Thursday, December 29, 2011

Living On Borrowed Money And Borrowed Time

How is the federal budget deficit being financed?  Who is willing to loan money to the U.S Treasury when we are $15 trillion in debt?  I thought that this chart from the Global Macro Monitor was interesting. It shows how this answer has changed with changing circumstances over the last 4 years.  It also provide perspective on how massive these borrowings have been.

In the first half of this year, the Federal Reserve through its QE2 program (by printing money), was almost the only buyer of federal debt.  As things deteriorated in Europe and the US markets in the third quarter of this year there was a massive flight to quality.  This brought in purchasers from rest of the world as well as scared U.S. investors looking for safety.

We are living on borrowed money and also borrowed time.  The Federal Reserve bailed us out of a train wreck with its QE2 program.  Just as that ended, Europe fell apart and provided another reprieve.

It is just a matter of time. It is not a question of if we are going to to go over the cliff, it is just a question of when.  Looking at the chart you can begin to imagine where interest rates would have to be right now to attract borrowers for our debt without QE2 and Europe.  This good fortune for America will not last forever.

There is a coming day of reckoning and we are doing nothing to prevent it.  There is an End Game in our future. The longer we wait to address our fiscal problems the more pain we will have to endure in the end.   At that time there will be many that will bemoan the way this game was played.

Blue= Other Domestic
Yellow=Federal Reserve
Red=Rest of theWorld
Purple Line=Fed Govt Borrowing

Wednesday, December 28, 2011

The Pathetic Political Payroll Tax Extension

I wrote earlier about the Payroll Tax Holiday extension and my problems with it in Delusional and Dysfunctional in D.C.

It never should have been enacted to begin with because it substantially undermines the Social Security program.  You have to be delusional to take $120 billion of revenue away from a program that is already heading toward substantial financial problems.

I also pointed out the practical flaws in the Senate's 2-month extension in Business As Usual in D.C., Unusual For Everyone Else.  The bottom line was that the Senate passed a bill that was totally unworkable and impractical in the real world.

Speaker Boehner and the House Republicans initially resisted joining in this disaster of a bill but ultimately caved to unrelenting political pressure and passed the Senate bill.  At least, that is the story that has been told.  More on that later.

Boehner made two errors in my opinion.  First, he should have never allowed the Senate to adjourn and go home.  This placed on all of the pressure on the House.  The House was left in the position of either passing the Senate bill or being held solely responsible for the payroll tax extension expiring. You might ask how this could have been prevented?

Article 1, Section 5 of the U.S Constitution states,
Neither House, during the Session of Congress, shall without the Consent of the other, adjourn for more than three days, nor to any other Place than that in which the two Houses shall be sitting.
In other words, the House could have blocked the Senate adjournment and forced them to stay in Washington so that both Houses would have to be accountable.

I am sure that this provision of the Constitution is largely ignored but it should not have been in this case.  The House should have objected to the adjournment of the Senate.  This is a mistake they should never make again.

Second, the House should have been specific that it was an either/or decision on the payroll tax extension.  They should have made clear to the Senate that it was either going to be a 2 month or 12 month extension, period.  The Senate would have to decide.  By voting for 2 months they were effectively closing the door on the full year extension by their choice.  There are simply too many other issues that need to be addressed in Washington than to keep revisiting the same issue over and over.  This should have been stated to the Senate when the bill was sent over from the House.  Setting expectations are everything in Washington.

This is all water over the dam at this point so it matters very little.

However, what I now find most interesting about the Payroll Tax Holiday Extension is that it appears to me to have been passed in a manner that raises questions about its constitutionality.  This is very troubling because it appears that the Republicans were complicit in this circumvention of our rule of law along with Democrats.  They chose political expediency over the rule of law.

The original House version of the Payroll Tax extension bill (12 months) was rejected by the Senate.  The Senate passed a 2 month version and sent it to the House, adjourned, and basically told the House to take it or leave it.  It is from this point that House lost the PR battle and caved on December 23.  The Senate bill was passed by unanimous consent in the House thereby supposedly allowing the bill to be fast-tracked to the President for signature into law.  This would be possible because the House agreed totally with the Senate version without any changes or amendments.  Therefore, it did not have to go to Conference Committee or the Senate for another vote.  If this is what happened I would have no problem with the process.

The reality is that the House bill that was passed was not identical to the Senate bill.  The practical flaws that I wrote about in the Senate bill were addressed in the House bill through a fairly substantial change in how the FICA wage base will be applied to high wage earners.  This Wall Street Journal article discusses this change.

My question is how could this law proceed to President Obama's desk for signature when the Senate never voted on this bill?

This is a discussion of the Constitutional Topic: How a Bill Becomes a Law from the web site.

Once a bill leaves the House and the Senate, it must be checked. If anything in the two versions of the bill differ, in any way (even in something as minor as punctuation), the bill must be reconciled. (emphasis added) The house in which the bill originated is given a copy of the bill with its differences. For example, if the House originated a bill, then sent it along to the Senate for consideration, and the Senate made changes, the bill is sent back to the House. If the changes are minor, they might be accepted by the originating house with no debate. If changes are of a more substantial nature, however, a conference is called for.
This seems to make it clear that when the House made the change in the bill it must be returned to the Senate for a vote with no debate (if considered a minor change) or a full conference should have been called immediately.  Neither was done.

How was this constitutional?  How could both the Republicans and Democrats in Congress have subverted the Constitution in this way?  Are political considerations now controlling everything that is done in Washington?

Perhaps there is some arcane rule I am not aware of in all of this.  However, I am having trouble finding  it. Can someone set me straight if I am off base?

UPDATE as of 12/29:

After further research I have determined that the Senate did pass the House Bill by unanimous consent shortly after the House did.  However, this was done even though the Senate was in adjournment.  I am still trying to figure out how the Senate can pass something while it is in adjournment! There could not have been one or two Senators present to approve the motion of unanimous consent. One was clearly Senator Harry Reid as shown in the Congressional Record for December 23, 2011 as follows:

 H.R. 3765. An act to extend the payroll tax holiday, unemployment compensation, Medicare physician payment, provide for the consideration of the Keystone XL pipeline, and for other purposes. 
 Under the authority of the order of the Senate of January 5, 2011, the enrolled bills were signed on today, December 23, 2011, during the adjournment of the Senate, by the Acting president pro tempore (Mr. REID).
Therefore, our legislators might have followed proper form in this process but this clearly is a travesty of the first order.  It is both discouraging and sad that this is the way the public's business is taken care of.

Tuesday, December 27, 2011

The Best of BeeLine-Vol 1

BeeLine is approaching its first anniversary.  In 185 blog posts during the year I have learned a lot and I hope I have given you a shorter route to what you truly need to know.  I never thought I would have enough material for 185 posts when I started BeeLine.  However, our governmental budget issues has provided more than enough material this year.  Of course, along the way I have also written about tiger moms, lightning bugs, long term bonds, jump ropes, jobs and much, much more.

If you are new to BeeLine or were just too busy, I have compiled the top 5 Best of Beeline posts for 2011 based on reader views.  These were the posts that more people read than any others during the year.  This most likely was the result of these posts being passed along the world wide web through Facebook or other referrals.  What better review than that?

