Thursday, April 28, 2011

The Wagon Is Getting Heavy

I have written before about the arguments that are made that the "rich" are not paying their fair share of taxes in this country.  Like so many liberal arguments, what is "fair'?  Who makes that decision?  What is the objective standard to determine a "fair" share of taxes.  See my post, "How Progressive Do We Want To Be?" which shows that the highest 10% of income earners in the United States are paying a higher share of taxes than all other industrialized countries in the world.  That's right, higher than Australia, Austria, Canada, Denmark, Finland, France, Germany, Italy, Japan, Korea, Netherlands, Norway, Sweden, Switzerland and the UK.

The highest 10% of income earners in this country earns about 33% of the total income but is paying 45% of the tax burden.  In other words, they are paying about 35% above their proportionate share if all taxes were levied based on their respective share of income. The average of the the other industrialized countries is to pay about 11% over their share of income.  Based on this objective measure of fairness, the rich are paying more than their fair share.  Of course, you will not hear this objective view from President Obama and the Democrats.  Their definition of "fair" is whatever they need to keep spending as much as they can.

John Merline in Investors Business Daily this week on "Obama Peddles Myths About Taxes And The Rich" writes about the misleading rhetoric coming from President and is worth your time. As Merline points out in his closing paragraph,
Polls show that the public largely favors raising taxes on wealthier families to help close the deficit. Whether that would change if they knew just how progressive the tax code already is remains an unanswered question.
I have found over the years that most Americans have no idea how heavy the tax burden is for the rich already.  When I recite the data Merline refers to below, most don't believe me.
For example, the top 5% of income earners — those making more than $159,000 — accounted for almost 60% of the nation's federal income taxes, although their share of total income was only 35%, IRS data show. At the other end, the bottom half of income earners account for just 2.7% of income taxes, although they earn 13% of all income. A whopping 45% of households don't pay any federal income tax, according to the Tax Policy Center. 
To put it all in perspective, look at this chart that shows the continued increase in the income tax burden on the Top 1% and the gradual elimination of taxes on the bottom 50% since 1980.  This may be good politics but it will eventually be the undoing of our republican democracy.  You simply cannot have fewer and fewer people pulling the wagon and more and more people in the wagon before it all breaks down.

Wednesday, April 27, 2011

Wake Up If You Are Under The Age of 30!

An interesting USA Today/Gallup poll was published today about the opinions on the Ryan and Obama deficit reduction plans that are currently in the news.  Overall, it is almost an even split with 44% of those surveyed favoring the Obama plan and 43% siding with Ryan and the Republicans.  What is most telling is that the highest percentage favoring the Ryan plan are those 65 years and older.  This is exactly opposite or what you might think going in. In fact, if you look at all age groups of age 30 or older, they favor the Ryan plan by 6 percentage points across the board. 

If it were not for the age group of 18-29, who favor the Obama plan by 53-30 over Ryan, the Republicans would have a clear advantage on this critical issue.  What does all of this mean?
  • The Republicans, behind Paul Ryan, have taken a bold move, taken early punches from Obama and the Democrats and they are still standing.  This could spell trouble for the Obama stategy of demonizing Ryan and the Republicans on this issue.  Voters do not seem to be buying it based on this poll.  We may have reached the point where people are starting to be more concerned for their children and their country than they are for themselves.  This is a hopeful sign.
  • The youth are prime pickings for more education and outreach from the Republicans on this issue.  It is ironic that this is the age group that will pay the biggest price for maintaining the status quo but are the biggest supporters for doing so.  This group has to leave the theoretical world that many live in and come face to face with THE REAL WORLD.  Where is MTV when you really need them?
  • This poll may also point to important battles yet to come in the 2012 elections.  Obama clearly needs to roll up enormous margins in the youth vote or he may have problems.  Can he energize this voter segment like he did in 2008? 
  • The Independent voter is still about evenly split between the two approaches.  They are still up for grabs.  That is why I still argue for the Republicans to come out for a conditional future tax increase, if and only if, spending is first brought down to at least 20% of GDP as part of a budget deal proposal.  See my post "My Mother Solves The Budget Deficit".  Remember, no dessert until you eat your vegetables!  This would leave the Democrats in a very difficult position on any budget discussions compared to a reasonable Republican approach.
  • Most importantly, these polls results mean that not enough BeeLine readers are under age 30.  Someone needs to tell them to start paying attention.  It is only their future.  

Tuesday, April 26, 2011

How Much Worse Can It Get? Much Worse.

It seems like every other day there is a story on how addicted our country has become to government largesse.  USA Today reported today that 18.3% of the nation's total personal income in 2010 were payments from the government for Social Security, Medicare, food stamps, unemployment benefits and other government programs.

From 1980 to 2000, government aid was roughly constant at 12.5%.

Another startling fact is that wages accounted for the lowest share of income-51%-since the government began keeping track of this data in 1929.  In other words, productive effort in this country was lower than it was in the Great Depression.

If you would take all of the government benefits paid in 2010 of roughly $2.3 trillion, it works out to an average of $7,247 in benefits for each man, woman. This is twice the 1990 average per person AFTER TAKING ACCOUNT OF INFLATION!  That's right, these government benefits have expanded at twice the rate of inflation over the last 20 years.

University of Michigan economist Donald Grimes hit the nail on the head when he said, "What's frightening is the Baby Boomers haven't really started to retire" pointing out that there are 77 million people born between 1946 and 1964 who will soon start looking for their Social Security and Medicare payments. In other words, we have not seen anything yet.

State Specific Data:

Highest government payments per resident                       New York              $9,442
Lowest government payments per resident                        Utah                       $4,731
Highest % of state resident income                                    West Virginia         28% (vs, 18.3% natl avg)
Lowest % of state resident income                                     Colorado                13%

Time is running out.  This cannot continue for much longer.

