Tuesday, August 30, 2011

One More Government Holiday=No Work

We are likely to see President Obama make a request to extend the Social Security payroll tax holiday for another year as part of his Jobs speech next week.  This tax cut was enacted for 2011 to put more money into the pockets of consumers to stimulate the economy.  It reduces the 6.2% employee social security tax to 4.2%.   It came at a cost of $112 billion in lost tax revenues.

It also came at a time when Social Security payments were already projected to be $46 billion more than revenues collected for the year.  Therefore, instead of Social Security falling short by $46 billion, it actually pushed the Social Security shortfall to $158 billion for the year.  Where did that money come from?  More borrowed money that got added to the national debt.

It now appears that President Obama wants to do it again.  Would you expect anything else?  After all, it is an election year and the hope and change speech from last time is not likely to get him re-elected.  Why not spend money we don't have, instead?

I just don't understand how we continue to think we can borrow our way to prosperity.  This is especially true when the borrowing is not spent on anything of long-term tangible value.  Spreading money around in the economy for people to buy goods manufactured in China or oil from Saudi Arabia does what for us?  It is like putting a vacation on your credit card.  You get a short term boost but you end up with the bill (and interest) and you have nothing more to your name to pay the bill than you had before.

It makes even less sense when it is considered that the Budget Super Committee is about to begin what will probably be very contentious discussions to try to find between $1.2 and $1.5 trillion in in deficit reduction over the next 10 years.  At the same time, an extension of the payroll tax holiday will increase the deficit in one year equal to about 10% of what they are trying to cut.  If Congress enacts the extension it is like they are trying to dig a hole during the day and they are filling it the same night.

When I speak on personal finance I always make a distinction between good debt and bad debt.  Most debt is bad for individuals if it is used to buy things.  Most things are here today and gone tomorrow.    Cars, clothes, couches, crab legs and cat nip.  Depreciating assets, if you can even call them assets.

There is good debt.  If you borrow to buy an appreciating asset you have the opportunity to use leverage for your benefit.  Mortgage debt on the purchase of a primary residence has historically been a good use of debt.  However, the last few years have shown that caution is necessary even with housing if prices are too high.  Education is another area where debt can make sense.  There is a strong correlation between higher education and higher incomes.  Taking on debt to further your education can be a sound investment.  Again, there are no absolutes.  Look no further than the number of law school graduates today without good job prospects in this economy and a load of student debt.

I am a strong believer in governmental infrastructure investment.  Roads, bridges, interstate highways, airports, energy and other assets that help to facilitate commerce.  Using debt to develop these assets provides you the ability to develop a future steam of commerce and the resultant income and taxes to pay the debt.  This is similar to the thinking of the public works projects during the New Deal.  Many of those projects are still in use today.  They paid for themselves over time...and more.  Compare that thinking with a plan that raids Social Security and effectively throws the money in the air with no idea where it will come down.

$112 billion is a lot of money.  For example, the Hoover Dam would cost about $600 million to build today (it cost about $50 million when it was built in the 1930's).  We could build almost 166 Hoover Dams with that amount of money.  Georgia Power has 2 nuclear power plants under construction for a budgeted cost of $14 billion. You could build 16 of these plants with that much money.  The entire interstate highway system of nearly 50,000 miles was constructed for $425 billion (in 2006 dollars).  If we assume that cost in today's dollars would be about $500 billion, we could increase the interstate system by almost 25% for $112 billon.

Now compare those numbers with the $814 billion Obama stimulus law passed shortly after he took office in 2009.  How much could we have done with that money if had been used strategically.  What do we have to show for it ?  It is hard to see any tangible effects beyond the debt we now have to pay back.   Compared to where we were when it was passed, unemployment is higher, energy prices are higher and our deficit is larger.

The reality is that the Social Security tax holiday will probably be extended.  There is not much political will in Washington to keep it from happening.  There are too many politicians worried about their re-election rather than resurrecting the country.  This tax holiday is likely to end up like most government holidays.  Not much work gets done of value.  This is not likely to work to do anything but increase our debt.

What should happen?  We shouldn't do it.  We can't afford it and we certainly should not be short changing Social Security when it already can't cover its current bills.  If we really believe that this is important to the economy then we should cut something else in the budget to pay for it.  Even better, if we believe that it is important to get $112 billion into the economy, let's make some investments today rather than just setting our children up to a lifetime of paying interest on our debt.

Friday, August 26, 2011

Tea Party? Wait Until The Hair Dryer Party Gets Organized!

The original Tea Party had its origins with some colonists who were upset about a tax on their tea.

The emergence of the new Tea Party has shown there are plenty of people who are concerned about the direction of the country.  However, they only represent about 20% of the electorate according to most polls. What could increase the numbers who strongly believe that we are on the wrong path?  What could energize more people?

How about if their hair dryer wouldn't work?  Or their air conditioning is off and its 95 degrees outside?  Or they can't turn the porch light on at night? Or they can't check the internet when they want to?

The Obama Administration appears to be on an all-out war on energy in this country.  Investor's Business Daily writes about the EPA's Looming Blackouts.
Energy: It won't matter which light bulbs we use as the administration's implementation of cross-state pollution rules shuts down coal plants across the country. Where will the jobs be when the lights go out?
It's called the Cross-State Pollution Rule, announced last month, and its implementation over the next 18 months will likely result in the loss of a fifth of the nation's electricity-generating capacity.
The result will be likely power shortages, skyrocketing rates and inevitable brownouts and rolling blackouts.
The head of the Texas Public Utility Commission says the rules could lead to rolling blackouts. The American Legislative Exchange Council says that nationally the new regulations will cost up to $129 billion and force utilities to retire one-fifth of coal-generating capacity.
Up to 110 gigawatts of capacity came on-line between 1940 and 1969 and were grandfathered under the Clean Air Act. Now the EPA is saying bring them up to their code or shut them down.
At the same time, John Hinderaker of Powerline writes about how "Obama's 'Industrial Sabotage" Devastates The Gulf".  The article shows how 10 oil rigs have left the Gulf of Mexico since the Obama Administration imposed a moratorium on deepwater oil and gas drilling in May 2010 and 8 more that were planned for the Gulf have been detoured to other foreign locales.  Hinderaker quotes Bonner Cohen of the National Center for Public Policy on the broader devastation of the Obama Administration's energy policies.
What you are seeing in Louisiana is only a small piece of larger mosaic being put together by the Obama Administration to make affordable energy as inaccessible as possible,” he said. “From the administration’s war on coal to the serious consideration it is giving to imposing a nationwide regulation of hydraulic fracturing, to its shut down of deepwater drilling in the Gulf of Mexico, to its `endangerment finding” from the EPA [Environmental Protection Agency], the administration is practicing its own form of selected industrial sabotage. 

To put this in context, about 40% of the nation's $8 trillion trade debt that we have accumulated over the years is the direct result of our continuing dependence of foreign oil.  Over the last 10 years we have sent about $2 trillion in funds to other countries for imported oil, according to Kevin Bambrough in The Daily Reckoning.

The economy does not work without energy.  The consumer cannot spend on other things in the economy if they are spending excessive amounts on energy.  If the consumer doesn't spend, the economy does not grow.  If the economy does not grow, unemployment continues to be a problem.

Hair dryers do not work without electricity.  People do not like it when their hair dryers don't work.  People want jobs.  But they also want their hair dryer to work.

How does it make sense for the Obama Administration to pursue these policies?  It would seem that a cornerstone of any jobs program would be to rollback these rules and regulations.  We have enough problems with energy independence as is by evidenced by the above chart.  Why would we pursue policies to make it worse?