I will follow up later this week with The Best of BeeLine-Vol 2 which will list my personal favorites of the year.

Here are the Reader's Choices for The Best of Beeline 2011.

A Tornado Tale
50 years ago a tornado destroyed the home I was in.  I survived to write BeeLine.  This is my story of that fateful day.

Confounding Compounding Chronicles
Compound interest is the most powerful force on earth.  If you do not believe it, read the best stories I know about compounding returns.  You will be a believer and you will also understand even better why our federal debt must be controlled...and very soon.  We are compounding are problems daily.

The United States of Redistribution
In 1945, less than 3% of federal spending was in payments to individuals. Today it is 66.2%.  The primary purpose of the federal government has become taking money from one person to give to another.
Is this what the Founding Fathers had in mind?

Where Do I Find a Ten-Bagger?
11 stocks increased more than 10-fold in the two years ending December 31, 2010. What did they have in common?  What lessons can be learned for your own investments?

How Progressive Do We Want To Be?
We seem to be hearing lately that the rich are not paying their fair share.  Who determines what is fair?  See how the United States compares to other countries in taxing the rich.

Thursday, December 22, 2011

Hurricanes and Hubris

It has been 2,251 days since a Category 3 or higher hurricane made landfall in the United States. reports on the 2011 hurricane season.

Amazingly, the U. S. has now gone six consecutive hurricane seasons, 2006-2011, without experiencing the landfall of a major hurricane, category 3 or stronger. The last such occurrence was Wilma in October 2005, although Ike (2008) and Irene (2011) were large systems that had major impacts despite being less than category 3 at U.S. landfall. This has been the largest number of consecutive years on record without a U. S. major hurricane landfall since at least the 1870s.

This chart shows that days between Cat 3 and higher hurricanes since 1900 which was published in Real Science.

You wonder how the National Wildlife Federation and other environmental groups can continue to argue that global warming is responsible for stronger storms and hurricanes? This is an example of the arguments that they continue to make as taken directly off of the NWF website.

The latest science connecting hurricanes and global warming suggests more is yet to come: tropical storms are likely to bring higher wind speeds, more precipitation, and bigger storm surge in the coming decades.
We must get at the root of the problem and reduce the global warming pollution that fuels stronger storms and leads to increasing sea level.

How can we prepare for future hurricanes and reduce the risk?
  • Reduce global warming pollution to minimize future hurricane risk
  • Restore and increase protection for coastal wetlands, lowlands, and barrier islands
  • Take global warming into account when choosing where to build
  • Take global warming into account when choosing how to build
  • Global warming must be factored into hurricane and coastal planning: Over this century, maximum windspeeds could increase 13 percent and rainfall could increase 31 percent.
This is an excerpt from the a speech Al Gore gave to the National Sierra Club convention in San Francisco on September 9, 2005, shortly after Katrina and a month before Wilma.  He speaks of an onrushing catastrophe with hurricanes getting stronger because of global warning.  However,  in the six years after that speech we had the fewest number of strong hurricanes in 140 years.
There are scientific warnings now of another onrushing catastrophe. We were warned of an imminent attack by Al Qaeda; we didn't respond. We were warned the levees would break in New Orleans; we didn't respond. Now, the scientific community is warning us that the average hurricane will continue to get stronger because of global warming.
Where is the accountability in the scientific community?  Science is supposed to be about establishing a hypothesis and making predictions that can be tested and verified.  If the tests produce negative results then the hypothesis must be faulty.  The global warming theorists have nothing but a theory as the objective evidence does not seem to support their hypothesis and predictions.   It is time to put the science back into climate science and take the hubris out of many of the climate change advocates and their predictions.

Tuesday, December 20, 2011

Business As Usual In D.C., Unusual For Everyone Else

The 2-month payroll tax cut extension that the Senate passed is another example of how out of touch D.C. is with the real world.

Payroll taxes are withheld from employee pay checks.  The withholding of those taxes from paychecks is typically done through sophisticated computerized payroll tax systems.  Large employers typically have purchased the software from companies like PeopleSoft or Ultimate Software to process their payrolls.  Smaller firms typically rely on outside companies like ADP or Paychex to provide the service.  Most payroll systems today are highly automated and the systems require significant programming to insure that withholding tables are correct for federal, state and local withholdings.

It is laughable that the Senate of the United States thinks that they are going to pass a 2-month extension of the payroll tax cut at this late date and it will be implemented seamlessly.  There simply is not enough time to program the payroll tax systems that do the withholding on the tens of millions of paychecks in this country.

If the extension was written as a simple 2-month extension of the current rules there would be no significant problem.  The programming is already in place to continue current law.  However, the Senate was placed in a box when they started looking at this compromise.  The regular Social Security Tax is set at 6.2% on the FICA annual wage base.   Wages above the wage base are not subject to the tax.  For 2012, the wage base is $110,100.  The 2-month payroll tax cut extension would continue the rate at 4.2% (a 2 percentage point cut) of the standard rate.

A normal extension would just continue current law and not be a real challenge for payroll tax systems.  However, continuing current law would mean that with a 2-month extension a millionaire would obtain what is effectively the full year of the payroll tax cut while an average wage earner would only receive 1/6 of the annual amount in those two months .  This is due to the fact that a millionaire would earn enough in the first two months to meet the full FICA annual wage base.  ($1,000,000/12=$83,333 X 2= $166,167.  A millionaire would hit the $110,100 wage limit early in February and have their entire $2,202  annual tax benefit in the bank.  Someone making $50,000 would get a tax break of $1,000 for the full year but with the 2-month extension they would only get $167 by the end of February.

This would have been pretty embarrassing to the Democrats in the Senate who have spent most of the last few months trying to implement an income tax surcharge on millionaires. How would they have looked if in the end they delivered a bill that not only did not include a surcharge on millionaires but gave the same group an outsized tax cut for the 2 month extension compared to middle and working class taxpayers?

To insure that this result did not occur, the Senate bill established a FICA wage base for the first two months rather than an annual FICA wage base.  The break only applies to the first $18,350 of wages through February 2012.  This may sound simple to implement to a U.S Senator or a young Congressional staffer in D.C. who has never lived a day in the real world.  However, to someone that needs to program a payroll tax system, this is a pretty big deal.  It is hard to see how this "modification" can be done easily, effectively or efficiently.

The bottom line of all this foolishness?  There will be thousands and thousands of man hours spent re-programming payroll systems and correcting the inevitable mistakes that result from the last minute shenanigans in D.C.  All of that work will not do one thing to improve anything or create any value added for anyone but the payroll tax programmers.  It will just suck more dollars out of the employers who could be using it to create products, services and jobs.  When March comes (whether of not the extension is continued or not) there will have to be an entirely new set of re-programming done again.