Monday, April 25, 2011

A Tornado Tale

50 years ago today I came close to death.  I was in a house that took a direct hit from an EF4 Tornado in Eaton, Ohio.  It was shortly before 400pm on a late April afternoon and I was in my bedroom organizing my baseball cards with my best friend.  My mother was visiting a neighbor with my younger brother.  I looked out the back window and looming straight ahead about a half mile away was the tornado dancing back and forth right in front of my eyes.  It appeared to be on a direct path to our home.

I remember seeing details that you normally don't pick up in photographs.  I clearly could see lumber, shingles and other debris swirling around near the top of the twister.  We made a quick call to my friend's home to warn them of the approaching tornado and headed for the basement.  We bounded down the stairs.  We heard the sound of a car's horn racing down the main road that was parallel to the tornado's path.  We later learned it was the family who operated the farm behind us who had decided to run for it rather than go to their basement.

A few seconds later the tornado hit.  It was a deafening roar.  It was as if you were standing right by the railroad tracks and a train was going by at enormous speed.  I remember covering my ears with my hands because of the roar.  I remember my friend and I shouting at each other at the top of our lungs but you could not hear over the sound.  Suddenly it got even louder and it sounded as if the entire house was caving in.  I remember looking up at the floor and joists above me and thinking that this was it.  I fully expected to be soon buried alive.  Time did slow down.  I remember thinking I had just turned eleven years old and this was the end of the road.  It then became deathly quiet.  The floor had held and my friend and I checked each other to be sure we were all right.

We cautiously started up the basement stairs.  The door would not open but we both put our shoulder to it and pushed. We got it about half way open and slithered out.  Staring at us through the adjoining door to the garage was a steel beam that had been thrown around like a tooth pick. It had penetrated almost a foot through the door into the house.  The windows on the back side of the house that faced the tornado were all broken.  The draperies hung in tatters and were now blowing in the wind.  The windows on the front of the house were intact but were caked with dirt and grass that looked like it had been sprayed on.  The dirt was so thick you could not see through the windows at all.  All through the house lay debris.  Drywall from the ceiling was laying all over. You could look up and see the sky.

I tried to make my way back to my bedroom but I couldn't navigate the debris that littered the hallway.  My friend and I went out the front door and we could see the tornado continuing on its way to more destruction down the road.  It looked much better from the backside.

I did not have shoes on but I began running toward the house where my mother was.  It had been spared but for some minor damage.  It was a debris field of 2x4's, downed electric wires and protruding nails to get to her. I saw some hay straw blown straight in to some siding as if it was a nail.  I reached my mother and looked back at our house for the first time.  I almost could not believe the sight.  It looked as if our house had been bombed.  I had a hard time choking back tears as I saw our house.  I kept saying to my mother, "Look at our house".  She just kept repeating, "It is ok.  You are alive".  Even after 50 years, you do not forget a day like that.

Photographs and other background on the tornado of April 25, 1961

Photo taken of the tornado by a local photographer at close to the time it destroyed our house.

Photo of what was left of the Turner farmhouse that was directly behind our house.  Witnesses said that when the tornado hit the 2-story frame house it lifted it straight up and the house exploded and deposited almost all of the debris in the basement.  Fortunately, the Turner family did not go to the basement for shelter.  Mr. and Mrs. Turner started for the basement but their 20-year son did not feel the house could withstand the tornado.  They jumped in their car and made a run for it.  That decision undoubtedly saved  their lives. It was their car horn I heard in the basement right before the tornado struck.

Our house was totally constructed out of stone.  I was in the basement on the left side of the house as you look at this picture.  The people are on top of debris that used to be the garage and a back porch that were on a slab.  It was the sound of the collapse of this part of the house that had me thinking the entire house was coming down on me.

The house as it looked shortly after construction in 1957 (4 years before the tornado).

The house from the right front showing the collapsed garage.  I was in the basement near this corner of the house.

Through April 24, according to the National Weather Service, there have been 438 confirmed tornadoes in the United States. Only one has been an EF4 similar to the Eaton tornado of 1961.  We have already seen 306 tornadoes in April, 2011. This is the highest April total ever.  The previous record was 267 in 1974.  The average number of April tornadoes is 163.  Keep your eyes on the sky and take shelter immediately if one of these terrible twisters heads your way.

Friday, April 22, 2011

One Picture Worth Trillions Of Dollars

John Taylor, an Economics Professor at Stanford University, puts the budget battle between President Obama and the Republicans into context in today's Wall Street Journal.

Americans are clamoring for a fact-based debate about the budget, but the numbers they're hearing from Washington are terribly confusing. Here's an example: Speaking at a Facebook town hall meeting here on Wednesday, President Obama sometimes talked about saving $4 trillion, at other times $2 trillion, and he varied whether it was over 10 years or 12 years, never mentioning any one year.
A simple chart, like the one nearby, would greatly clarify the debate. It shows total federal government spending year-by-year for the two decades starting in the year 2000. Spending is shown as a percentage of GDP, which is a sensible and quite common way to assess trends: When the percentage rises, government spending rises relative to total income or total goods and services produced in our economy.
For the past decade, the chart shows the recent history of government spending. For the next decade—the window for the current budget—it shows three different spending visions for the future.
The uppermost line shows outlays under the official budget submitted by Mr. Obama to Congress on Feb. 14. The lowest line shows the House Budget Resolution submitted by House Budget Committee Chairman Paul Ryan on April 5, while the third line shows year-by-year outlays I estimated from the 12-year totals in the new budget proposed by the president on April 13.
The chart clearly reveals a number of important facts that are not coming up in town hall meetings. Most obvious is the huge bulge in spending in the past few years. In 2000 spending was 18.2% of GDP. In 2007 it was 19.6%. But in the three years since 2009 it's jumped to an average of 24.4%.

