inspiring.

 I want to see Atlas Shrugged so I don't forget what it would be like if Atlas did shrug.  You should put it on your calendar.  Do it right before you file your tax return.  I can't think of better timing.

Stats And More Stats

I have always enjoying looking at data and stats.  Looking at the stats and trying to understand what it means.  When I was a kid, it was eagerly going through the baseball stats.  In those days they only published all the stats once a week in the Sunday paper or in the weekly issue of The Sporting News.  As I got older my interests expanded.  I used to read the World Almanac every year and also discovered the Statistical Abstract of the United States along the way.

I came across the 2011 edition of The Statistical Abstract the other day and several interesting tidbits.

• 2.1% of households earn over $250,000.  However, 3.4% of Asians exceed this level of income, 2.3% of Whites, .8% of Hispanics and .5% of Blacks.  In total, 2.5 million households earn over $250,000 in the U.S.
• 24 million households earn more than $100,000.  This is about 20% of all households.  However, 30% of Asian households are doing better than this.  Only 10% of Blacks bring in this much.
• The top 5% of households ($180,000 or more of income) earned 21.5% of aggregate income.  This is down from the 22.1% the top 5% earned in 2000.  This seems to counter the argument that the "rich"benefited from the Bush years.
• 29.5% of Americans 25 years and over have graduated from college.  29.9% of Whites, 52.3% Asians, 13.2% Hispanics and 19.3% Blacks.  In 1970, only 4.4% of Blacks were college graduates and only 31% were high school graduates compared to 84% today.  This is major progress. 
• In 1960, we spent $27 billion on all health care expenditures in the country.  50% of this amount was paid out of pocket by consumers.  In 2010, we spent $2.6 trillion and only 11% was out of pocket.
• $114 billion was spent on gambling in 2008.  This is almost 5 times what was spent in 1990 (in real terms).  To put this in perspective, we s only spent $7 billion on museums and libraries, $10 billion at motion picture theaters, $21 billion on spectator sports and $16 billion on all other live entertainment.
• We spent 3 times as much on recreation in 2008 as we did in 1990 (in real terms).  
• 17% of the population moved to a new residence at some point in 1981.  Only 12% moved in 2009.  26% of 25-29 year group moved in 2009 but only 4% of those 85 years and older.  The West is the most mobile (15%) and the Northeast is the least mobile (8%).

Employed Or Unemployed?

There was good news with the announced unemployment rate of 8.9% yesterday.  This is the lowest rate since April, 2009.  As recently as last November the rate was 9.8%.

However, a closer look at the underlying numbers suggests that we should temper any excitement over the numbers for the time being.  The most important number is the number that are employed, not the number that are unemployed.

The unemployment rate just considers those individuals who are actually seeking work. It excludes students, housewives, retirees and those that have just become discouraged and are no longer trying. For example, a 55 year old who is laid off is counted as long as her unemployment benefits are paid but is considered retired when the benefits stop.  Even though she may still be interested in continuing to work she would be considered retired by the statisticians in calculating the unemployment rate.

Many argue that a better measure of the employment situation is to look at the labor participation rate.  This shows the % of individuals who are working compared to the total working-age population.  Looking at this measure the February numbers actually show that fewer people are working as a % of the total population than at any time in the last 25 years-64.2%.  The average for the last 25 years has been 66.1%.  If this was used as the baseline for those looking for work (a reasonable assumption based on the last 25 years) the unemployment rate would be 11.6%.

For men in their most productive work years between 25 and 54, the labor participation is only 88.2%-the lowest it has been since this data was first collected.

 

A closer look at the numbers also provides some interesting insights.  For example, the percentage of those 55 and older who are working is at the highest level in almost 50 years.  40% of those age 55 or over are working.  This is almost ten percentage points higher than it was 15 years ago. Those working in the 20-24 age group has also dropped by about 10 percentage points in the last 25 years.  At the same time, the percentage of those 16-19 working is at record lows.  Only a third of this age group is employed.  In the late 1970's, almost 60% of this demographic was working.

If you break down the age 55+ demographic further you see that the labor participation rate has increased in all age brackets up to and including 75 and over in the last 25 years.  This is probably due to a number of factors-baby boomers at the lower end of this age demographic whose skills are needed in the workforce, lack of retirement savings and better overall health (and poor health options due to the high costs of pre-age 65 retiree health coverage).

  

What does this mean?  Keep an eye on the labor participation rate rather than the unemployment rate to get a better idea whether the economy is improving.  It is really about the percent that are employed than the percent that are unemployed that matters most.  

IPad Blog

My first blog post using an iPad. It is truly amazing what Apple has done with this device. Look at my post of January 19, 2011 (The Mall,Main Street and Wall Street) for a little history about Apple and its stock. I would link you but I have not figured out how to do that.

Today's big news was the announcement of the iPad2 and the appearance of Steve Jobs in doing the honors. Jobs has been reportedly ill so it was good to see him on stage.

Just when competitors are bringing other tablets to market, Apple is taking this product category to another level. I would not like to compete with Apple. However,I do like Blackberry's tablet's name--Playbook.