This letter from the National Payroll Reporting Consortium describes the practical implementation problems in the Senate's 2-month extension pretty clearly.
The difficulty is in establishing a new Social Security Taxable Wage limit of $18,350 for the two- month extension period. More than ten percent of the workforce1 is likely to meet that limit, and would be subject to the higher 6.2% tax rate for earnings over that amount. However, many payroll systems are not likely to be able to make such a substantial programming change before January or even February. The systems affected tend to be highly complex, normally requiring at least ninety days for a change of this magnitude for software testing alone; not to mention analysis, design, coding and implementation.
NPRC understands Congress’ concern that highly compensated employees not enjoy the full benefit of the 2% tax break because of bonuses or other high compensation falling into the first two months of the year. Nevertheless with the first of January now only two weeks away and payroll departments trying to meet year-end compliance mandates and reconciliation, there simply is insufficient time to implement this major change in withholding requirements. It would also necessary to await IRS regulatory guidance for further details concerning the change.
 All in all, business as usual in D.C keeps business from being anything but usual in the rest of the country.

Sunday, December 18, 2011

Delusional and Dysfunctional in D.C.

There is no better example of the delusion and dysfunction that exists in Washington, DC than the political theatre surrounding the proposed extension of the payroll tax holiday.

The payroll tax holiday was ill-conceived from the beginning.  It was added to the Bush tax cut extension late last year to allow President Obama and the Democrats to presumably show that they got something in the deal.  It came at a cost of $120 billion.  It also came at a time that the Social Security Trust Fund was running a cash flow deficit for the first time in its history.  Social Security taxes are projected to be $46 billion short of expenditures for the year after a $49 billion deficit in 2010.

2011 also marks the first year that an ever increasing wave of baby boomers are turning age 65.  Each successive year will see more boomers turn age 65 and put more pressure on Social Security.   The Congressional Budget Office projects that about 97 million people will be (hope to be?) collecting Social Security benefits in 2035.  56 million people are collecting benefits today.  That is a 73% increase in the number of recipients not to mention the cost of increasing benefit payments.

You have to be delusional to take $120 billion of revenue away from a program that is already heading towards financial stress.  However, President Obama was not content with these small potatoes.  For his proposed Jobs Bill of 2011 he wanted to double down on the payroll tax holiday for 2012 at a cost of $240 billion.  His proposal was to extend and increase the amount of the tax holiday and also to expand it  to employers for the first $5 million in wages paid.  This would have meant that almost 40% of Social Security payments in 2012 would have been unsupported by current revenues.

How was this going to be paid for?  The Democrats proposed a tax on millionaires that would take 10 years to raise the money given away in a one year payroll tax holiday extension.  This is the kind of math that is typical of the dysfunction in D.C.  Spend it one year and pay for it over 10 years.  At the same time, undermining the entire Social Security system by attempting to change it into another redistribution scheme rather than the contributory retirement system it is supposed to be.  Of course, all politicians in D.C. are claiming that their highest priority is protecting Social Security.  This is the delusion and dysfunction of D.C. at its highest.

House Republicans refused to go along and passed their own version of the payroll extension for 2012 last week without expanding it.  This lowered the cost to $120 billion-the same as last year.  It would be paid for by freezing federal employee pay through 12/31/13, increase federal employees' contribution to their retirement and increasing the amount that high income beneficiaries have to pay for their Medicare Part B and D premiums.

The Senate responded on Friday by passing the payroll tax extension for just 2 months.  In effect, they have kicked the can down the road once again.   They have taken an uncertain 2012 and made it even more uncertain.  Is it really a 2-month extension and its over?  Or do they just want to get home for Christmas and they will deal with it again in February?  Dysfunctional is the only way to describe these actions.

There is absolutely no way that the payroll tax holiday should have been enacted to begin with considering the financial condition of Social Security.  To extend it is insanity.

However, this is the way politics is played and no one wants to step up and say NO!  Democrats want to look like they can be for tax cuts.  Of course, a large part of their constituency is not paying any income taxes so what can they do?  They can only seek more refundable income tax credits or look to the payroll tax. The Republicans have fought hard to draw the line on any more redistribution tax schemes that soak the rich so they are not in a good position to argue against extending an across the board tax cut.

We are where we are because no one wants to take the political fire for "raising" the payroll tax that should not have been reduced to begin with.  This is another one where President Obama deserves the blame.  He is supposed to be a leader.  He is supposed to be the adult in the room.  By proposing an extension of the payroll tax he showed he is interested in only playing politics. We do not have a chance to move beyond the delusion and dysfunction in D.C. until he leaves office.

Wednesday, December 14, 2011

Forward Gear

I think we sometimes lose sight of the fact how much safer our living evironment is today than it was in the past.  A good example is in a story I read today in USA Today about traffic fatalities.

Traffic fatalities in the U.S. dropped in 2010 for the fifth straight year.  A big factor in the decline is the fatality rate in big states-particulary California.  For example, California traffic fatalities dropped 12% from 2009 to 2010 but that accounted for 37% of the national decrease in deaths.  This is also a good example of just how big California is in relationship to the U.S as a whole.

2,715 people died on California's highways in 2010.  That is a horrible fact.  However, this is the lowest number of deaths on California roads since 1944.  To put that in perspective, there were 1/10 the number of vehicles on the road and vehicles traveled 1/16 the number of miles per year in 1944 compared to 2010.  In other words, you are over 10 times safer on the highway today than you were then.

How has that been accomplished?  Safer cars, seat belts, child car seats, padded dashboards, air bags, better road designs, faster emergency services, advanced medical care and on and on.  Innovations, inventions and improvements made our lives safer and better.

You see the same progress in workplace safety.   98 people died building the Hoover Dam. 11 died in the construction of the Golden Gate Bridge. 5 people died building the Empire State Building.  In the 1930's it was almost an accepted rule that in large construction projects there would be one death for every $1 million of construction cost.  Today it is rare to have a death on a large construction project.  For example, I could not find any reports of fatalities in the construction of the One World Trade Center building (Freedom Tower)  where steel frame construction has reached over 92 of the planned 105 floors.

There always seems to be no end to complaints of how bad it is today compared to how it used to be.   We hear about evil corporations and heartless capitalists that just don't care.  There is talk of how this or that policy is killing people.  Drug companies. Car companies. Energy companies.Health insurance compnanie. Guess what?  It can be a lot worse and it has been vastly worse for almost all of human history.  A human life (beyond the womb)-this is not a political statement but a historical statement) carries a much higher value today in this country than ever before .  Be thankful you are blessed to be living today.  Make it your goal to do your part to make sure it is also better tomorrow for those that follow you.  The life you have today was given to you by the hard work and sacrifices of many others.  Pay it forward.

Monday, December 12, 2011

Candidate, Organization, Message and MONEY!

Any political campaign needs four things to be successful.
  1. Candidate
  2. Organization
  3. Message
  4. MONEY
The most important elements in a campaign are the candidate and money.  With enough money you can pay for the organization and get smart political consultants to craft a message.  However, it is hard to win with a bad candidate no matter how much money you have.  It is also hard for a good candidate to win with little money.

We saw how these four elements came together 4 years ago for Barack Obama.  He was a new, fresh face that was articulate and charming on the campaign trail.  He energized a lot of people and was able to build an impressive volunteer organizational base.  He developed a simple message of "Hope and Change" and brought in truckloads of money.

How do the factors apply to the Republican Presidential Primary?