I would like to think that the President would understand that the economy runs on energy...and that people who can't get their hair dryers to work...vote. That is why maintaining and developing as much affordable energy as we are capable of should be Job#1 in any Jobs Program. 

Wednesday, August 24, 2011

Caviar, Crab Legs and Cashews Paid By You

Two interesting stories on federal programs to feed the poor caught my eye in the last few days.

It seems the U.S. Department of Agriculture has turned down a request by Mayor Michael Bloomberg of New York City to implement a pilot program that would not permit food stamps to be used to buy soft drinks.  New York City wanted to see if an experimental ban on soft drinks in the food stamp program would assist in their efforts to fight obesity and increase nutrition in the nation's largest city.

The USDA stated that the experiment would be "too large and complex" to implement and evaluate.

The food stamp program now has approximately 46 million recipients.  That is up almost 50% since President Obama took office.

This article brought to my mind what is the real objective of food stamps?  To relieve hunger and provide good nutrition would seem to be the prime objectives.  Decades ago, William F. Buckley wrote a piece in which he noted that poor people could be given those things with a diet of bulgur wheat, beans and lard that the government could provide in bulk in a section of every grocery store.  All free to anyone who wanted it.  No frills to be sure but it would get the job done with a fraction of the cost and bureaucracy of the food stamp program.

I am not suggesting anything so draconian but it seems that something is amiss. When someone can go into a grocery store and purchase caviar, crab legs and cashews with taxpayer money, and most of the taxpayers footing the bill would never think of buying these with their own money, we should be rethinking our approach.  I have seen or been told stories of each of these purchases.

Bakery cakes, cookies and candy are also eligible purchases for food stamp recipients.  In fact, most everything that is edible in a grocery store is eligible under the food stamp program except for hot, prepared meal items. Cigarettes and alcohol are excluded but someone can buy the caviar and crab legs and sell them for .50 on the dollar to someone else, take the cash and do anything they want with it (like buy their tobacco and beer).

The USDA says that it is too complicated to try to segregate food items but the federal government requires that chain drug stores and pharmacies code what is eligible for FSA and HSA accounts in their inventory systems.  Why can't it also be done with food items?

I am all for helping people.  However, welfare and public assistance is supposed to be a helping hand to get someone back on their feet.  We don't want people in need but we also don't need people who are content with their circumstances.  This country was built by people who were not content with their situation.  Eating caviar and crab legs is likely to make you a little too content.  Are eating Cheetos really the best way to meet our objectives of feeding the poor?

Just for discussion how about a plan like this? It would be built around 3 tiers much like most prescription drug plans.

Tier 1-Fresh vegetables, fruits, flour, rice and other natural ingredients could be purchased at a 50% discount with food stamps
Tier 2-Most food items would carry the regular price in food stamps
Tier 3-Candy, soft drinks, junk food, caviar, crab legs, cashews, bakery cakes and other luxury items would require a 100% surcharge.  The Tier 3 surcharge pays for the Tier 1 discount.

I have said it before and I will say it again.  We need new thinking and new ideas.  What we have now is not working.  We need to fix this country with new approaches.  This might not be the best plan but there has to be something better than we have right now.

A second story involves a $4.5 billion expansion of the "The Healthy Hunger-Free Kids Act" which will provide free lunches to ALL students in the Detroit school system.  That is right, ALL-rich, poor, needy, non-needy, of Detroit's 66,000 students.  This expansion is ultimately supposed to cover all schools across the country if at least 62.5% of a school district's families are below 130% of the federal poverty level.

What is the logic behind this expansion?  Quoting from the article in The Corner by Henry Payne
This new program is part of Obama’s orgy of spending, a binge that has ballooned the federal budget by 25 percent since his inauguration. But the program’s logic is even more insane than the price tag: The administration says it is giving rich kids free food to eliminate the shame that less-fortunate students may feel in receiving free food. We’re not making this up.
“We’ve worked very hard to reduce the stigma,” Aaron Lavallee, a U.S. Department of Agriculture spokesman, told the Detroit News. “We’re seeing a lot of working-class families who’ve had to turn to free school meals to feed their children.”
“Now all students will walk through a lunch line and not have to pay,” says Mark Schrupp, Detroit Public Schools COO. “Low-income students will not be easily identifiable and will be less likely to skip meals.”
78% of students in Detroit already qualify for free lunches based on the guidelines.  It would seem that the only kids (and parents) that had their feelings hurt were the 1 of the 5 that had to pay than being the 4 of the 5 that did not have to pay.

Please remember that we are borrowing all of this money to buy these school lunches and pay for the cavair, crab legs and cashews while we also hear that there is absolutely nothing that can be cut in the federal budget.

Monday, August 22, 2011

Improper And Wicked Projects

I wrote previously about The Original Argument which is an updated writing of the Federalist Papers.  I have moved around the book reading different Papers as I have time.  It really is unfortunate that more people are not familiar with the Federalist Papers for in this contemporaneous writing we have the theories, rationale and reasoning of the Founders for our Constitution.  What is truly amazing in reading the Federalist Papers is how well they understood human nature.  Power, politics, greed, fallibilities, bias, conflicting interests, oppression. There is nothing going on today that they did not anticipate.

Due to the intelligence and insights of our Founding Fathers they wrote a document that considered all of the above and more in writing the U.S. Constitution.  They knew that instability, injustice and confusion within the institution of government had caused many to fail.  They were determined to build a governmental structure that could endure for the ages.

Federalist Paper #10 was written to describe "How the Union Will Act as a Safeguard Against Domestic Division and Rebellion". They understood that opposing political factions were the greatest potential threat to any government and that in many governments the only redress was violence.  They wanted to insure that factions could not wield power that would be dangerous to either the rights of other citizens or the common good.  What did they see as the most common and tangible source of faction?  The conflict between rich and poor. Here are the exact words from #10.
The most common and durable source of factions has been the various and unequal distribution of property. Those who hold and those who are without property have ever formed distinct interests in society. 
Where did they see the most danger for a majority to trample on the rights of a minority?  Taxation.
The apportionment of taxes on the various descriptions of property is an act which seems to require the most exact impartiality; yet there is, perhaps, no legislative act in which greater opportunity and temptation are given to a predominant party to trample on the rules of justice. Every shilling with which they overburden the inferior number, is a shilling saved to their own pockets. 
They understood that those that governed us had to be a cut above to balance and mediate these conflicting interests and put the public interest above any special interests.  However, they also knew that this was naive. The Common Argument modern translation puts it this way.
Enlightened statesmen will not always be in power, and even if such mediation could happen, it would rarely take place with long-term interests in mind, since the immediate "here and now" interests of the party in power would most likely win the day at the expense of the rights of the other party, or the good of the whole.
Our Founding Fathers were one smart group.

They also knew that there was little they could do to prevent factions from occurring.  That could only be done by limiting liberties or insuring every citizen has the same opinions, feelings and the same interests. Neither was acceptable to the Founders.  They had no interest in preventing the causes, which is what Communist and Totalitarian governments do.  They focused on controlling the effects of factions.  Thus, they constructed a republican governmental framework with an ultimate goal of securing both the public good and private rights against the dangers of an oppressive majority faction.  Everything in the Constitution was built on this foundational principle.