When I show people this chart they ask why Washington is even having the debate. They say: If government agencies and programs functioned with 19% to 20% of GDP in 2007, why is it so hard for them to function with that percentage in 2021, when GDP will be substantially higher and with many opportunities for reforms and increased efficiencies? And if GDP and employment grow more quickly, as they would if private investment increased as a result of lower government spending and debt, then that 19% to 20% share of GDP could provide much more in the way of public goods.
This means that the House budget plan, with spending in the same range, approximately balances the budget with no increase in taxes. This is good news for economic growth. In contrast, balancing the first or even the second Obama budget requires substantial tax increases—more than the administration has yet to propose.
What more do you need to know?  

Thursday, April 21, 2011

Is 2012 The Year That Republicans Act More Like Democrats?

The Presidential Primary season is about to gear up over the next several months.  The primaries are still a year away but any serious candidate has to be establishing the necessary organizational and fundraising platform now if they are going to be competitive.

The perspective that I have on presidential primaries is similar to my view of the two parties. They fundamentally view the world in two different ways.  Democrats see the world in much more theoretical and idealistic terms.  Republicans tend to be more practical and pragmatic in their outlook.

Democrats tend to favor the most idealistic of the candidates. They seem to be more easily smitten with the new and fresh face. Who is the knight in shining armor that is going to make everything right?

Republicans have a tendency to nominate the most practical choice.  Or the steadiest hand with the lowest downside.  Being the fresh face in a field of Republican hopefuls has historically been a risky proposition.   Republicans have not been prone to roll the dice with their candidates.  Democrats are more like riverboat gamblers.

Look at the record.  The Democrats nominated the young JFK over Hubert Humphrey and Lyndon Johnson in 1960.  LBJ was not seriously challenged in 1964 but Eugene McCarthy and Bobby Kennedy caused him to withdraw from the race in 1968. Humphrey got the nomination that year but he did it by relying on the party bosses.  He did not run in one primary.

The Democrats came back in 1972 with liberal, anti-war South Dakota Senator George McGovern. They then turned to a relatively unknown Georgia governor in 1976.  Carter survived a challenge by Teddy Kennedy in 1980 who arguably had the more established political resume.  

The Democrats went against type in 1984 with former VP Mondale but not without becoming enamored with super-cool Senator Gary Hart. They came back with a big bet with Michael Dukakis in 1988.  Bill Clinton, another young first time Presidential candidate from a small state, prevailed in 1992.  They went against type with Al Gore in 2000 but he was only opposed by one candidate that year, Bill Bradley.  They then started a love affair with Howard Dean before he imploded early in 2004 and John Kerry was able to fill the vacuum.  Of course, untested Barack Obama then upset Hillary Clinton in 2008.

The Republicans, on the other hand, always seem to be looking for the most practical candidate they can find.  Nixon in 1960. Barry Goldwater won the nomination over Nelson Rockefeller and Bill Scranton in 1964 that was against type.  However, that was a watershed year that marked the end of the East Coast moderates influence in the GOP.  Nixon was the nominee again in 1968 and 1972.  Ford held off the emerging conservative movement with Reagan in 1976.  However, it opened the door for Reagan to be the practical choice for the nomination in 1980.  

Bush, another VP, gained the nomination in 1988 and held off challenger Pat Buchanan in 1992.  Steady Bob Dole was the guy in 1996.  George W. Bush was a newcomer in 2000 but he had the advantage of his father's name and an organization that positioned him as the establishment favorite from the start.  Of course, John McCain prevailed in 2008 against newcomers Romney and Huckabee.

What does this tell us about handicapping the 2012 Republican primary field? If past is prelude, look for the nominee to be Romney, Huckabee or Gingrich. Romney and Huckabee would seem to be the candidates that most closely fit the past profile. Gingrich is a riskier choice based on his more controversial past public profile.  Sarah Palin is Gingrich times two.  The rest of the field has an uphill battle considering past history.

Will the Tea Party movement change the paradigm?  That is the big question. Many Republican voters are clearly concerned about the status quo.  Tea Party supporters are not interested in business as usual. This may open the door in 2012 for a candidate that could catch fire like some of the past Democrat nominees. A pragmatic straight talker who says what he means and means what he says.  

Chris Christie has that type of persona.  The same for Paul Ryan. We are seeing the same thing out of Donald Trump. Christie and Ryan say that they are not running.  Trump is looking like he is going to take the plunge.  

John McCain named his campaign bus "The Straight Talk Express" in 2008.   My hunch is that this is what Republican voters are looking for in 2012.  This actually works against the top group. Their political brand is better known.  Can they be credible in challenging the status quo when they are viewed as the status quo?  Donald Trump's recent surge in the polls seems to bear this out.  However, I do not think Trump will be able to withstand the scrutiny that is required in the heat of the campaign.  He simply has taken too many inconsistent positions over the years.  

I look at Trump right now like the "rabbit" in a mile race when one guy is sent out to set the pace for the others in the field.  He starts fast but he cannot finish.  However, he has shown the type of straight talk that voters are looking for.  In that way he is like the "rabbit" pushing the other runners to run faster and harder and showing them the pace they need to win.  Trump is clearly showing the other candidates that politics as usual is not what voters are looking for.

This provides an opening for a new face to emerge.  A Mitch Daniels or Tim Pawlenty? A Michele Bachmann or Herman Cain if you want to stretch your imagination.  However, new faces need to gain attention and credibility early to attract the organization and money to survive the first votes.  Christie and Ryan have the platform to get the attention and credibility they need without getting in the race early.  The others are going to have to find their own ways to connect with voters to show that they are both an idealistic and practical choice.

Will 2012 be the year that Republicans act like Democrats?  The primary system we have today is not built for late entrants. Therefore, the remainder of this year will likely determine if a new face emerges from the crowd that captures the mood of Republican voters.  History has shown that is not easily accomplished.  It will take someone that can clearly distance themselves from the pack of fresh faces by early next year.  If there is uncertainty, Republican voters will likely gravitate to the most pragmatic choice.   