Mitt Romney and Newt Gingrich have each distinguished themselves in the debates.  In fact, were it not for the unprecedented number of televised debates, Newt Gingrich would probably have been out of the race several months ago.  He has elevated himself as a candidate to the top of current polls almost solely on his abilities in those debates .  Romney has shown himself to be a top tier candidate based on his solid performance in the debates.  Contrast these candidates with Rick Perry who has struggled in the debates and hurt his candidacy despite raising a lot of money (see below).  

Herman Cain was propelled to the top of the polls based on his likeability as a candidate and his simple message of 9-9-9.   He is the only candidate that was able to craft a simple, memorable message that connected with voters.   However, he had almost no real professional organization in his campaign and would likely have struggled in many primary states due to this fact alone had he not imploded.

During the course of the debates I came to believe that Romney, Gingrich and Santorum were the best candidates.  They each showed that they have the depth and breadth of experience to be President.  Bachmann, Perry, Cain and Huntsman do not seem to me to be ready for prime time.  Ron Paul seems to me to be past prime time.  He strikes a chord on some issues but I think he comes across as the crazy uncle who lives in the attic bedroom upstairs for most voters.

However, MONEY is still the kingmaker of most campaigns.  Let's take a look at the money factor as it relates to the major Republican candidates.

These figures are for the period through September 30, 2011 per the Federal Election Committee (FEC) website for each of the major candidates.

                                   Total Receipts                                    Cash on Hand

Mitt Romney                 $32.6 million                                       $14.7 million
Rick Perry                     $17.2 million                                       $15.1 million
Ron Paul                       $12.8 million                                       $   3.7 million
Michele Bachmann       $12.1 million                                       $   1.5 million
Herman Cain                 $ 5.4 million                                        $   1.3 million
Jon Huntsman                $ 4.5 million                                       $      .3 million
Newt Gingrich               $ 2.9 million                                       $      .4 million
Rick Santorum               $ 1.3 million                                        $     .2 million

Mitt Romney has clearly shown the greatest ability to raise money for his campaign followed by Rick Perry.  He also has a large war chest that should mean he will have staying power deep into the primary process.  Most of the other candidates will need early successes to bring needed money in to fund later primaries.  This is absolutely critical for Newt.  If he does not break away from Mitt and the others by the Florida primary at the end of January he will likely be done.  His funding will not be there and his slim resources to this point have hurt his organizational efforts in many states.

Romney's money allows him the luxury of being able to stay around to wait to see if Newt makes a mistake.  He just has to make sure that he avoids a big mistake.  He also needs to develop a message that will resonate to take him above what appears to be his core support of 20% in current polls.

The primary schedule is very interesting with the January schedule featuring the Iowa Caucus on Jan 3 followed by the New Hampshire primary (Jan 10), South Carolina (Jan 21) and Florida (Jan 31).     Romney, Perry and Paul have the resources to go beyond January even if they have not won one of these four contests.  If the other candidates do not do well in these January contests it is unlikely they will have the money to continue.

Most of the February activity are state caucuses where organization can be critical.  After Florida, it is 4 weeks before the next two primaries-Arizona and Michigan- on February 28.

This leads up to the Super Tuesday on March 6 with 25% of the total delegates in play on that one day. However, at this point only 40% of all delegates will have been selected, and if the race is not decided by this point, it could be a long battle where money will become increasingly important and the candidates will have little time to raise it.

Here is the full primary schedule which is in an interesting column by Rhodes Cook for Sabato's Crystal Ball who argues that the primary schedule actually leaves the door open for a late-starting candidate to still enter and win the nomination.

 Cook explains how the primary schedule could still produce some surprises.
(The primary schedule) is less condensed at the front, much more loaded with events at the back, with the prospect of a viable, late-starting candidate quite real.
This is not to say that it will happen, but simply to note that it could. Such a scenario could not have unfolded in 2008, when the early January events were followed in short order by an early February Super Tuesday vote-fest that involved nearly half the country.
But the elongated layout of the nominating calendar this time provides the opportunity for a late-starting candidate to emerge. Should Mitt Romney stumble badly in the January events in Iowa, New Hampshire, South Carolina and Florida, another establishment Republican could enter the race in early February and still compete directly in states with at least 1,200 of the 2,282 or so GOP delegates. Many of them will be up for grabs after April 1 when statewide winner-take-all is possible.
Similarly, should non-Romney alternatives led by Newt Gingrich, Michele Bachmann and Rick Perry fall flat in the January contests, there would be time for the conservative wing of the party to find a new champion to carry its banner through the bulk of the primary season.
In some respects, the layout of the 2012 primary calendar resembles that in 1976, starting in the dead of winter with events in Iowa and New Hampshire and building to a crescendo with California in early June. That year, President Gerald Ford and former California Gov. Ronald Reagan battled delegate for delegate until Ford prevailed at the convention that summer in Kansas City. It was the most closely contested and longest-running Republican nominating contest in the last 40 years.
On the Democratic side, the “back-loaded” arrangement of the primary calendar encouraged two late entries in 1976, Gov. Jerry Brown of California and Sen. Frank Church of Idaho. Each won several spring-time primaries. But they mounted their campaigns too late to offset former Georgia Gov. Jimmy Carter’s long lead in the delegate count.
Eight years earlier, Sen. Robert Kennedy of New York was a far more successful late starter. He entered the Democratic race after the New Hampshire primary and proceeded to run off a series of high-profile primary victories, culminating with a winner-take-all triumph in California in early June. Had he not been shot the night of his California victory, Kennedy might have gone on to wrest the nomination from Vice President Hubert Humphrey. As it is, Kennedy’s unfinished campaign is one of American history’s more intriguing “what ifs.”
Who will come out on top when all is said and done?  I have no idea right now but the winner is likely to be the one who best balances all four elements that a political campaign needs.  Romney is best positioned right now across all four key elements.  Gingrich is stronger in a couple areas right now but he needs money to go the distance to get the organization he needs to last until the Spring.

Prepare for an interesting 6 weeks ahead but keep in mind that there are 6 months of primaries ahead of us before it may all sort out.

Sunday, December 11, 2011

The Green Thing

I received this nice little story about "The Green Thing" in an email the other day.  It is a nice retrospective for those who are old enough to remember and good perspective for those too young to remember the way things were before this green thing got popular.

Checking out at the store, the young cashier suggested to the older woman that she should bring her own grocery bags because plastic bags weren't good for the environment. The woman apologized and explained, "We didn't have this green thing goin' on back in my earlier days."The clerk responded, "That's our problem today. Your generation did not care enough to save our environment for future generations."

She was right -- our generation didn't have the green thing in its day. Back then, we returned milk bottles, soda bottles and beer bottles to the store. The store sent them back to the plant to be washed and sterilized and refilled, so it could use the same bottles over and over. So they really were recycled. But we didn't have the green thing back in our day.

We walked up stairs, because we didn't have an escalator in every store and office building. We walked to the grocery store and didn't climb into a 300-horsepower machine every time we had to go two blocks. But she was right. We didn't have the green thing in our day.