They built a government which derived all of its power directly or indirectly from the People, administered by representatives who hold their offices at the pleasure of the People, for a limited period of time, or during good behavior.  Using different time periods for holding office, including the separation of powers between the three branches of the federal government and limiting the power of the federal government relative to the states were all important foundational principles to achieve their overarching goal of facilitating majority rule but protecting minority rights.

Perhaps most applicable to today is what Federalist #10 says in the second to last paragraph.  It explains why they set up the republican form of government we have and not a democracy or parliamentarian system. It literally stopped me in my tracks when I read it.  I re-read it several times in The Original Argument and then went to the actual Federalist Papers to read it exactly as it was written.  There could not be a better example to show how far we have deviated from the path the Founders established and why they set up safeguards in the Constitution to protect the People.  It reads as follows with the bold emphasis being mine:
The influence of factious leaders may kindle a flame within their particular States, but will be unable to spread a general conflagration through the other States. A religious sect may degenerate into a political faction in a part of the Confederacy; but the variety of sects dispersed over the entire face of it must secure the national councils against any danger from that source. A rage for paper money, for an abolition of debts, for an equal division of property, or for any other improper or wicked project, will be less apt to pervade the whole body of the Union than a particular member of it; in the same proportion as such a malady is more likely to taint a particular county or district, than an entire State.
How much more relevant can you be to what we have seen in recent years in this country, most particularly in the Obama Administration?  The Founders found all of these to be "improper or wicked projects"by dangerous factions.  These were the types of government abuses they were trying to prevent.

  • a rage of paper money (what is the Federal Reserve doing?)
  • an abolition of debt (what was done to the secured creditors in the GM and Chrysler bankruptcies or with the bailout of Wall Street?)
  • for an equal division of property (Redistribution of income and wealth through a focus on taxing the rich)
Isn't it interesting that each of these "improper or wicked projects" is also at the core of what has motivated the Tea Party?  Terrorists?  I think not.  These are the sons and daughters of the Founding Fathers united against the very factious leaders our forefathers warned us about.  


Saturday, August 20, 2011

Stay on Vacation?

President Obama is on vacation on Martha's Vineyard after his 3 day campaign bus trip through the Midwest.  Seeing some of the aftermath of the trip, it might actually be better that he is vacationing than in Washington working on the People's business.  Here are three specific examples of why it might be better for the country if he did not worry about getting back to work too soon.

Example 1
I wrote yesterday about his exchange with the misinformed college student from Augustana College in Illinois.

Example 2
Peter Kirsamow of The Corner has these questions for President Obama after the trip.
During your bus tour this week you repeatedly called for “shared sacrifice” and for the “wealthy” to pay their “fair share” in order to reduce the federal deficit and debt. According to the latest IRS data:
  • The top 1 percent of income earners pay 38 percent of all federal income taxes. They earn 20 percent of all (adjusted gross) income.
  • The top 10 percent of income earners pay 70 percent of all federal income taxes. They earn 55 percent of all income.
  • The top 25 percent of all income earners pay 86 percent of all federal income taxes. They earn  67 percent of all income.
  • Approximately half of U.S. households pay no federal income taxes whatsoever.
From which of the above categories do you want more “shared sacrifice?”

Do you want those in the top 25 percent of income earners to pay more than 86 percent of all federal income tax? If so, how much more?
Do you maintain that the top 25 percent should pay more federal income taxes because they use federal government services or benefit from federal government programs more than those who pay no federal income taxes? If so, which specific federal programs/services provide more benefits to the top 25 percent than to those who pay no federal income taxes?

What, if anything, should be the “fair share” paid by those presently paying no federal income taxes?

The threshold adjusted gross income for the top 25 percent of income earners is $67,280.  Do you consider that “wealthy?”

Example 3
Finally, consider the experience of M.J. Lee of Politico who followed the President's advice that he gave to  a farmer who had questioned the President about new rules and regulations that could impact his farming business.   He contacted the USDA.  Here is the background in the story.
At Wednesday’s town hall in Atkinson, Ill., a local farmer who said he grows corn and soybeans expressed his concerns to President Obama about “more rules and regulations” – including those concerning dust, noise and water runoff -- that he heard would negatively affect his business.

The president, on day three of his Midwest bus tour, replied: “If you hear something is happening, but it hasn’t happened, don’t always believe what you hear.”

When the room broke into soft laughter, the president added, “No -- and I’m serious about that.”

Saying that “folks in Washington” like to get “all ginned up” about things that aren’t necessarily happening (“Look what’s comin’ down the pipe!”), Obama’s advice was simple: “Contact USDA.”
You really need to read the entire chronology of what the reporter had to deal with to appreciate how unhelpful President Obama's advice was to the farmer.  As Lee observed, he was soon  in "the bureaucratic equivalent of a hot potato."  You can also better understand why the room broke into laughter while the President answered the farmer.

I am not begrudging anyone taking a vacation. However, most American workers have to make sure all of their work is done before they go on vacation.  I think Congress and the President both should have stayed on the job since there is so much unfinished work in Washington.

At the same time, considering the aftermath of the President's bus trip, perhaps he will do less damage attacking the golf ball, the beach and lobster rolls on Martha's Vineyard than he did earlier this week in the Midwest.

From Michael Ramirez in Investor's Business Daily

President Obama's statements on rest compliments of Mark Levin.

NOVEMBER 2, 2009 – "We will not rest until we are succeeding in generating the jobs that this economy needs"
NOVEMBER 23, 2009 – "I will not rest until business are investing again, and businesses are hiring again"
JANUARY 28, 2010 - "We will not rest until we build an economy that's ready for America's future"
MARCH 5 2010 – "I’m not gonna rest & my administration is not gonna rest in our efforts to help people who are looking to find a job"
JULY 8, 2010 – "My administration will not rest until every American who is able and ready and willing to work can find a job"

Thursday, August 18, 2011

Misinformed At Augustana

One of the great frustrations I have is seeing how many misinformed people there are in this country.

This was in evidence yesterday with a question that President Obama got from a college student from Augustana College in Illinois.

The student stated that he thought it was very unfair that the Social Security FICA tax was capped on annual earnings (currently $107,000) and stated that he thought it was not right that someone like Mitt Romney should not have to pay more since he is obviously a millionaire.

He concluded with this question for President Obama, "Can we look forward to you telling the Republicans that it's time the wealthy pay their fair share".

President Obama responded, "Well, first, this is a very well informed man here."

You can see the video here.

Unfortunately, the student is not very well informed at all.

First of all, I do not think that Mitt Romney is employed. Therefore, he has no income from salaries and wages.  The FICA taxes that fund Social Security are applied only to earnings.  They do not apply to dividends, capital gains and other forms of investment income that I am sure make up the vast bulk of Romney's income.  Therefore, a change in the annual earnings limit would have no effect on what Romney pays for Social Security taxes.  If you read my post, The Person Behind The Tree, the same can be said for most other millionaires.  They are millionaires not due to their salaries.  They are millionaires because of their investments.  It used to be referred to as CAPITALISM in this country.

Second, Social Security was not set up to be a welfare redistribution of income system.  It was specifically established as a social insurance program for all Americans.  The formula determining the Social Security benefits that an individual receives is dependent on the contributions the worker (and his employer) have made into the system.  The more you contribute, the higher the benefit.  Under the Social Security law as it has existed since it was first enacted, if the earnings maximum is increased then the worker is entitled to a higher benefit.  This link between the taxes workers pay into the system and the benefits they receive has been considered a foundational principle since the program was first proposed by President Franklin Roosevelt.