UPDATE: Charles Krauthammer handicaps the 2012 Republican field of candidates.

Tuesday, April 19, 2011

Many Happy Returns

The federal tax return filing deadline is now behind us.  I practiced as a CPA and tax attorney for many years so there is nothing nearer and dearer to my heart than taxes.  Let's look at a few tax stats.

These are Total Receipts from tax revenue sources by year for the federal government:

1950       $39 billion
1960       $92 billion
1970      $193 billion
1980      $517 billion
1990      $1,032 billion
2000      $2,025 billion
2010      $2,162 billion

If you need to see why we are in so much fiscal trouble you need look no further than these revenue growth numbers.  We have historically enjoyed a doubling of tax revenues every decade.  However, 2010 is barely above total receipts 10 years ago.  At the same time, expenditures have exploded over those same years.  From $1,789 billion in 2000 to $3,456 billion in 2010.  The math is pretty simple.  Spending has doubled in the last 10 years just as if nothing has changed.  However, receipts have been flat.  That is how you end up with a $1.65 trillion budget deficit for this year.

The Democrats want to blame this on the Bush tax cuts.  However, the $2,025 billion in revenues in 2000 dropped to $1,782 billion in 2003 due to the after-effects of 9/11.  The Bush Tax Cuts were implemented in the 2002-2003 period and by 2007 revenues had increased to $2,568 billion-that is almost a 50% increase in tax receipts in 4 short years.  The real estate crash, mortgage meltdown and deep recession then took tax receipts down with the economy.  Revenues did not decline because of the Bush tax cuts.  They declined because of the economy and increasing taxes would certainly not make it better right now.

Who pays the individual income tax?  This is based on 2008 data, the most recent available.

Top 50% of all taxpayers pay 97% of all individual income taxes
Top 10% pay 70%
Top 5% pay 59%
Top 1% pay 38%
Bottom 50% pay 3%
45% of all taxpayers pay $0

You might think this is fair.  After all, you constantly hear in the media and from liberals that the rich are getting richer and they should pay more.  Let's look at the share of income as well as the share of taxes for each of these groups to better assess fairness.

                       Share of Total Adjusted Gross Income              Share of Taxes
Top 50%                                  87%                                                          97%
Top 10%                                  46%                                                          70%
Top 5%                                    35%                                                          59%                                                        
Top 1%                                    20%                                                          38%

Is this fair?  I don't know but it does start to feel uncomfortable when one group is paying almost twice what would be a straight proportionate share based on income.  However, this is the very group that President Obama is targeting in his rhetoric.  If you read this Wall Street Journal article you will also see that the real tax target will ultimately have to be the middle class as this is where most of the money is as this chart shows.  There is simply not enough income in the top brackets.

You might also want to look at my previous post, "How Progressive Do We Want To Be" for a comparison of the United States to other industrialized countries' tax systems.  In fact, the U.S already has a much more progressive tax system than all other industrialized countries.

The bottom line is that to have the array of generous entitlements that President Obama and most Democrats want is going to require massive across the board tax increases.  It cannot be financed by continually going to the top 1% or 5% of income earners.  He needs to be honest with the American people.  There is nothing wrong with having this debate.  It is a legitimate issue for the American people to decide.  Paul Ryan and the House Republicans have had the courage to put a spending cuts proposal out there and President Obama is now spending all his time attacking it.  If he thinks this proposal is lacking then he needs to be honest on show the American people what type of across the board tax increases are really needed to fulfill his vision for America.  This should be the true debate in the 2012 elections.

Congratulations on getting your tax return filed.  Many Happy Returns!

Sunday, April 17, 2011

Confounding Compounding Chronicles

A big reason that I am a fiscal conservative is that I understand the power of compound interest.   If it is working for you, it makes your life easy.  If it is working against you, it will ultimately bury you.

Over the years I have enjoyed collecting stories showing the power of compound returns.  No matter how many times I see these stories they always seem to be confounding.  It just doesn't seem possible that the numbers can be right.  It invariably causes me to pick up the calculator and run the numbers.  The math never lies.  Here are a few of the better chronicles about compounding.

The Servant and the King
There was once a King who had a servant who was always very diligent in everything he did for the King.  The King enjoyed playing chess with the servant from time to time.  One time after playing chess the King was in a benevolent mood.   He offered to grant the servant any request he desired.  The servant demurred saying that he did not need anything. The King urged him to ask for something for his gratitude for his service.

The servant finally relented and told the King that he was a modest man and did not require much.  He would only ask that the King give him a grain of rice today on the first square on the chess board.  He then asked that the King give him two grains of rice the next day, four on the next day and continue to double the number of grains of rice on each succeeding square on the board.  The King quickly agreed and laughed to himself about how foolish the servant was.  He was prepared to give him something of real substance.

The grains of rice grew slowly but after a few weeks the King's financial advisor started to grow worried. The King's supply of rice was exhausted about half way through the 64 squares of the chess board.  They were now buying rice on the open market to settle the promise.  The financial advisor did a quick calculation of the amount required.  He told the King that it exceeded the entire value of the Kingdom by a thousand-fold.  The total number of rice grains...18,444,680,000,000,000,000!  The Servant ended up with the Kingdom.

The Indians and Manhattan Island
We all learned in history class that the Dutch bought Manhattan Island in 1626 for what is said to the equivalent of $24 in cloth and beads.  I remember thinking "what a steal".  This had to be one of the greatest purchases of all time.  I later learned about the "Rule of 72" which allows you to determine how long it takes for a sum to double at various rates of return.  Simply stated, your money will double in 10 years at 7.2% interest (72 divided by 7.2=10).  At 6% interest, it takes 12 years (72 divided by 6=12).   A 3% interest rate will take 24 years to double.