Back then, we washed the baby's diapers because we didn't have the throw-away kind. We dried clothes on a line, not in an energy gobbling machine burning up 220 volts -- wind and solar power really did dry our clothes back in our early days. Kids got hand-me-down clothes from their brothers or sisters, not always brand-new clothing.

Back then, we had one TV, or radio, in the house -- not a TV in every room. And the TV had a small screen the size of a handkerchief not a screen the size of the state of Montana.

In the kitchen, we blended and stirred by hand because we didn't have electric machines to do everything for us.

When we packaged a fragile item to send in the mail, we used wadded up old newspapers to cushion it, not Styrofoam or plastic bubble wrap.

Back then, we didn't fire up an engine and burn gasoline just to cut the lawn. We used a push mower that ran on human power. We exercised by working so we didn't need to go to a health club to run on treadmills that operate on electricity.

We drank from a fountain when we were thirsty instead of using a cup or a plastic bottle every time we had a drink of water. We refilled writing pens with ink instead of buying a new pen, and we replaced the razor blades in a razor instead of throwing away the whole razor just because the blade got dull. But we didn't have the green thing back then.

Back then, people took the streetcar or a bus, and kids rode their bikes to school or walked instead of turning their moms into a 24-hour taxi service.

We had one or two electrical outlets in a room, not an entire bank of sockets to power a dozen appliances. And we didn't need a computerized gadget to receive a signal beamed from satellites 2,000 miles out in space in order to find the nearest pizza joint.

But isn't it sad the current generation laments how wasteful we old folks were just because we didn't have the green thing back then?

Wednesday, December 7, 2011

Mixing Oil and Water

New oil and gas drilling techniques such as hydraulic fracking require vast quantities of water.  Each oil well drilled in arid South Texas can require 6 million gallons of water to break open rocks deep in the earth and  release oil and natural gas according to an article in The Wall Street Journal.

This sounds like the use of an enormous amount of water resources until it is compared to the amount of water it takes to irrigate a corn crop in the same area.  It takes 407 million gallons of water to irrigate 640 acres of corn to bring it from seed to maturity.

What is the economic result of the use of that water resource?  640 acres of corn would produce about $200,000 of revenues.  The same amount of water used in hydraulic fracking could be used to drill enough wells to generate $2.5 billion of oil.

You might be surprised to learn that only about 7% of the total use of water in the United States is for domestic uses such as drinking, bathing, sanitation, cooking and lawn watering. Most water usage by far is used for thermoelectric power (48%) and irrigation (31%). The remaining 14% is spread between industrial, livestock, mining and aquaculture.

What is the better use of that precious water resource?  Economics are great but you still can't eat oil.  There still must be a good case to use that water for the corn crop.  This would seem to be logical thinking until it is considered  that in the United States it takes an estimated 400 gallons of gasoline equivalents annually to feed each American.  Agricultural energy consumption breaks down this way according to one study I found.

31% for the manufacture of inorganic fertilizer

19% for the operation of field machinery

16% for transportation

13% for irrigation

08% for raising livestock (not including livestock feed)

05% for crop drying

05% for pesticide production

08% miscellaneous
I have written about it before but it bears repeating.  Energy is what makes the American economy go. Without affordable and accessible energy the economy is not going to grow.  We also need it to make our crops grow and to bring them to market. 

Water is a precious resource and we need to protect it and conserve it.  However, we also need oil and other fossil fuels to grow and maintain our way of life.  The old adage is that oil and water do not mix.  That thinking does not work when it comes to our economy and our future.  We need to mix and balance both to our best advantage if we are going to optimize our health and wealth looking forward.

Friday, December 2, 2011

Arts and Sciences, Supply and Demand

I came across a couple of interesting facts about our education system recently in an article in the Casey Daily Dispatch titled "Friends Don't Let Friends Major In The Liberal Arts" by Doug Hornig and Alex Daley.
  • 25% of students who begin high school in the United States do not finish.  Fewer students who start high school today graduate than they did 40 years ago.  79% finished in 1971 but only 75% are graduating today despite the fact that the world and the economy is far more complex and education and skills are far more important in securing a good paying job. 
  • In fact, the United States is the only developed country in the world where a higher percentage of  55 to 64 year olds has a high school degree than do 25 to 34 year olds.
  • This chart from tells the story.
Source: U.S. Department of Education, Digest of Education Statistics, 2009.

Hornig and Daley tell the story of what happens after high school.  What I found surprising is that the percentage of college graduates for American citizens aged 25-34 is no higher than the percentage for those aged 55-64 - 41% of both age groups have a degree.  30 years ago that was good enough to lead the world.  We now rank 16th!
Of those students who do make it through high school, 30% will not go on to any further education. That means 70% enroll immediately in a two- or four-year degree program, a major increase from the about 49% three decades ago. Despite rising college entry rates, we are not graduating any additional college students. That's largely because among those who immediately enroll in college post high school, some 40% are not expected to get their degrees within six years.
The result: our overall college-educated cohort has flatlined over the past 30 years. The number of American citizens aged 25-34 who have attained a college education – including either a two- or four-year degree program – is exactly the same as the percentage among 55-64-year-olds, at 41%. (The US is also the only developed nation where a higher percentage of 55- to 64-year-olds than 25- to 34-year-olds has graduated from high school.)
Thirty years ago that 41% figure led the world in college grads; now we're 16th and trending lower.
I have always believed that one of the major advantages our country had was our higher education system which is available and accessible to almost everyone.  This is much different than in many other countries where the university is only an option to the privileged or is closed to the few that can pass difficult and highly competititive national tests.  We still are the country of choice for higher education in the world.  For example, an incredible 33% of all doctoral candidates in our universities are foreign students.
While it has some problems for sure, the US remains a leader in post-secondary educational quality. One need look no further than the increasing number of foreign students pursuing advanced degrees in the US. For the 2009-10 school year, about 690,000 non-US citizens were enrolled at colleges in the US – the highest level in the world and up 26% from a decade ago.  
Not only are foreigners attending our schools in record numbers, they are far more apt to pursue high-level degrees than US students. Foreign students constitute 2.5% of bachelor's degree students, 10% of graduate students, and 33% of doctoral candidates.
When you look at what the foreign students are studying compared to our students it is also cause for concern.  Growing economies need people trained in science, technology, engineering and math- so-called STEM studies.  However, these are exactly the areas of studies that American students are avoiding in favor of a Liberal Arts education.  In fact, many colleges promote a liberal arts background arguing that it is more flexible for the 21st Century economy that will likely require increased job adaptability.

The result is only 1 in 6 American students is majoring in the STEM areas.  For foreign students, it is 1 in 3.
When fewer students attended college and even fewer jobs required technical skills, private employers, and especially government, could soak up the overflow, putting people to work provided they had a degree, any degree... for a while. English literature, sociology, psychology, communications, fine arts, gender studies, and the like were majors that led, inadvertently, to nontechnical jobs – the blue-collar work of an information economy, marketing, and business, and of course to teaching the increasing numbers of new college students.
However, more careers than ever now require technical skills. Economic growth has slowed and unemployment rates have spiked, making employers much pickier about qualifications to hire. Plus, boomers have chosen or been forced to work longer in those professorships and other jobs.
There is now a glut of liberal arts majors. A classic bubble, born of unrealistic expectations that the investment of a hundred grand (or more) must result in a cascade of job offers. Or at least one.
It's not happening. A study from Georgetown University listed the five college majors with the highest unemployment rates (crossed against popularity): clinical psychology, 19.5%; miscellaneous fine arts, 16.2%; United States history, 15.1%; library science, 15.0%; and military technologies and educational psychology are tied at 10.9%.
Unemployment rates for STEM subjects? Astrophysics/astronomy, just about 0%; geological and geophysics engineering, 0% as well; physical science, 2.5%; geosciences, 3.2%; and math/computer science, 3.5%. 