The maximum annual Social Security benefit today for someone who has paid at the annual earnings limit is slightly over $25,000.  However, if there was no earnings limit someone making $1 million per year would be entitled to $162,000 per year in benefits.  $400,000 per year would equal about $72,000 per year.

This drives competing policy questions surrounding increasing the wage limit.  Is it wise to be paying these large payments to well-to-do people when Social Security was designed to be a floor of protection for retirement?  On the other hand, if you tax the high earners but don't provide an additional benefit you have undermined the core principles that have governed Social Security for almost 75 years.  You have turned it into yet another wealth redistribution program. Social Security was supposed to bind Americans of all earnings level together for retirement income protection.

The Congressional Research Service has an entire paper on the subject written in 2010 if you want to be informed about the pros and cons of raising or eliminating the taxable earnings base for Social Security.

We have some very difficult challenges ahead of us.  If we are going to solve our problems, people need to be informed about the issues.  Most importantly, our leaders have a duty to make sure the people know the facts.  It appears that we are failing on both points.

I know Augustana College to be a great school.  Can someone set this student straight?

An interesting footnote to this story...
Ed Henry of Fox News spoke to the student after he questioned the President and reports that he was wearing a tag that said "Volunteer" on it.

Wednesday, August 17, 2011

The Person Behind The Tree

The IRS has recently released statistics on income taxes for the year 2009.  This is always interesting data for a tax and trivia geek like me.

The Wall Street Journal has an op-ed in today's paper entitled "Millionaires Go Missing" after reviewing the data.  It seems that there were a lot fewer millionaires in 2009 than in 2007.  If the goal of President Obama was to redistribute income, the IRS data shows that the economy has done the work for him.
In 2007, 390,000 tax filers reported adjusted gross income of $1 million or more and paid $309 billion in taxes. In 2009, there were only 237,000 such filers, a decline of 39%. Almost four of 10 millionaires vanished in two years, and the total taxes they paid in 2009 declined to $178 billion, a drop of 42%.
This chart shows the effects of the recession on the rich.

Even though the ranks of the millionaires have been depleted they still shoulder a big portion of the income tax burden and those with incomes over $200,000 are paying the majority of income taxes in this country.  This is the top 3% of all income earners.  They actually paid more in income taxes than the other 97% combined!
The millionaires who are left still pay a mountain of tax. Those who make $1 million accounted for about 0.2% of all tax returns but paid 20.4% of income taxes in 2009. Those with adjusted gross income above $200,000 a year were just under 3% of tax filers but paid 50.1% of the $866 billion in total personal income taxes. This means the top 3% paid more than the bottom 97%. Yet the 3% are the people that President Obama claims don't pay their fair share. Before the recession, the $200,000 income group paid 54.5% of the income tax.
To summarize...
  • Those making $200,000 comprised 3% of all tax returns
  • They earned 25% of total income (down from 33% in 2007)
  • They paid 50.1% of all income taxes (down from 54.5% in 2007)
Those with incomes above $1 million earned 16.1% of total income in 2007 but had dropped to 9.5% of total income in 2009 according to the WSJ.  They paid 20.4% of all income taxes even though they represented just .2% of all returns files. 

Which year were the majority of Americans better off?  When the rich had a higher percentage of total income or a smaller percentage?  John F. Kennedy said it many years ago and it still applies today,

 "A rising tide raises all boats"

As the Wall Street Journal points out...
It's an old story: The best way to produce income equality is to destroy trillions of dollars of wealth. Everyone loses, but the rich lose relatively more than the poor and the middle class. By that measure, if few others, Obamanomics has been a raging success.
I looked over the data myself and pulled out a few interesting points of tax trivia.
  • Middle class earners between $60,000 and $200,000 comprise 2/3 of all taxable returns
  • This group also reports about 50% of all total income earned.  They earn 58% of all salaries and wages.  27% of all dividends. 41% of Schedule C business income.  8% of capital gains. They bear about 36% of the income tax burden.
  • On the itemized deduction side, these middle class earners make up 45% of the total amount for state income taxes, 55% for property taxes, 58% for home mortgage interest and 46% of all cash charitable contributions.
  • Those reporting over $1 million in income principally make that much money by risking their capital.  Only 32% of their total income is from salaries and wages.  By contrast, 80% of middle class income comes from salaries and wages.  71% of all capital gains income was reported from those making over $1 million in 2009.  I am sure a good portion of this is from one-time events like the sale of a business, farm or investment property that was the reason they were a "millionaire" in 2009.  37% of all dividend income was also earned by millionaires.
  • Looking at itemized deductions, millionaires only account for 1% of the mortgage interest deduction, 4% of the property tax deduction, 17% of cash contributions and 20% of the state income tax deduction.  Compare these percentages to the middle class above and you see that itemized deductions are a much greater benefit to the middle class than to the rich.
What can you take out of this?  The biggest difference between the wealthy and the middle class is the investment income they are deriving from risking their capital.  This is really driven by capital gains income.  It is the big differentiator between the rich and the middle class. As my father used to tell me, "You don't get rich working.  You get rich when your money works for you."

Of course, to get your money working for you, you need to put it at risk.   Money is much like seed. Seeds don't do anything if they sit in a drawer,cabinet or bag in the barn.  However, if they are properly planted, nurtured and cared for, one seed can grow into an enormous tree. That tree can begat an entire forest.

Right now we don't have enough people willing to plant seeds.  Is this the time to tax the person behind the tree that has the seeds for the next tree?

"Don't tax me, don't tax thee, tax the person behind the tree"-Senator Russell Long (D) LA

Chairman-Senate Finance Committee

Tuesday, August 16, 2011

President Calls For Balanced Budget Amendment

No, not our President.  President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany today called for all euro zone nations to enact constitutional amendments requiring balanced budgets.  They want the process completed by the summer of 2012.

Did we ever think we would see the day when the Europeans would be pushing for more conservative fiscal reforms than we are?  The Tea Party is ahead of the rest of the country right now.  I predict that will change in time.  The Europeans realize they have no choice.  Washington will eventually come to that conclusion as well.  It just might not occur after 2012.

Monday, August 15, 2011

Politics and Pollination

William Poole, who is the former President of the Federal Reserve Bank of St. Louis, recently wrote about why it is so hard to bridge the gap between taxes and spending. As he puts it...
Most arguments favoring federal spending seem implicitly to assume that someone else is or should foot the bill. For Democrats, "someone else" is the upper-income taxpayer. I propose the Social Security test instead.
Under his Social Security test every piece of spending should be looked at in comparison to an across the board cut in Social Security benefits.   He suggests that we apply this test to all federal spending.  You should not be able no to hide behind the thought that "someone else" is paying the bill.

You want solar, ethanol or windmill subsidies?  You want to pay for Obamacare subsidies? You ought to be willing to put your own money on the line.  If everyone in America knew that they would bear the burden of each spending decision how many would stand up and be willing to pay for the costs with their own money?

Gay marriage is a good example.  More people seem to favor allowing same sex marriage than a few years ago.  However, the federal Defense of Marriage Act (DOMA) states that marriage is between one man and one woman.  Without this law, gay couples in states like Massachusetts and New York could claim and collect Social Security and Medicare benefits.  However, these programs have never contemplated gay marriage.  It is not in the actuarial cost of these programs which are already going bankrupt.  Repealing the DOMA (as the Obama administration favors) would result in higher Social Security and Medicare costs.  How many people would be willing to reduce their own Social Security and Medicare benefits if that was the result of legalizing same sex marriages?

That is the balanced thinking that has to occur.  People have to be held accountable with their own money on spending decisions.  Not someone else's.