How much would the Indians have today if they had invested that $24 in 1626 and got a 7.2% annual return ?  Almost $10 trillion!  How does that compare to the value of Manhattan Island today?  I actually called the New York City Assessor's Office in 2000 to get that answer.  They told me that all of the real estate of Manhattan Island in that year had a total appraised value of only $125 billion and that included all of the buildings on it.  Even if we assume that real estate prices have doubled over the last 10 years (no way!) the Indians would have over 37 times as much money today if they had simply invested the money and let it compound.  At 6% the Indians would still have over $100 billion.  Real estate is not quite the investment you thought it was, is it?

Brutus and Caesar
Caesar was a great politician but like all politicians he had his share of enemies.  In order to insure that his children were taken care of if he met an early demise, he instructed Brutus to set up a trust for his children with $1,000 Roman dollars.  Of course, Brutus was not the most trustworthy guy.  He skimmed off a penny and set up a trust for his own heirs invested in safe government bonds yielding 3%.  Caesar's children got $999.99.  Brutus left  instructions that no one was to touch the money for 2,000 years.

How would that work out?  One cent compounded for 2,000 years at 3% would grow to $473,000,000,000,000,000,000,000 ( that is 473 billion billion).  The current GDP of the United States is about 15 trillion.  In other words, one single penny compounded for 2,000 years would be able to buy everything in the U.S. economy for the next 30 billion years.

If one penny could grow to that sum over the last 2,000 years why isn't there more wealth?  The biggest reason is that people rarely can keep their hands off the money.  Compounding only works if interest compounds on interest.  Most people can't do that.  They spend the income as soon as they earn it.

Another big reason is that the original investment capital is lost and the compounding stops with it.  Brutus thought he was being smart by investing in the safest investment around-government bonds.  Unfortunately, those bonds were Roman Empire bonds.  The empire fell apart and the government bonds became worthless.  Not only was the compound effect lost but so was the original penny.

Implications for Tomorrow
Consider the power of compounding as we look at our current government debt situation.  We owe almost $14.3 trillion in federal debt.  What was once a small snowball is becoming a gigantic boulder that has the potential to crush everything in its path.  Even if we don't add any more additional deficit spending to the snowball it is going to get bigger with each succeeding year just with the interest cost.  Of course, the current Obama budget will add an additional $1 trillion in new debt to the snowball plus the additional compounding effects.

That is why we have little choice but to act now.  We have a very small window of opportunity to avoid a lot of pain down the road.  Compound interest will bury us.  That is a mathematical certainty unless we stop the boulder or slow it down considerably.

If you want to get a good overview of the U.S. debt situation (and a whole lot more) go to for a scoreboard display of all the key statistics.

Thursday, April 14, 2011

Living Within Our Means

It is hard to express how disappointed and discouraged I am after seeing President Obama's budget deficit proposal yesterday.  I keep hoping to see some leadership.  It never appears.  It is increasingly apparent that he has no interest in leading.  He is only really good at campaigning.  He started the 2012 campaign yesterday.  It was a speech filled with careless talk, contradictions and contempt for Paul Ryan and others who have put forth serious proposals to solve our serious problems.

President Obama always sounds good until you really look beyond the words.  A good example in yesterday's speech was this statement.
"We have to live within our means, we have to reduce our deficit, and we have to get back on a path that will allow us to pay down our debt".
When I see a statement like this the first question I ask is what is "our means"?  Who defines that?  As I showed in my last post, "our means" would seem to be something around 18% of GDP.  Tax receipts have averaged around 18% of GDP since World War II.   It has been a little higher from time to time, but in only two years has it exceed 20%-in 1945, when we had to pay for WWII and in 2000 when the stock market boom created enormous temporary capital gains.   Therefore, any honest analysis would indicate that 18% of GDP is the best indicator of "our means".

The OMB estimates that our revenues will be 16.6% of GDP next year.  Therefore, there is an argument for some tax adjustments as part of an overall budget deal.  However, it must be remembered that a big reason that revenues are down right now is because of the unemployment rate and the poor economy.  The same tax code, tax rates and tax deductions generated 18.5% of GDP in 2007 before the economy imploded.   We also generated more revenue with the Bush tax cuts in place than we did in any year in the first term of the Clinton Administration (after the Clinton tax increases).  Recall that these are some of the years that the liberals think were the glory years of enlightened tax policy. 

If 18% defines "our means" how much are we living beyond "our means".  This year we are spending over 25% of GDP and the current projection is for that to still be in excess of 24% of GDP in next year's budget. Could it be any clearer that we have a spending problem rather than a revenue problem?  It should also be evident that the spending problem that is in excess of "our means" is at least 6% of GDP.  To put that in perspective, that is almost $1 trillion in annual spending that needs to be cut to live within our means.

How would President Obama propose to solve the problem?  Increase taxes on the rich.  Cut out waste in Medicare and demand more efficiency and accountability from Medicaid.  Cut out waste in the Defense Department.  Keep annual domestic discretionary spending low by building on the budget deal of last week (a deal he fought to the bitter end).  That was about as specific as he got.  That was also a classic campaign speech.

If we could actually get all the savings from waste in Defense, Medicare and Medicaid that has been promised by politicians over the last 30 years we would have a budget surplus right now rather than borrowing over 40 cents of every dollar we spend.  It is pretty clear that "living within our means" as President Obama defines it means only one thing.  Getting tax revenues up to where our spending is right now-24% of GDP.

We are only about a month away from reaching the current debt limit ceiling. President Obama had the means to begin to chart a path to a bipartisan solution.  It simply appears to be beyond his means.  As a result, I will be very surprised if the debt ceiling limit is increased on its pending expiration date. After that, it will get very interesting.

Tuesday, April 12, 2011

My Mother Solves The Budget Deficit

Anyone who reads BeeLine knows that I am a fiscal hawk.  You are not going to find anyone who is more concerned about our fiscal situation or more vocal about the need to confront our budget deficit.