Georgetown University's Center on Education and the Workforce produced the study referenced above, "What's It Worth?: The Economic Value of College Majors" (this link is to the Selected Findings of that report), with a detailed analysis of earnings and employment outcomes for different undergraduate majors.  The study indicates that a college education does produce greater earnings potential compared to a high school education but different undergraduate majors lead to significantly different career wages.  For example, petroleum engineers with a bachelor's degree have median earnings of $120,000 per year and those with a counseling psychology degree earn only $29,000.

There are 179,000 students majoring in Philosophy, 125,000 in Anthropology or Archealogy and 80,000 in Art History according to the Georgetown report. By contrast, 154,000 are majoring in Chemical Engineering, 15,000 in Petroleum Engineering and 12,000 in Environmental Engineering.   How many philosophers or art historians do we need compared to chemical and petroleum engineers?  These disparities alone explain a lot about the income disparities upon graduation.  Supply and demand are concepts that even non-economics majors should understand.

Another major problem of higher education in the United States is the growing disparity between female and male college enrollment.  There are now 3 women in college for every 2 men.  In the early 1970's these percentages were reversed.   This chart was last updated in 2005 but it shows the change in the proportion of 18-24 men and women in college since 1967.

Source: US Census Bureau by the Population Reference Bureau

Since women have traditionally been less likely to select STEM studies this has also exacerbated the technical skills problem in higher education. For example, the Georgetown study indicates that females only comprise 16% of engineering students. More needs to be done to encourage girls in these fields from a young age where the cultural bias seems to be even more pronounced.

What does this all mean?  More education does not guarantee more income.  There are high school drop-outs that are millionaires.  However, you increase your odds of increased income with more education.  The 25% who do not finish high school face many challenges in earning an income in the 21st century.  However, those who go to college need to think carefully about their choice of majors.

College is an investment.  Students and their parents should be thinking about the return on that investment more than ever as college costs soar and more rely on student loans to pay for their education.

Thursday, December 1, 2011

It Is Not A Pipe Dream

Energy makes our economy go.  We need it for anything we want to do.  It needs to be available and it needs to be affordable.  Energy is the engine for jobs and job growth.  Without it you are going nowhere in creating jobs.  President Obama has chosen to throw billions of dollars at so-called "green" energy projects like Solyndra while totally ignoring traditional energy resources that are proven and plentiful.

President Obama also recently deferred a decision of the Keystone XL pipeline project until after next year's election.  The pipeline would allow oil that is extracted from Canada's oil sands to be economically and safely transported to U.S. refineries on the Gulf Coast.  This was a shovel ready project that the U.S. Chamber of Commerce estimated would create 20,000 jobs.  President Obama punted because of pressure from environmental groups which argue that adding this pipeline is a potential environmental risk.

However, there are already 600,000 miles of oil and gas pipelines crisscrossing the United States according to The Casey Daily Dispatch. The Keystone pipeline is 1,700 miles by comparison.

Here is a map of just the major natural gas pipelines in the U.S.

Marin Katusa of The Casey Daily Dispatch explains why pipelines like Keystone XL are necessary.

When it comes to moving oil and gas across land, pipelines are far and away the best choice. They are the safest transportation mechanism for the people who work in the industry and for the environment, and they are the most efficient, meaning they burn less energy to move all that fuel than the other options. And really, there are not many other options. In a few places oil is moved by rail, but rail is slower and less energy efficient, and trucks are too small. Pipelines are it, and have been since that first pipeline moved gas from Pennsylvania to New York City to light street lamps. Every hour the world consumes a million tonnes of oil and a quarter of a trillion cubic meters of gas - and almost all of it moves, at one point or another, through a pipeline.

Despite all the obstruction from Obama the United States is rapidly moving toward energy independence with almost no help from Washington.  The transformation is remarkable but most Americans don't even know it is happening.  After all, the success of the efforts of the oil and gas industry is not something most in the mainstream media want to be running stories about.  A few facts to consider.
  • The Wall Street Journal reported this week that the United States is on track to be a net exporter of petroleum products in 2011 for the first time in 62 years.  This is a function of booming demand from emerging markets, improved efficiencies at U.S refining facilities and reduced domestic usage.
  • The U.S exported 753.4 million barrels of everything from gasoline to jet fuel in the first 9 months of the year while it imported 689.4 million barrels.  As recently as 2005, the U.S imported nearly 900 million barrels more of petroleum products than it exported.  Most of the exports are refined products but it still shows a dramatic change from just a few years ago.
  • In August 2011, U.S. drivers burned 7.7% less gasoline than in the same month four years ago.  This shows the effects of the economy (if you are not working you don't have to drive to get there) as well as improving gas mileage.
  • North Dakota's oil production of 424,000 barrels per day in July was up 86% compared to 2 years ago due to drilling in the Bakken field.
  • The unemployment rate in North Dakota is 3.5%-the lowest in the U.S.
  • When the OPEC was at its peak in the 1990's, the U.S imported about 2/3 of its oil.  We  now  import less than half of our needs and 40% of that is coming from Canada and Mexico.
  • Harold Hamm, the founder of Continental Resources which has made the biggest investment in the Bakken field, believes that there's 24 billion barrels of oil in the Bakken field.  If that is accurate it would be one of the largest oil field ever discovered in the world.
  • Huge natural gas fields have also been discovered in Pennsylania (Marcellus Shale) and Ohio (Utica Shale).  Drilling activity is skyrocketing with Marcellus and Utica activity is beginning to ramp up.

Therefore, despite the best efforts of the Obama administration to tax it and regulate it out of existence while throwing billions of dollars at "green" energy, it is the oil and gas industry that is succeeding.  This is no pipe dream.  It is time for President Obama to start helping, and stop hindering, what is going on in this proven energy sector.

Wednesday, November 30, 2011

Dreams And Nightmares At Q-School

There is no sport where there is more individual accountability than in professional golf.  It is you and the course.  There is no one to blame.  There is no one to save your bacon if you perform badly on a play.  It is all on you.

It is also a true meritocracy.  There are no long term contacts or signing bonuses.  There is no injured reserve or continuing contract payments if you get hurt and can't play.  You play (and you must play well) or you don't get paid.  It can be cruel and unforgiving on those 18 holes when it is just you, your swing and your mind.