In reality, Poole is talking about an across the board tax increase. He is just using the Social Security test to simplify the point.  As he explains in his commentary...
I hope that Republicans repeat at every opportunity, "What is your plan?" We must understand, as the CBO makes clear, that our budget problem cannot be solved by a tax increase confined to the top brackets. For tax increases to make a material contribution to solving the budget problem, the increases will have to apply to most brackets.
I would be delighted if my proposed Social Security test provokes some clear thinking. After all, if you would rather have a tax increase on all brackets, keep in mind that the increase will fall in part on those currently receiving Social Security benefits and the rest of the tax increase will fall on future Social Security beneficiaries. Roughly speaking, broad tax increase, reduction in Social Security benefits -- same difference.

There are few people in this country who are stronger fiscal conservatives than I am.  If you have read my blog, I think you understand that.  However, we need to fix our deficit problems.  How do you fix it if you cannot bring any ideas to the table to solve the problem.? If the party line of the Democrats is that we cannot afford to cut any spending and the Republicans are just as adamant about tax increases, where do you build the bridge?  Someone has to step out and lead.  These are the finer details on how I would suggest any revenue increases be framed.

  • Spending cuts must be at least 4 times as large as any broad based tax increases and 6 times as large as any class warfare tax increases.

  • Any revenue increases must not take federal receipts as a % of GDP over a maximum limit of 18.5%-the long term historical average for revenues is actually only 18.2%.  

  • 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 .  It cannot be used for new spending.

  • I suggest that the Republicans on the Super Committee put these types of principles on the table early and challenge the Democrats to give us their plan.  I would also announce that the goal of the Republicans is to do something much bigger in deficit reduction than what is required in the legislation. Go big-at least $5 trillion in deficit reduction.  I would also clearly state the above principles in public before I went behind closed doors to work on details.  This would serve three purposes-

    One, it would contribute to needed transparency in the coming process,
    Two, it would show right away to the public that the Republicans are serious about building a bridge to solve problems,
    Three, it would allow the Republicans to seize the initiative and allow the Republicans to keep saying to the Democrats "We have suggested a reasonable plan on revenues. Where is your plan on spending?"

    To be successful in governing you have live in the world of what is possible.  The plan I outline above is what I would consider to be on the far edges of "possible" in our current environment.  The first priority is to get the Democrats to start walking out on the bridge to substantial spending cuts.  I believe these principles would also be considered "reasonable"by the vast majority of Republicans and Independents and a fair number of Democrats. It is time to get Democrats to walk the walk on spending cuts and start explaining that if there are tax increases in the mix they most likely are going to touch everyone.

    Senator Russell Long used to say "Don't tax me, don't tax thee, tax the man behind the tree" making the same point that William Poole makes above.  The problem is that there are not many trees left in the forest today.  We need to plant more trees (taxpayers) and we need to plant more ideas to get our fiscal problems fixed.  Yet another idea planted here at BeeLine.  We just need more pollination in Washington to get something to bloom somewhere.

    Sunday, August 14, 2011

    A Balanced Meal

    The composition of the Super Committee to deal with our mounting budget problems are now known.  The work of this group to develop $1.5 trillion in deficit reduction must be completed by November 28 with the approval of the Congress required by December 23 in order to avoid $1.2 trillion in cuts split evenly between domestic programs and defense.

    We likely are heading for another impasse as the Democrats insist on tax increases on the "rich" and the Republicans insist on spending cuts that are much more substantial than the Democrats appear willing to consider. How do you bridge these differences?

    I have written before that I am a reasonable man.  I also was not born yesterday.  Therefore, I have stated that I would not be adverse to some modest revenue increases in a grand bargain.  However, I would insist on at least 6 times the spending cuts as any revenue increases.  I would also insist that the spending cuts come first.  Any revenue increases would be deferred until the spending cuts were "in the bank".  To use President Obama's own language, "We need to eat our peas first".  Revenue increases are the dessert that you only get if you do the tough stuff first.  That is my definition of a balanced meal.

    This is about the proportion of spending cuts to tax increases that has been successful in other countries that solved large deficit spending problems.  Lower ratios of spending cuts to tax increases have generally been unsuccessful in correcting large fiscal imbalances.

    In addition, if the revenue increases involved elimination of any of the Bush tax cuts for the "rich" then the spending cuts could not involve any means testing of Social Security or Medicare for these groups.  We need to get away from the class warfare.  Higher income taxpayers should not have to pay higher taxes and also have their Social Security and Medicare cut at the same time.  They have paid into these programs which were designed to serve all Americans.  They were not established as welfare programs.  We should be careful about turning them into welfare.

    If I were negotiating with the Democrats I would also offer another alternative.  If the reasonable offer above is not acceptable, I would also offer a 4:1 spending to revenue increase deal.  However, this deal would require that all revenue increases be across the board proportionally on all brackets and open the door for means-testing for Social Security and Medicare.  Everyone would have to sacrifice.  Of course, since the rich pay the most in taxes they would end paying the most in any tax increase anyway.  The Democrats never want to say this.  However, we would move away from the class warfare that the Democrats like to play.

    This strategy would be designed to put the Democrats in the position of having to come up with a spending reduction plan.  They can soak the rich and we can get more substantial deficit reduction.  Or they can protect some spending but they will be responsible for a tax increase on everyone.  If they want balance then they should start looking at both sides of the equation honestly.  We all should.

    Why is there value in this approach?

    I'll explain in my next post.  Check back.

    Thursday, August 11, 2011

    The Fourth Turning

    In 1998 I read a book that had a tremendous impact on my understanding of history, my view of the future and how the perspective of the American people will change over time .  That book is the The Fourth Turning by William Strauss and Neil Howe.  I recommend it often and I still re-read it and refer to it even though it was written 14 years ago.

    The Fourth Turning refers to the cycles of history.  There is a pattern to history. There are four turns much as there are four seasons.  A new era -or turn- occurs about every two decades or so.  As the authors describe it...
    At the start of each turning, people change how they feel about themselves, the culture, the nation, and the future.  Turnings come in cycles of four.  Each cycle spans the length of a long human life, roughly 80 to 100 years. 
    The four turnings are much like the seasons.

    There is a Spring which is a High where institutions are strengthening and individualism is weakening and a new civic order is implanting.  This was the period beginning right after WW II to the late 1960's

    There is a Summer which is the Awakening.  This is an era of spiritual upheaval when the new civic order comes under attack from a new values regime.  This period began in the late 1960's with the flower children and Vietnam War protests and lasted until the late 1980's.

    There is a Fall which is the Unraveling.  This is a period of strengthening individualism and weakening institutions.  The old civic order decays and the new values regime firmly implants.  This began in the late 1980's and the authors predicted that it would run for about 20 years.

    The Fourth Turning is the Crisis.  It is a decisive era of secular upheaval according to Strauss and Howe. In 1997, they predicted that "sometime around the year 2005, perhaps a few years before or after, America will enter the Fourth Turning."

    When I read this book in 1998 it seemed an audacious prediction.  America was riding high.  The stock market was booming.  The federal budget was in surplus.  The defense budget was being trimmed every year as there seemed to be no real threats to peace.  All seemed right in America.  It was hard to see what  they were talking about.  Yet the book gave me an uneasy feeling and increased my sensitivity to observing the changes that were going on around me.

    Consider the news of the day.  Trillions in deficit spending and no end in sight.  US Treasuries downgraded.  The Dow down 1,800 points in the last 3 weeks.  A leadership vacuum in The White House and gridlock in Congress.  Three wars in the Middle East.