However, I am also a realist.  We have dug ourselves such an enormous hole that we are not going to extricate ourselves from the excesses quickly.  When 42 cents of every dollar we spend is borrowed the consequences of making big changes immediately is like asking a drug addict to quit their addiction cold turkey.  There is also the reality that Democrats still control the Senate and the Presidency.  Nothing is going to really get done in the near term unless you can put something on the table that is agreeable to all.

It is important to keep all of this in mind as you evaluate the budget battles going on in Washington.  I have not gotten too worked up about the recent budget continuing resolution extensions.  These are small but important skirmishes.  However, the big battles lie ahead.  Most particularly, the looming vote to increase the debt ceiling vote that will likely be required in the next month.

I think to this point John Boehner and the House Republicans have played their cards right.  They have won every small skirmish and have brought spending down little by little each time.  President Obama and the Democrats are on the defensive.  It was not even 2 months ago that President Obama released his proposed budget for 2012.  Tomorrow he will release a new budget proposal that is supposed to make new recommendations for entitlement reform and tax increases.  Does anyone believe that he would be doing this if it were not for the success of the House Republicans on these budget battles and the release of Paul Ryan's Path to Prosperity 2012 Budget Proposal?

Many of those on the right (and I am probably far more conservative than most of them) believe that the Republicans should have gone to the mat over the continuing resolution bill last week and risked a government shutdown. I disagree. Most voters have little idea of what a continuing resolution is. Shutting down government over something that people don't understand would not have been smart.  On the other hand, people have a better understanding of what a debt or credit limit is.  This is the issue to take a stand on.  The Republicans should not agree to any debt ceiling increase unless there is a credible, long term plan to reduce the deficit.  As I recommended in my post, "Debt Ceiling Dilemma" almost 3 months ago,

The Republicans have the high ground.  The debt ceiling limit increase should be tied to long term budget reforms that set hard future budget targets.  We need a reasonable glide path that brings the spending excess down in steps. Perhaps this is also the opportunity to tie passage of the debt limit with Congressional approval of a Balanced Budget Amendment and/or Federal Spending Limitation to the Constitution.

How should the budget targets work?  One suggestion might be to make the spending cuts the Republicans talked about in the Fall campaign as the starting point.  Budget targets are then established for the next 5 years to bring the budget into balance by the end of that period.  This provides the opportunity for a recovery in the economy to lessen some of the pain.  However, if cuts are needed, the budget deal I am recommending would require 
across the board cuts on everything except interest on the debt.  Is this hatchet job the best way to do this? No.  But having this trigger mechansim out there is the only way to get something done.  Congress has proven over and over that they only will act if they have no other choice.  If Congress has a better way to do it when the target date is reached, they can pass alternative legislation that gets the same overall result to avoid the across the board cuts that are scheduled.
President Obama is going to propose some type of tax increases tomorrow afternoon.  I know these are an anathema for conservatives as they are for me.  However, the future of our country is more important than personal ideology.  I am not willing to exclude anything that may be needed to fix the problem.  If you are going to be credible in the debt limit debate and in the 2012 General Election you can't take things off the table. However, I am also not willing to agree to any tax increases until needed spending cuts are in the bank.  I do not believe that most Americans (and even most conservatives) are unwilling to consider taxes as part of a grand bargain.  However, taxpayers have always been taken to the cleaners in these deals in the past.  It is supposed to be spending cuts and tax increases but the tax increases take affect and the spending cuts never get implemented.  The only way the taxpayers can be protected is to say NO. NO. NO. NO.NO to any  tax increases.

Opposing all tax increases is the only way that any Republican has been able to stay politically viable.  If you even hint that you would consider a tax increase, your political future is over.  However, I don't see how that strategy can continue under current circumstances if Republicans want to become the governing party for the long term.  I also don't see how the Democrats can be viable if they do not come forward with plans for real spending cuts.  The future is going to belong to the party that shows that it has a practical plan to dig us out.  Which party can uphold their principles and also be practical?

I think the Republicans would be well served to agree to a tax increase in the upcoming debt ceiling discussions, if and only if, federal outlays are first reduced to no more than 20% of GDP (we are now over 24% of GDP).   Tax increases would be in play but would only be triggered if the spending cuts come first. If a tax increase was required, taxes as a % of revenues could not exceed 18% in total (which is the long term historical average over the last 30 years).  See the chart below from the Heritage Foundation's Chart Book:

In fiscal 2010, federal revenues were only about 15% but they are expected to recover with the economy.  The current OMB estimate for next year is that revenues as a % of GDP will be 16.6% of GDP.  Therefore, spending cuts of of at least 4% of GDP would be needed first in order to trigger any tax increase on the back end.  There would need to be $3 or $4 dollars of spending cuts in advance for every $1 of tax increase using this approach. 

Does this strategy sound familiar?  I learned it from my mother.  I could not have my dessert until I ate my vegetables.  I could not play baseball until I did my homework.  I could not watch television until I cleaned my room.  The taxpayers should not put a dime into any budget deal until the spending cuts are in the bank. However, if you look at the chart above it is clear there is a revenue problem in addition to a spending problem.  Facts are facts.  I am convinced that the taxpayers (including that 1% at the top who pay 40% of all the income taxes collected) would support this deal if they believed that they would not get stabbed in the back as they have so many times before.

Now is the time for the Republicans to lead us out of the mess.  However, to do this they must be realistic and reasonable.  This plan is both and would be difficult for the Democrats to defend against. With this plan in play I would be very comfortable in having a showdown on the debt limit.  The Democrats want tax increases.  They can have them but they can't have their dessert first.  Let the Democrats be the ones to take us over the cliff if they want to.  They would have a tough time explaining their position to the American people.  I want the Republicans to maintain the high ground and I want them to be in a position to win it all in 2012.  To do that they have to show that they are both practical and principled.  They have to also show that they can be trusted.  This is their chance to do it.  It is the time to go all in but only if they have a totally defensible position.

 As for my momma,  I hope you see that she did not raise no fool!