Today marks the beginning of what is usually the cruelest of all weeks in professional golf.  The PGA Tour Qualifying School Tournament is played over the next 6 days with 172 golfers in the field.  108 holes must be played and only the top 25 will earn the right to tee it up in next year's PGA Tour events.  Bear in mind that success this week only gives someone the opportunity to compete for prize money next year.  There are no guarantees in this sport.  And many nightmares over the next year for those who miss the top 25 by a shot or two or three.

You really understand that point when you look at a few of the players that are teeing it up this week.  The playing field includes 4 players who have previously won major tournaments.  One of the four, David Duval, was once the top ranked player in the world and won the 2001 British Open.  The others include Rich Beem (2002 PGA Championship), Lee Janzen (1993, 1997 US Open) and Shaun Micheel (2003 PGA Championship).  There are no free passes based on your name or reputation.  David Duval or Lee Janzen is no different than Wes Roach or Jess Schutte when they tee it up.

We are fortunate that we still have a professional sport where there are no guaranteed contracts, collective bargaining disputes and million dollar crybabies.  A sport where Keegan Bradley was not eligible for the tour a year ago and he now reigns as the 2011 PGA Champion with $3.8 million in the bank from winnings during the last year.   If there is a sport that still embodies the values of the American Dream it is  professional golf.

I have seen surveys in the past that show that PGA Tour professionals are overwhelmingly Republicans.  Upwards of 90% typically support the Republican presidential nominee.  This should not be surprising.  There is no redistribution of income or guaranteed income on the PGA Tour.  The rules are strict and are honored.  Many penalties are self imposed.  There are no bail outs if you put yourself in the rough or the trees.  It is your responsibility to find a way to get back on the course.  There is little room for excuses at the end of the day or the end of the year.  It is on you.

At the same time, there is very little animosity for those at the top of the heap.  In fact, Arnold Palmer, Jack Nicklaus and Tiger Woods always got their homage from the rest of the players.  Why?  Because the other players understood that their superior play pushed everyone else to elevate their game.  In addition, their success also trickled down throughout the Tour with more interest, bigger purses, more sponsors and more tv revenue.  Everyone benefited from those on top.

There are a lot of lessons to be learned by thinking about the PGA Tour's Q-School this week.  Good luck to all those who toil on the golf course in search of that dream.

Monday, November 28, 2011

Retirement? What's That?

Little noticed in the bleak economic and unemployment statistics is the fact that the American work force is getting grayer and grayer.

Americans are working longer and longer due to a number of factors.  Too many people took too much on in debt.  Too many people no longer have pension plans.  Too many people have seen their 401(k) plans and IRA accounts fall short of what they thought they would be worth.  Too many people did not save enough to begin with.  There are fewer strenuous blue collar jobs that are tough on the body of someone over the age 55 and more jobs in the economy that are easier for older workers to be ongoing contributors.  There are greater numbers of older workers who have the health and abilities to continue to work much longer than prior generations

Edward Glaeser, a Professor of Economics at Harvard, outlines how the labor landscape has changed in an opinion piece in The New York Times.

Between 2007 and 2010, the number of working Americans over 65 years old jumped 16 percent; the number of under-65’s in the labor force shrank. The trend started before the current downturn: the number of Americans over 65 in the labor force increased from 10.8 percent in 1985 to 12.1 percent in 1995 to 15.1 percent in 2005 to 17.4 percent in 2010. Until 2001, most workers age 65 and older had part-time jobs; since 2001, full-time work has been far more common.
Consider the difference between today’s extended work life and the average American work life during the mid-20th century in the midst of what was, in retrospect, a retirement boom. Again, the numbers present a vivid picture: from the ’40s to the ’80s, the percentage of men who were 65 and older in the labor force fell precipitously — from 47 percent in 1949 to 15.6 percent in 1993. By the 1980s, retirement at age 65 was nearly universal for American workers. Today, however, 36.5 percent of 65- to 69-year-old men are still part of America’s labor force. (The number of working women in this demographic is slightly lower.)

For those age 55 or older, there are actually more people working today than at any time in the last 50 years-about 40%.  This is almost a third higher than it was 15 years ago.  This is great news for our economy if these experienced people want to continue working.  However, many seniors have had to return to work in the last few years because of lost retirement assets, unrealistically low interest rates for savers and increasing health care costs that Obamacare has only made worse.

Just consider the impact of today's interest rates and what they have done to seniors.  A retiree with a $250,000 nest egg has traditionally been able to plan on earning a 4-5% safe return on that money in a certificate of deposit, money market or short term treasury bond.  That would provide close to $1,000/month of income for the retiree.   According to, the average 1-year CD rate nationally is just .35% and money market rates are below .25% today.   A 3-year Treasury bond has a current coupon yield of .375%.  Therefore, what previously was $1,000 per month in income for a retiree with $250,000 in savings now produces less than $1,000 of income annually on the same nest egg!  This is a loss of over 90% in potential income.

It is somewhat surprising to me that this coordinated central bank and federal policy that purposely has taken money from one class of asset holders (savers) to give it to another (Wall Street and the big banks) to bail them out of bad decisions and bad loans has not gotten more attention.   This is the issue that Occupy Wall Street should be focused on.  Those savers are our parents and grandparents and other responsible souls who played by the rules their whole life.  They saved their whole life to build a nest egg for a respectable retirement.  Their reward today-a return on their money of less than 10% of what has traditionally been considered a fair return on their savings.   Their reality tomorrow-the real possibility that they could lose even more if inflation begins to erode the purchasing power of their retirement nest egg due to these same government policies.

Looking at these facts it is not hard to see why we are seeing fewer retirees.  This also probably explains why we also don't see more gray hairs at Occupy Wall Street.  Most of them are working and can't get the day off.

Saturday, November 26, 2011

Why They Call It Football

Why do they call it football?  Because putting the foot on the ball is an important part of the game.  Kick-offs, punts, extra points and field goals often make the difference between winning and losing a game.

However, long distance field goals have taken on increased importance this year.  Sports Illustrated recently reported that NFL kickers are on pace to make 34 more 50+ yard field goals this year than the previous record.  In fact, placekickers are on track to make more field goals from beyond midfield than were even attempted a decade ago.

Jan Stenerud is the only placekicker specialist in the Pro Football Hall of Fame.  His career conversion rate from beyond 50 yards was only 26.6%.  In 19 pro seasons he had only one season in which he kicked more than two fields goals in excess of 50 yards.

Oakland's Sebastian Janikowski and Jacksonville's Josh Scobee each have three 50+ yarders in one game this year.   Scobee is 5 for 5 and Janikowski is 5 for 6 for the year.  David Akers of San Francisco and Phil Dawson of Cleveland are both 6 for 6 from over 50 yards this year.  (NFL stats as of 11/26/11)

Why the long distance success?  Kickers are just a lot more accurate and have bigger legs than ever.   Among kickers who have attempted at least 20 field goals so far this year, only Graham Gano of Washington, has not been successful at least 75% of the time.   He is converting 66.7% of the time but even he is 3 for 5 from 50+ yards.  Rookie Dan Bailey of Dallas is 27 for 28 for the year (96.4%) and Matt Bryant of Atlanta and Mike Nugent of Cincinnati are both 18 of 19 for the year.