    I hope you now understand why I believe that The Fourth Turning is one of the most consequential books of our time.  To read these pages today that were written a decade and a half ago is chilling.  There is no sugar coating it.  We are in for a period where the very survival of the society will feel as if it is at stake.  It will be high stakes and high risk.  Much like the days of the American Revolution, the Civil War or the Depression Years and World War II.  These were the other Fourth Turnings in American history.  If you do the math you see that these events were all separated by about 80 years.  We have entered a similar era according to Strauss and Howe.

    What does it all mean?  We need to change our approach.  We need leaders that will lead.  We need to be decisive in confronting our problems.  We need to put the public interest ahead of special interests.  There will need to be political upheaval and public sacrifice.  There will need to be more personal responsibility and personal accountability.  We need to de-fund time-encrusted government bureaucracies.  We need to promote traditional virtues.

    We also need to focus on reversing the decline of the middle class and focus more on children and less on senior programs.   We need less class warfare and find better ways to build bridges between the classes.  We need to understand it is about our country and not about us.

    We need to understand there is a role for government to help us navigate the rough waters ahead of us.  There are many things that only government can do.  To get through this period government will have to be the force that can galvanize and unite us to meet the challenge.  We cannot survive the crisis if we are all going our separate ways.  To meet the big challenges of the previous Fourth Turnings like the Revolution, the Civil War and World War II it took a strong government to lead and to galvanize the people to meet the crisis and create a new sustainable civic order.

    I am not talking about the type of government we have now.

    Our Constitution specifically states that the key duties of our government are to provide for the common defense and promote the general welfare. It was not designed to pick winners and losers. Its role was seen to protect both and to see that both had a level playing field. It is supposed to be about the public interest rather than special interests.  It is about what is best for the United States rather than US as individuals.  This is the type of government that helped us survive previous Fourth Turnings.

    We do not yet have the leadership or government in place yet to do what needs to be done.  However, I see the glimmer of true hope and change starting to emerge.

    We are on a path for a rendezvous with history according to Strauss and Howe.  We have entered The Fourth Turning just as they predicted.  We now need to prove that we are as worthy as our forefathers in meeting the challenge in that rendezvous.  We each will have a role to play.  Are you worthy?

    Wednesday, August 10, 2011

    Fuel On The Fire?

    The federal excise tax on gasoline is scheduled to expire on September 30.  It currently is levied at 18.4 cents per gallon at the pump and brings in about $25 billion in federal revenues annually.

    Since the current tax expires on September 30 that means there will need to be an affirmative vote by both the House and the Senate, and President Obama must sign the bill, by that date for the tax to remain in effect. Almost all of the money collected from the tax goes to the Federal Highway Trust Fund which is the largest source of federal funding for road and mass transit improvements.

    Are we looking at another battle on Capitol Hill?  Does it make sense for conservatives to throw more fuel on the fire? I think it would be unwise to block the renewal as the value of a good transportation infrastructure is one area of government spending that most people agree with.  It would make no sense to try to constrain this spending. In fact, the establishment of primary federal roads (referred to as "post roads") is specifically enumerated as a power of Congress in the Constitution. (Article I, Section 8).

    However, is a federal excise gasoline tax the best way to provide this funding?  This tax is levied on top of state taxes that are also levied at the pump which are also used for road projects.  State taxes average about 31.1 cents per gallon on top of the 18.4 cent federal tax.  Therefore, about 50 cents of every gallon at the pump are taxes and the feds and states are fighting over the same source of revenue.

    At the same time, we continue to rely on imported oil for about half of our needs for oil but we have no coherent energy policy to reduce this dependence.  This makes no sense to me from any perspective-economic,employment or national security.

    Why would we not consider being a little more strategic in our thinking?  How about eliminating the federal gas tax and replacing it with a tax on imported oil?  Raise the same amount of revenue but tilt the playing field in favor of the development of domestic sources of oil.  My calculations would suggest that it would take about a 7-8% tax on all imported oil at current prices to raise the same amount of revenue as we are collecting on the current federal gas tax. This provides Exxon or BP with a choice of drilling outside of the country and importing or drilling domestically and lowering their costs by 7-8%.  We also get the added advantage of creating some very high paying jobs here as well.  All of this without any tax increase on the American people. 

    Pushing this idea might also have the additional benefit of putting pressure on President Obama and the Democrats to open up drilling opportunities in the Gulf, ANWR and other areas that bear great promise.  It would be refreshing to see President Obama interested in encouraging drilling here rather than in Brazil and other countries.  In case you missed it earlier this year, the U.S. is going to lend at least $2 billion to Brazil's state-owned oil company, Petrobas, to finance exploration of an offshore discovery in Brazil.  Here is what President Obama said at that time...
    We want to help with technology and support to develop these oil reserves safely, and when you’re ready to start selling, we want to be one of your best customers.  At a time when we’ve been reminded how easily instability in other parts of the world can affect the price of oil, the United States could not be happier with the potential for a new, stable source of energy.”
    We have problems on top of problems but we do nothing to try to fix the problems.  If we want new, stable sources of energy shouldn't we be doing everything to develop those in our own country?

    We need to start bringing some new ideas to the table.  Is the federal gas tax extension a good place to start thinking differently?  It could be.  However, we again have the practical problem that Congress is on vacation until after Labor Day and that leaves almost no time for a rationale, reasonable debate.  Why do we let Washington do this?  Everything becomes a crisis because no one is thinking strategically and systematically.

    If the House Republicans want to show they are serious about turning the country around and sending a message to the country, cut the vacations short and get back to Washington, DC.  Let President Obama fly around the country to fundraisers and vacation in Martha's Vineyard.  Republicans need to show that they are serious and have serious ideas.  Because we have serious problems.  The gas tax could be the first step in reforming a tax system that would put more value on common sense than just raising dollars and cents (per gallon).

    Tuesday, August 9, 2011

    The Wavering Waiver Presidency

    We are in a Wavering Waiver Presidency.  We may have been promised hope and change but what we have seen are a lot of wavering and waivers from this President's Administration.

    It started almost from the beginning.  President Obama waived his opportunity to develop his own stimulus plan right after he took office and outsourced it to Nancy Pelosi and Harry Reid.  Instead of getting a stimulus package that might spur economic growth and create jobs, we got almost $1 trillion of bailouts of states, unions and paybacks to Democratic special interest groups.  The result-an explosion of debt and unemployment that is higher today than when the stimulus passed.  We also have nothing tangible to show for it other than the debt and the interest that will have to be paid on it for years into the future.

    He did the same thing with his health care reform package.  We never saw an Obama plan.  He outsourced that to the Congress.  To get it passed they also waived the normal legislative rules to avoid the Senate filibuster rules.  The result-a health care law that was passed without any Republican votes and which poll data still indicates the majority of Americans would like repealed.

    Once the law was passed, however, the Obama administration started issuing waivers to the law they passed as unions and businesses complained of its onerous provisions.  Provisions that would actually reduce health care coverage rather than expand it as President Obama promised.   More than 1,400 waivers were requested.  The Administration granted over 95% of them until it announced recently it would not grant any more in the wake of continuing negative PR about the waivers.

    Shortly after taking office, President Obama appointed a bi-partisan debt commission (the Simpson-Bowles Committee) that was charged with recommending steps to deal with our structural budget deficits and entitlement spending problems.  What did President Obama do with the recommendations?  Nothing.  He did not even adopt a few of them.  He waived responsibility again.  The result-we have now ended up with the first debt downgrade in the history of the United States from AAA status.  Bear in mind that this AAA status held up through World War I, the Great Depression, World War II, double digit inflation and 20% interest rates.   Our AAA rating could not withstand a wavering waiver President.