Apple sold almost 15 million iPads in the first year which brought in $10 billion in revenues. Just think what they could do if the economy was better!

BeeLine at Two Months

BeeLine is two months old.  

A few stats...

• 27 posts for the month (37 in the first month.  I told you that I could not keep up that pace)
• 769 page views (an average of 27 per day which is down from last month's average of 35-ouch!)
• The two posts with the most views during the month were "Social Security-What Would FDR Say?" and "The United States of Redistribution"
• Page views from 10 different countries (UK had 24 views which was the largest behind the U.S.  Picked up views this month from Finland and New Zealand)
• Still no evidence that BeeLine has been noted or quoted in the blogosphere to this point. ( Destined for oblivion?)?

The biggest viewer days have come when some of you have linked posts to your Facebook friends.  Feel free to do so if you find something worth sharing.  I am exploring establishing a BeeLine Facebook page but have not put it together yet.

Some interesting Facebook trivia compliments of Online Schools.

• 72% of those with internet access in the United States have a Facebook profile
• Among 18-34 year olds, 48% check Facebook right when they wake up.  28% check Facebook before they get out of bed.
• 750 million photos were unloaded to Facebook on New Year's weekend alone.
• Every 20 minutes, 10 million comments are made.
• 48% of young Americans said they find out about news through Facebook.
• 70% of the Facebook user base resides outside the U.S.

If you want to see an interesting graphic of Facebook's reach check this out.  It was created by an intern at Facebook by the name of Paul Butler which I found at www.fastcodesign.com.  This is a map that shows the friend connections between people on Facebook.  The more connections between two places, the more lines and the lighter the color on the map.  Fewer connections, fewer lines, darker color.

A little over seven years ago none of this existed.  Truly incredible!

The Definitive Guide To The American Public Debt Crisis

I came across this analysis on the financial condition of the US. government prepared by Mary Meeker of Kleiner Perkins.  Kleiner Perkins is a venture capital firm in Silicon Valley.  Meeker has prepared the most comprehensive and understandable report I have seen on the subject.  She has written it with the perspective of looking at the financial statements as if the federal government was a business.  She refers to it as USA Inc. and looks at it in the same way as a turnaround expert might look at it.  The full analysis is 460 PowerPoint slides.  She leaves no stone unturned.  I have not seen any better summary of all the relevant issues and policy options in one place.

If you think this was prepared by some right-wing Tea Party activist, think again.  Meeker cites Al Gore, Peter Orszag (Obama's former OMB chief) and Laura Tyson (Clinton's former Chair of the Council of Economic Advisors).  If you want to understand the very serious situation we are in this is the source document for you.

If you don't want to wade through 460 slides, you can view this 15 slide summary prepared by Henry Blodget for Business Insider.  Here are a couple of the more important slides from that summary.

The sizes of the circles represent the relative sizes of revenues and expenses.  Note that in 2010 we spent $1.3 trillion in excess of what we took in.  In 2011, this number is projected to be in excess of $1.5 trillion.  You will also see that entitlement spending is approximately $2 trillion of the $3.5 trillion is spending.

How did we get here?  This chart shows it pretty clearly.  Entitlement spending has increased 10.6X in real terms over the past 45 years but real GDP has increased 2.7X.

This is a very telling slide if you are concerned about the costs of the health care reform bill.  In 1965, when Medicare was passed, it was estimated the program would cost $12 billion in 1990.  The actual cost was $110 billion, 10x higher than estimates.  

The policy options that Meeker lays out are sobering.  For example, to bring Medicare into financial sustainability here are two stark choices, 

• Cut Medicare by 53% to address the shortfall of Medicare funding, or
• Increase the Medicare tax rate by 3.9% (from 2.9% to 6.8%) on both employees and employers.  That is close to an 8% tax on payroll.  

Take your choice or a combination of the two.  Either way it is not going to be pretty.  The bigger problem is that the longer we wait to deal with the issues, the harder it is going to be and the more people will suffer.  

Who Is Really Being Attacked in Wisconsin?

It bothers me to see the critics of Governor Scott Walker in Wisconsin and John Kasich in Ohio argue that efforts to rein in the power of the public sector unions is an attack on the middle class or a violation of worker rights.  This line of reasoning does not recognize the fundamental structural differences between public sector and private sector unions.  It also totally ignores the fact that middle class workers and taxpayers in the private sector have really been the ones under attack in recent years.  This is the group that has borne most of the job losses over the last few years and this is the group that is paying the taxes that are funding public sector pay and benefits.   Pay and benefits that actually exceed their own.


David Brooks in the New York Times this week explains the key differences.

In Wisconsin and elsewhere, state-union relations are structurally out of whack.

That’s because public sector unions and private sector unions are very different creatures. Private sector unions push against the interests of shareholders and management; public sector unions push against the interests of taxpayers. Private sector union members know that their employers could go out of business, so they have an incentive to mitigate their demands; public sector union members work for state monopolies and have no such interest.

Private sector unions confront managers who have an incentive to push back against their demands. Public sector unions face managers who have an incentive to give into them for the sake of their own survival. Most important, public sector unions help choose those they negotiate with. Through gigantic campaign contributions and overall clout, they have enormous influence over who gets elected to bargain with them, especially in state and local races.