Monday, April 11, 2011

Uncharted Territory On Borrowings

I have written often in this blog about the serious consequences of not dealing with our gigantic federal deficit spending and the accumulating national debt.   If you need to borrow money you need someone to loan you the money.  Someone who has saved some money and is willing to extend you that loan.  In the last few years, the savers who were willing to loan money to fund our deficits were in Japan and China.  Over the last year, these sources dried up.  We are now borrowing money from the Federal Reserve who has simply printed it.

You get a true idea of how massive this borrowing spree has been when you look at the chart below.  This chart from The Daily Reckoning shows that over the last two years public sector borrowings have been more than 100% of domestic credit growth in both 2009 and 2010.  In effect, public sector debt financing has totally crowded out all new private sector borrowing over the last two years.

In an economy where we need private investment to create jobs and where you need a robust mortgage market to support house sales, public sector borrowings are consuming everything that is available.  The giant sucking sound you hear is a government vacuum cleaner that is not even leaving crumbs for the private sector economy.

As you can see from the chart above, this is "uncharted" (pun obviously intended) territory.  Just a decade ago, this situation was reversed.  Private sector borrowings actually represented more than 100% of credit growth when the federal government was paying off debt rather than increasing it.

I hope you are not in need of a loan.

Thursday, April 7, 2011

USA University

I have always believed that one of the great assets our country has enjoyed compared to the rest of the world are our colleges and universities.  An recent article in The Wall Street Journal provides some great support for that position.

  • 154 of the top 500 universities in the world are in the United States.  China has 22, Brazil 6, Russia and India 2 each.
  • For every 100 college-aged people in the United States, there are 82 enrolled in a college or university.  This compares to 75 in Russia, 30 in Brazil, 22 in China and 13 in India.

Source: The Wall Street Journal 4/5/2011

What makes the American system so great is its accessibility.  There are lots of great schools and they are open to almost everyone.  This is not the case in most other countries.  There are fewer options and the system of admissions falls far short of egalitarianism.  Only a small sub-set of the population will usually have the opportunity to get into a university.

Contrast this with the United States where there is so much opportunity.  Does having money help?  Absolutely.  However, there is no other country in the world that provides more young people of every walk of life the opportunity to get a college degree.  Grants, loans, athletic and academic scholarships are all available if a student works hard and has the grades and test scores to back it up.

Don't ever buy into the cries that the deck is stacked against people in this country who want to advance.  There has never been a country in the history of the world that provided more opportunity for every single person to make something of themselves.  Our universities are clear evidence of that.  In the 2009/2010 academic year there were almost 700,000 foreign students in our universities according to the Institute of International Education out of a total college enrollment of 19.5 million students.  128,000 of those students were from China.  105,000 were from India.  40 years ago, there were barely 100,000 foreign students in total in this country.  People from all over the world seek out our higher education.

These foreign students come here thousands of miles from home.  They take classes in a language that is not natural to them.  They live in a culture far removed from what they knew growing up.  They succeed.
American students, what is your excuse?  You have more opportunity available to you than anywhere else in the world.  

Wednesday, April 6, 2011

Paul Ryan-A Man For The Times Or A Man Ahead Of The Times?

I have written before about my admiration for the work of Paul Ryan, Chairman of the House Budget Committee, in "The Punter And The Quarterback".

Ryan showed yesterday that he is a true leader with his 2012 budget proposal.  A proposal that would reduce projected spending by over $6 trillion over the next 10 years.    Are these spending cuts?  Not like you and I would consider spending cuts in our own budgets.  Government spending will continue to grow.  In fact, it provides for spending above the projected level of inflation.  This article and chart by Dan Mitchell of the Cato Institute that I found on Powerline provides some context.

The breadth and depth of what Ryan has proposed will establish what I think is a national dialogue like nothing I have seen in my lifetime.  This is not your typical "get along to go along" proposal or one based on merely "kicking the can down the road".  This is a transformative moment in the debate about our nation's fiscal path and the choices before us.

Ryan has drawn a clear choice for the American people.  This should put to rest any argument that there is no difference in who we send to Washington.  This is one guy who says what he means and means what he says. He knows how big the stakes are.  He knows that he will be attacked unmercifully by the Left.  He also knows that if we don't act now that we will pay a much higher price later.  A price that will inflict even more pain and affect even more people every day we delay in confronting our unsustainable spending.

The big question is whether the American people are ready to face up to reality.  Polls consistently show that the majority of the public supports restraining government spending in a general sense.  However, polls also show that there is no majority support for cutting anything in specific terms.  See my post, "In Touch With Reality???"

Paul Ryan has put a proposal forward that will require the American people to decide what path they want to be on.  A path that can provide a way out of the fiscal mess we are in and the potential to put us on a "path to prosperity" as Ryan calls it.  Or the current road to ruin that we are currently on.  The American people have to decide the future they want.  The 2012 election just got much more interesting due to Paul Ryan. That is when we will also find out whether Ryan is the man for the times or simply is a man ahead of the times.  No matter which way it goes, I know one thing.  Paul Ryan is A MAN!  We have not seem many like him in Washington in a long time.

Tuesday, April 5, 2011

Makers and Takers

Right on the heels of my post, "A Factoid On A City On Steroids (Supplied By You)" comes Stephen Moore in the Wall Street Journal writing "We've Become a Nation of Takers, Not Makers".  Moore points out that more Americans now work for the government than in manufacturing, farming, fishing, forestry mining and utilities combined.
Today in America there are nearly twice as many people working for the government (22.5 million) than in all of manufacturing (11.5 million). This is an almost exact reversal of the situation in 1960, when there were 15 million workers in manufacturing and 8.7 million collecting a paycheck from the government
It gets worse. More Americans work for the government than work in construction, farming, fishing, forestry, manufacturing, mining and utilities combined. We have moved decisively from a nation of makers to a nation of takers. Nearly half of the $2.2 trillion cost of state and local governments is the $1 trillion-a-year tab for pay and benefits of state and local employees. Is it any wonder that so many states and cities cannot pay their bill
Every state in America today except for two—Indiana and Wisconsin—has more government workers on the payroll than people manufacturing industrial goods. Consider California, which has the highest budget deficit in the history of the states. The not-so Golden State now has an incredible 2.4 million government employees—twice as many as people at work in manufacturing. New Jersey has just under two-and-a-half as many government employees as manufacturers. Florida's ratio is more than 3 to 1. So is New York's.