    Throughout the entire debt ceiling limit discussions we never once heard President Obama articulate a plan.  He wavered.  He waived any responsibility to lead.  In the end, it was Speaker Boehner and Senate Majority Reid who had to put a deal together at the last minute.

    Of course, almost 3 years into this Presidency it is impossible to find anything this Administration is willing to take responsibility for.  They continue to waive responsibility for everything.  Unemployment-Bush's fault.  The federal debt-Bush.  The debt ceiling limit-Republicans and The Tea Party.  The debt downgrade-The Tea Party. The budget deficit-corporate jets and rich people not paying enough in taxes. The slowing economy-The Japanese Tsunami, the Arab spring and high oil prices.

    The Wavering Waiver Presidency is on the waiver trail again today. It seems that the "No Child Left Behind" law that was passed in 2001 (co-sponsored by John Boehner and Teddy Kennedy) with wide bi-partisan support with tallies of 384-45 in the House and 91-8 in the Senate set testing standards that were too tough.  This article provides the background.

    The goal of the law was to have every student proficient in math and reading by 2014.  This was to be accomplished by requiring states to bring more students up to the math and reading standards each year based on student testing.  Secretary of Education Arne Duncan has warned that 82 percent of U.S. schools could be labeled failures next year if No Child Left Behind is not changed.

    The step-by-step ramping up of the 9-year-old law has caused heartburn in states and most school districts, because more and more schools are labeled as failures as too few of their students meet testing goals.
    Critics say the benchmarks are unrealistic and brands schools as failures even if they make progress. Schools and districts where too few kids pass the tests for several years are subject to sanctions that can include firing teachers or closing the school entirely.
    What is going on here?   A law that was passed in 2001 by an overwhelming bi-partsian majority set a goal of having every student proficient in math and science by 2014.  Sounds like a reasonable plan. They gave 13 full years for schools to reach the goal.   In effect, schools had the entire school career of students entering kindergarten the year the law was passed to meet the goals established.  How much more reasonable can you be? It sounds as if schools are failing miserably in meeting the goals.  They now want waivers and the President is going to do it?  Is this for the benefit of the students or the teacher's unions?

    If only dealing with our downgrade, deficit and entitlements were so easy.  If you don't like the result just give out waivers.

    This is another reason why we need a Balanced Budget Amendment. Wavering and waivers seem to be a little too easy to come by when you are in Washington. Particularly when you are dealing with The Wavering Waiver Presidency of Barack Obama.

    Monday, August 8, 2011

    Not One Pretty Picture

    A basic rule of neuroscience is that the more visual the input is, the more likely you (your brain) are to recognize and recall it.  This phenomenon is called the Pictorial Superiority Effect, or PSE.  There is a good description of this in the book,  Brain Rules by John Medina,  that I read a couple years ago.
    Text and oral presentations are not just less efficient than pictures for retaining certain types of information; they are way less efficient.  If information is presented orally, people remember about 10 percent, tested 72 hours after exposure.  That figure goes up to 65 percent if you add a picture.

    Human PSE is truly Olympian. Tests performed years ago showed that people could remember more than 2,500 pictures with at least 90 percent accuracy several days post-exposure, even though subjects saw the each picture for about 10 seconds.  Accuracy rates a year later still hovered around 63 percent.
    If you are still having a difficult time in grapsing our federal budget situation, here are a four pictures that tell the story without the need for a lot of words.  The first two charts were published in The Big Picture.  Bud Conrad from Casey Research is the source for the third chart and The Heritage Foundation produced the fourth chart.

    The red line below is what we are spending.  The blue line is what we are collecting in revenues.  The gap between the lines is our federal budget deficit.  The shaded areas are recessionary periods.

    The next chart shows what we are spending and what our revenues are as a share of the economy (GDP).  The red line is the share of federal government spending.  The blue line is the share that revenues represent of GDP.

    You can see from this chart that since 1970 (outside of recessions and the dot.com boom that resulted in large capital gains driven revenues in the late 1990's), revenues have generally been between 18% and 19% of GDP no matter what the income tax rates were.  They were as high as 70% in the 1970's and as low as 28% in the late 1980's under Reagan.  This is why this seems to be a logical level for detemining what we can afford as a nation to be spending on federal government services-between 18% and 19% of GDP-with 20% as the outer limit.

    The final chart shows the effects of the debt limit deal signed by President Obama earlier this week. The red columns represent projected spending.  The blue shows the projected reductions in spending for each year in the agreement.  This does not include the $1.5 trillion in projected in deficit reduction from the Select Committee that is supposed to be voted on by December 23.  How much is the $1.5 trillion as a percentage of projected spending over the next 10 years?  About 3%!  The work of this Commission is going to be portrayed as extraordinarily difficult.  Does this look tough? 

    The last "picture" is from The Heritage Foundation and shows the projected rise in entitlement spending on Social Security, Medicaid, Obamacare subsidies and Medicare compared to average tax revenues as a % of GDP.  Is it any wonder U.S. debt has been downgraded when there is so little political will to do anything to address this problem?  Paul Ryan and the Republicans have tried.  President Obama and the Democrats need to get serious. 

    I hope that you can bring these images to mind the next time you vote.


    Thursday, August 4, 2011

    Watch Your Wallet

    The debt ceiling limit is behind us.  However, what lies ahead?  It is one thing to have a debt limit but it is another thing to get someone to loan you the money.

    Consider this chart that Chris Mayer on Agora Financial put together.  It shows that the United States needs to rollover almost $500 billion of U.S. Treasury debt during August.  It also has to finance a projected $159  billion for the budget deficit in August.  This means that the Feds have to float almost $650 billion of debt in August to keep the federal fiscal shop afloat.

    To put that in perspective that is almost the total amount of the QE2 debt-buying (money printing) program of the Fed that ceased at the end of June.  It is also about half of the estimated $1.2 billion in U.S. debt that China holds.  Who is going to fund the federal government and buy all this debt?

    The United States actually borrowed an additional $239 billion just yesterday according to this
    Washington Times story.  This actually ate up 60% of the $400 million debt limit increase that was signed earlier this week that is supposed to tide us over until the end of the year.  The Treasury was clearly making up for some of the manueverings they did to extend the debt limit into August.  If you recall, the actual limit was actually hit in May.  However, an added $239 billion in additional debt in one day is mind blowing.

    Right now Europe seems to be coming unglued.  Italy, Spain, Portugal and Ireland all have huge fiscal problems in addition to Greece.  Of course, the German and French banks are the ones that have the biggest exposures to these debts and this opens up the Germans and French governments as well.  That, in turn, is also bad for the Euro.

    US Treasury rates have dropped in the last few days and gold has soared (until today).  There are many Europeans looking for a safe haven right now.  This is an advantage for us at the moment but potential trouble has to lie ahead when you look at the massive amount of debt that has to be rolled over every month.

    Companies and countries do not crater because they run out of assets.  They typically hit the wall when a crisis of confidence (even one that might be short term) locks them out of the debt markets when they need to refinance their debt.   This causes a default because they don't have the cash to pay off the debt and don't have the time to liquidate their assets.  This is what caused numerous banks to fail in the 1930's and what brought down Lehman Brothers in 2008.  The road to disaster for any organization is to fund long-term obligations with short term borrowings.  Why?  Because you could very well reach a day when you need to refinance your debt and no one is willing to help on that particular day.  Game over.