As a result of these imbalanced incentive structures, states with public sector unions tend to run into fiscal crises. They tend to have workplaces where personnel decisions are made on the basis of seniority, not merit. There is little relationship between excellence and reward, which leads to resentment among taxpayers who don’t have that luxury.

If private sector workers have less job security, lower pay and lower benefits how can it be argued that middle class public sector employees are under attack?

When it comes to workers rights, public employees enjoy much greater rights than private sector employees without even considering collective bargaining rights.  Many government employees enjoy civil service protections and many teachers also enjoy tenure protection.  Contrast this with the private sector in which most are employed under the doctrine of employment-at-will.  This means that any hiring is presumed to be "at will" and the employer is free to discharge individuals for "good cause, or bad cause or no cause at all"  Likewise, the employee is equally free to quit or cease work at any time.  How can this be an attack on public sector employee rights when they enjoy much greater rights and protections than their private sector counterparts?

I thought that this chart that was published last April in The Washington Examiner was also interesting.  It shows that public sector unions and state debt go hand in hand. As Brooks says above,"states with public sector unions tend to run into fiscal crises".  While there are many reasons for states to take on debt, there is definitely a correlation between the states that have the highest percentage of state and local employees in unions and the per capita debt load in the state.  Bear in mind that this chart was published almost a year ago when this issue was not close to being front page news so there was no axe to grind.

All the talk of attacks and rights makes for nice drama.  However, it has no reasonable basis in fact. The public sector union argument is about one thing-political power.   The unions like the required dues and the Democrats like the money that comes from the dues.  Of the top 8 donors to political campaigns in 2010, 4 were connected with public sector unions or teachers.  They spent approximately $25 million on political campaigns.  3 of the 4 (Service Employees International Union, American Federation of Teachers and American Federation of State/County/Municipal Employees) did not give one cent to Republicans. The National Education Association gave 2% of their take to Republicans. 

The workers and teachers are merely supporting actors in this play.  The public sector union bosses and Democrats are the leading actors.  Taxpayers will be nothing but bit players as long as that continues.

The Land of Pension Debt

All of the noise may be in Wisconsin but its neighbor to the South (the state that is hosting the Democratic legislators from up North) is quietly being sucked into a black hole of massive debt.  The same state that is the home of President Barack Obama...and Abraham Lincoln.  The Land of Lincoln could now be called The Land of Pension Debt.

Yesterday Illinois borrowed $3.7 billion to fund its state pension program.  Almost half of the state's $30 billion in debt outstanding has been borrowed to shore up the state's retirement fund.  However, it still is only 43% funded according to the bond-offering document.

According to a study by Josh Rauh of Northwestern University last year, the Illinois state pension plan is on a path to run out of money completely in 2018-just 7 years from now.  Illinois is currently paying benefits of about $15 billion per year out of its pension fund.  It expects $35 billion in revenues for FY2012 for the entire state budget after raising the state income tax rate late last year by 66% and corporate taxes by 48%.  If the pension assets run out as Professor Rauh projects, an additional $15 billion will be needed each year to cover the pension obligations (which are now covered by assets in the pension fund).  Where is that money going to come from?

Illinois did pass a pension reform bill last year that changes the rules for new hires beginning in 2011.  However, that will do nothing to solve the problem between now and when the money runs out unless the new hires are going to retire by 2018 ( I can only hope the Illinois service years requirements are not that short!).

The situation in my home state of Ohio is even more troubling according to Rauh's calculations.  Ohio will not run dry until 2023 but it is paying out $19 billion per year in pension benefits but it only has annual revenues of about $26 billion in its entire state budget.  Thus, the annual pension payments are almost 75% of what Ohio is bringing in each year. From this perspective, Ohio is in worse shape than Illinois if (when?) the pension assets run out.  This is the worst ratio of benefits to state revenues in the nation.

Illinois and many other states have created a state pension system that is simply unsustainable.  It is a house of cards and it is hard to see how it can be saved.  The only hope that they would seem to have to save these plans is to take immediate and drastic action on several fronts beginning with eliminating all cost of living increases (COLA) for current and future retirees (which is almost unheard of in any private sector plan), freezing all benefits at current levels for all state employees and converting to a defined contribution plan. 

These tough policy choices put you squarely up against the public employee unions.  That is why Governor Scott Walker wants the flexibility to carve benefit issues outside of the collective bargaining sphere in Wisconsin but is willing to bargain over wages.  Wages are certain.  Health care and pension costs are unpredictable.  You know what you have given in a wage increase. You have no idea what you have given in health care and pension benefits.  There are just too many variables and the employer bears all the risks on the downside.  The private sector has understood this for a long time. The public sector has not cared because they just relied on pushing the problem to current or future taxpayers.  It certainly has been a lot easier to push it on to future taxpayers in Illinois.  That is how you get a funded ratio of 43%.  Taxes are a dry hole right now and the can has been kicked as far as it can go.

There is no where to hide.  Certainly not in Illinois.  This is true whether you are a Democratic legislator from Wisconsin or Illinois!