In fact, of the top 25 all-time field goal percentage leaders, 21 are active players this year.  Only 4 kickers not playing today have good enough conversion rates to be in the top 25 all-time.  Those four-Mike Vanderjagt (2nd all-time at 86.466%), Matt Stover (9th-83.659%), John Carney (14th-82.414%) and Jeff Wilkins (18th-81.867%).  Jan Stenerud, the lone Hall of Fame kicker, ranks 106th all-time at 66.846%.  Lou ("The Toe") Groza ranks 151st at 54.886%.  The all-time leader is Nate Kaeding of San Diego (currently out for the year with a knee injury) at 86.5%.

Of course, you would never see this many 50 yard field goal attempts unless the head coaches did not have a lot of confidence in their kickers. Since 1994, a missed field goal outside the 20 yard line results in the ball being placed at the spot of the kick.  Therefore, a missed 50 yard field goal gives your opponent the ball at their 40 yard line with excellent field position.  You can see in the chart above that this rule change brought the number of 50+ yard attempts down between 1991 and 2001.  However, the current stable of great kickers in the league has given coaches the confidence to go for the long distance 3 pointer.  That confidence is being rewarded like never before.

Enjoy football this Thanksgiving weekend and appreciate the skill of the kickers.  There have never been better foots in football history.

Monday, November 21, 2011

Super Failure

The so-called Super Committee on Deficit Reduction failed to agree on a package of $1.2 trillion in deficit reductions over the next 10 years.  This means that automatic reductions in spending will now be triggered in discretionary programs and defense beginning in 2013.  To illustrate how minimal these reductions really are in the context of overall spending, see the chart below.  Bear in mind this is also the same level of deficit reduction the Super Committee couldn't reach consensus on.  The bottom line is that federal spending was projected to increase by $1.7 trillion between 2013 and 2021.  It will now increase by only $1.6 trillion.

I spoke with a member of the Super Committee last August shortly before the group began their work and I shared my views on how I thought the Republicans on the Committee should approach the deliberations.  Now that the work of the Committee has concluded without success, I will share the recommendations I made. 

I  believe that a major opportunity was lost with the failed efforts of the Super Committee.  It was not unexpected but I believe that the Republicans could do a much better job of framing the issues for the average voter (rather than appearing to merely be protecting the rich) and in forcing the Democrats' hand to putting some significant spending reductions on the table.

Failure to achieve a grand bargain now has also put the entire Bush tax cuts at risk as they expire at the end of this year.  There would now seem to be very little chance that anything will be done in this regard until after the election in a lame duck session (much like what occurred in 2010).  This will also delay the opporunity for any real tax refrom until 2013 or later.

Here it is what I offered to the Super Committee and I offer again with the hope that somehow, someone, somewhere can get something done in Washington.  By the way, President Obama, where are you ?  Where is your plan?  Keith Hennessey counts up five deficit reduction opportunties that President Obama has now missed.

·         Make it known that the Republicans are interested in a budget deal that vastly exceeds the $1.5 trillion legislative requirement.  $4-$5 trillion would seem to be a reasonable goal.
·         The Republicans should also state that they will only consider revenue increases in conjunction with a “grand bargain” approaching this level of deficit reduction together with a tax reform package that would lower marginal rates and broaden the tax base.  Most importantly, the Republicans should state their desire is for a “simpler and fairer” tax system.   Most particularly, people want less complexity in their lives today and a simple tax system has great potential appeal.
·         The initial tax reform package would need to be “revenue neutral” to the current Tax Code of 2011. As part of any deal, this tax reform should be passed in 2012 to be effective January 1, 2013 coincident with the expiration of the Bush tax cuts. Taking care of this now mitigates against the risk of the Bush tax cuts expiring on schedule at the end of 2012.
·         Spending cuts must be at least 5 times any potential revenue increase in any “grand bargain”.  Lower ratios of spending cuts to revenue increases generally have not been successful in other countries in correcting fiscal imbalances. This research should be mentioned over and over to define what a “balanced approach” is.  Otherwise, the Democrats will define “balanced” to be equal parts of spending cuts and tax increases.
·         Republicans should also stop referencing dollar amounts when it comes to budget cuts.  They should always be stated as percentages of spending over the 10 year budget cycle.  Saying you are looking to reduce projected spending by 10% over the next 10 years is much easier for voters to understand than saying you are going to cut $4 trillion.  It also appears to be very reasonable in scope (which it is). This is critical in marketing any deficit reduction to voters and to defend against potential attacks by Democrats.  People need context to understand difficult issues with big numbers.  Framing as a % of total projected spending over the 10 year budget period is the way to do this effectively.
·         Any revenue increases agreed to would have to be contingent on spending cuts coming first.  This could involve increasing the marginal rates on the new broader based tax system after it was implemented.  This could be structured as an across the board increase on all rates proportionally.  Or it could be tilted to the top rate bracket if necessary to get a deal with the Democrats. I would always explain this by stating that we agree with President Obama that “we need to eat our peas first”.  Revenue increases are the dessert you get if you do the tough stuff first.  I would further explain that this is the Republican definition of a balanced meal or menu to address our problems.
·         I know that stating that there should be any agreement to a revenue increase is an anathema to most Republican voters.  However, I continue to believe that it is not the tax increase per se that people are worried about.  They know all too well that tax increases get signed into law but the spending cuts never materialize as advertised.  Therefore, any revenue increases must be contingent based on the actual spending cuts taking place. I have not spoken to one person that would not agree to some tax increase if they were assured that it would actually help solve the problem. That is why there has to be an iron clad mechanism that insures the spending cuts are “in the bank” before revenue increases take effect.   
·         In any event, the “tax increases” in the package I am recommending may never be assessed and realized if the economy rebounds and if tax reform and lower marginal rates realize their full potential.  I recommend that any revenue package should have a ceiling that limits revenues to no more than 18.5% of GDP (see below).
·         If the economy does not recover soon, the pressure to raise taxes (especially on the wealthy) will grow even stronger.  Revenues as a % of GDP at less than 16% are not enough to sustain even the most minimal governmental obligations.
·         There is no other way that I know of to build a bridge to a possible deal than with this contingent tax approach.  It may not completely satisfy the hard line Tea Party member but it will be viewed as reasonable by most Americans.  Most importantly, it will put the onus on the Democrats to take the lead on suggesting spending cuts.  It also provides breathing room for our economy to recover before any tax increases could take effect.
·         An additional requirement for any revenue increases is that they must not take federal receipts as a % of GDP over a maximum limit of 18.5%.  It should be explained to voters that this limit is actually higher than the long term historical average for revenues of 18.2% as another example of the reasonable nature of the Republican approach to deficit reduction. If revenues in any year exceed this amount, the excess must be refunded pro-rata to those who paid it or used exclusively to retire the federal debt.
In summary, I would describe this to the American people as a plan similar to what their mother would do.   A balanced meal is being offered with everything on the table.   However, we have to eat our peas first.  Tax increases are like the dessert.  You get them if you eat your peas first.  Your mother knows that if you eat your dessert first you quickly lose your appetite for the peas.  We cannot afford to keep eating the dessert first.  We need to get leaner first to have room for dessert later.

If you are a fiscal conservative, would you support this plan?