It is ironic that the only two states that actually have more manufacturing workers than government workers, Indiana and Wisconsin, have been the states at the forefront of the efforts to bring some balance to the public sector union issue.  That says a lot about Mitch Daniels and Scott Walker for showing leadership on the issue.

As Moore points out, this statistic is as much about productivity gains in manufacturing and farming in the private sector as it is about a bloated public sector.  We simply produce far more output per worker than in the past.  There is a reason for less jobs in manufacturing and farming as a result.  However, in education, it has gone the other way.

Over the period 1970-2005, school spending per pupil, adjusted for inflation, doubled, while standardized achievement test scores were flat. Over roughly that same time period, public-school employment doubled per student, according to a study by researchers at the University of Washington. That is what economists call negative productivity.
The same is true of almost all other government services. Mass transit spends more and more every year and yet a much smaller share of Americans use trains and buses today than in past decades. One way that private companies spur productivity is by firing underperforming employees and rewarding excellence. In government employment, tenure for teachers and near lifetime employment for other civil servants shields workers from this basic system of reward and punishment. It is a system that breeds mediocrity, which is what we've gotten.
Most reasonable steps to restrain public-sector employment costs are smothered by the unions. Study after study has shown that states and cities could shave 20% to 40% off the cost of many services—fire fighting, public transportation, garbage collection, administrative functions, even prison operations—through competitive contracting to private providers. But unions have blocked many of those efforts. Public employees maintain that they are underpaid relative to equally qualified private-sector workers, yet they are deathly afraid of competitive bidding for government services.

This is why the efforts to restore some balance in the relationship between public sector employees and the public they serve (and who pay their salaries and benefits) is so critical to our nation's future. Despite all of the efforts of the unions to make this about workers' rights, this is just another example of putting special interests above the public interest. What about taxpayer rights? What about the public's rights? Moore puts it in the proper context with FACTS. Another inconvenient truth for the public sector union lobby.

I would be remiss when talking about Makers and Takers than to refer you to the book by Peter Schweizer where I first saw these words strung together. It is an excellent read about "why conservatives work harder, feel happier, have closer families, take fewer drugs, give more generously, value honesty more, are less materialistic and envious, whine less... and even hug their children more than liberals". Check it out.

Monday, April 4, 2011

Where Do I Find A Ten-Bagger?

Most everyone is looking for that great stock pick that can make them rich. I like to think in terms of bags of money. A stock that doubles in value is a two-bagger. You have two bags of money for the one you started with. I like to think the ultimate is the ten-bagger. Start with a $1,000 and turn it into $10,000. Better yet, turn $10,000 into $100,000. There are not many ten-baggers out there but they do exist. I have been fortunate to invest in a couple over my career. It usually involves both good timing and patience even more than skill to get a ten-bagger. You have to buy at a good price. More importantly, you have to be disciplined to not want to take your money off the table when you have doubled, tripled or quintupled your money. That is not easy to do.

USA Today's Matt Krantz has a list of the 11 stocks that have been ten-baggers for the two years ending December 31, 2010. It is interesting that 11 stocks make the list for two years but only 4 stocks would be on the list if you went back five years. What did I say about timing? Remember how the stock market was way down at the end of 2008? Those dark times were a great opportunity to buy these companies.

The interesting thing about ten-baggers is they come in various sizes and flavors. They are not necessarily the next new thing. It can just as often be an old name that fell on hard times and turned things around. Take a look at the several on the list and see what I mean.

Crocs                     14 bagger         Your kids bought the shoes but you didn't buy the stock?

Ion Geophysical     12 bagger         High tech seismic imaging for oil and gas

Ruby Tuesday        11 bagger        Stock fell off a cliff in late 2008 and came back strong

SFN Group            11 bagger         Staffing solutions that also fell and came back

La-Z Boy               11 bagger         You could have been in the recliner and enjoyed this return

Sonic Auto             10 bagger         Auto dealer with 122 locations based in Charlotte

The common denominator in all these picks was that the stock dropped like a rock in late 2008 and rebounded.   Therefore, big gains are realized more easily by buying at the right price than by selling at the right price.  For example, Crocs was selling for around $40/share in January, 2008 and dropped to $1.24 by the end of the year.  It climbed back to over $17 by the end of 2010 for that 14x gain.

None of these ten-baggers was a new stock or start up.  Only one could be argued to be anything high-tech or new economy.  We are talking about shoes, restaurants, furniture and the like.  However, just as you like to buy shoes and furniture on sale, it is also the best strategy for buying stocks.  For the big gains don't buy when every one else is buying.  Buy when every one else in selling.

Sunday, April 3, 2011

BeeLine on Facebook

BeeLine now has a Facebook page! This will make it easier for you to follow BeeLine as the Facebook page will be updated every time there is a new post.  Become a follower of BeeLine and you will always be on the shortest route to what you need to know.

BeeLine has just completed its 3 month anniversary.  Updated stats:

  • 2,500 views thru 3/31/11, 635 in March.  Views continue to decline.  Facebook to the rescue?
  • 81 posts YTD, 19 posts in March.  
  • There have been views from 17 different countries besides the U.S.A.   New countries this month included China, India, United Arab Emirates, Israel and the Czech Republic.
  • There was a lot of viewing from Germany in the last month.  I don't know what is driving the interest but welcome to our good friends that are keeping the Euro in business.
  • "Michael Moore Is Not "MMMM Good" had the most view during the month.