    Warren Buffett puts it this way...

    Borrowers learn eventually that credit is like oxygen. When either is abundant, its presence goes unnoticed. When either is missing, that's all that is noticed. Even a short absence of credit can bring a company to its knees. In September 2008, in fact, its overnight disappearance in many sectors of the overall economy came dangerously close to bringing our entire country to its knees." 

    It is unimaginable that we could not borrow somewhere in the worst case.  However, at what cost?  Italian 10-year bonds were yielding 6.07% yesterday.  Spain was at 6.23%.  The U.S was at 2.595% yesterday and dropped to 2.41% today. 2 year t-bills today yielded .25% today-the lowest ever recorded.  One month t-bills are actually negative thanks in part to an announcement by Bank of New York Mellon that it would begin charging fees for large cash deposits.  It seems that they have had a number of large cash deposits in the last month as large investors lowered their risk profile from foreign currencies, stocks and commodities and moved to cash.

    At the same time, stocks got hammered today losing 500 on the Dow despite the debt ceiling deal.  Of course, if the debt limit deal had not been agreed to we would now be hearing it is all the fault of the Tea Party Terrorists.  Who do we blame if we can't blame the Tea Party or Bush now?

    We live in interesting times.  Watch your wallet very closely.

    Wednesday, August 3, 2011

    One More For Our Bill Of Rights-The Right To Have A Free Cell Phone

    I did not need to see this story today in the Pittsburgh Tribune-Review, especially when the country is going broke.  It seems that a cell phone is now considered a necessity in our welfare state.  In addition to housing assistance, Medicaid and food stamps you can also get a free cell phone and 250 free cell minutes every month in Pennsylvania and a number of other states.

    This is all paid for out of the Universal Service Fund which is a required payment (a tax) on all telecommunications providers pursuant to the Telecommunications Act of 1996.  This tax gets put on your cell phone bill by the phone company which then takes the money from you and is required to give free phone service to other people that are not you. 

    Three months ago, Walters, 48, of Swissvale started using Assurance Wireless, a program of Sprint subsidiary Virgin Mobile that provides free cell phones and 250 monthly minutes to people receiving government support such as Medicaid or food stamps.
    In Pennsylvania, two programs offer free cell service: Assurance Wireless and SafeLink from Tracfone Wireless, which specializes in "no-contract" cellular service. The federal Universal Service Fund, which all telecommunications providers support as required by federal law, pays for the programs.
    Amy Storey, a spokeswoman for CTIA - The Wireless Association in Washington, said all U.S. wireless carriers charge consumers a fee to recover the cost of their contribution to the fund, which varies quarterly as determined by the Federal Communications Commission.
    Assurance Wireless, which is in 26 states and Washington, D.C., started in Pennsylvania in February and is now being publicized in newspaper, TV and radio ads. The company reports more than 5.5 million people could qualify for the program in Pennsylvania. Gary Carter, manager of national partnerships for Assurance, was not able to provide the exact number of people who have signed up.
    SafeLink, which has been available to Pennsylvanians for three years, is in 39 states. Spokesman Jose Fuentes could not provide an exact number of users in Pennsylvania, but said there are more than 2 million nationwide.
    "The program is about peace of mind," Carter said. "It's one less bill that someone has to pay, so they can pay their rent or for day care. ... It is a right to have peace of mind.

    I was at a meeting this week when one of  country's major health insurance carrier cited the statistic that well more than 50% of the calls they get on their Medicaid business was  now coming in on cell phone lines.  I thought that it was interesting that someone could pay for a cell phone but could not pay for other items.  Now I know better. 

    I am all for helping people who need a helping hand.  However, where does it stop?  If peace of mind is a right do I have a right to have cable tv so I can monitor the news so I will have the peace of mind of knowing what I might not know?  How about paying for a pet?  Having a dog around makes most people have better peace of mind.  Better yet, I always have a lot more peace of mind when I am on vacation.  Are we going to pay for those as well?

    This is madness and it cannot continue for much longer if we are to survive as a nation.

    Tuesday, August 2, 2011

    It Was Ugly. It Is Supposed To Be Ugly.

    Several polls have come out in the wake of the debt ceiling limit and budget vote.  A Pew Research Center poll asked people to describe their feelings about the process in one word.  Words like "ridiculous", "disgusting" , "stupid" and "frustrating" were at the top of the list in describing the recent political theatre in Washington.

    A CNN/ORC poll released today indicates that just 44% of those polled approved of the agreement to  "raise the federal government's debt ceiling through the year 2013 and make major cuts in government spending over the next few years," while 52 percent disapprove.  Only 35 % of Republicans and Indpendents approve of the deal while 63% of Democrats indicated they were in favor.
    "Specific elements of the agreement are more popular than the agreement overall, however, suggesting the tumultuous and often times messy process had a negative impact on Americans and their perception of Washington. One measure of that: the percentage of Americans who approve of the way Congress is handling its job has shrunk to an abysmal 14 percent, easily the lowest measure in five years of CNN polling.

    Asked specifically about raising the debt ceiling, Americans are more mixed, with 48 percent approving and 51 percent disapproving. But here too, independents are squarely against raising the debt limit, 37 percent to 61 percent.
    A strong majority supports cutting about a trillion dollars in spending over the next ten years, with provisions to cut more in the future. Democrats (68 percent), Republicans (72 percent) and independents (60 percent) all approve of the spending cuts.
    But Americans disapprove of the lack of tax increases on businesses and higher-income Americans in the final agreement. Just 40 percent approve of the fact that the agreement does not contain tax increases. A majority, 60 percent, disapprove of the final package not containing those increases.
    What does all this mean?  It means that the system is working exactly as our Founding Fathers designed it to work in our Constitution.  David Rivkin, Jr. and Lee Casey refer to it as "A Debt Deal The Founders Could Love" in today's Wall Street Journal.
    The debt-ceiling crisis has prompted predictable media laments about how partisan and dysfunctional our political system has become. But if the process leading to the current deal was a "spectacle" and a "three-ring circus," as Obama adviser David Plouffe put it, the show's impresarios are none other than James Madison and Alexander Hamilton. Our messy political system is working exactly the way our Founders intended it to.
    To the extent House members were the most intransigent during the process—a matter of opinion, in any case—they were meant to be. The House of Representatives is the "popular branch," as described in The Federalist Papers, and was intended to "have an immediate dependence on, and an intimate sympathy with, the people."
    Many people, especially those who elected tea party candidates last November, passionately believe that the federal government has gone off the rails. They think that Washington has been spending like a drunken sailor since President Obama took office, and that this profligacy must end.
    By contrast, the Framers conceived the Senate as a body of graybeards (or, at the very least, as modestly mature individuals who have reached the age of 30). It was meant to represent the interests of the states and to serve as a check on "the impulse of sudden and violent passions," or the danger of "factious leaders" offering "intemperate and pernicious resolutions" that might in time characterize the lower house. If the Senate has been less willing than the House to call an immediate halt to federal borrowing and to seek a more gradual return to fiscal responsibility, this too is exactly what it is supposed to do.
    The result was a compromise, as it has nearly always been throughout our history. This will be a disappointment to many who voted for real and immediate fiscal restraint, but that too is to be expected. The Framers believed in gradual change. They prized stability and predictability. Most would have agreed with Talleyrand's injunction—"above all, not too much zeal"—and themselves watched as Talleyrand learned this lesson the hard way. An early and enthusiastic participant in the French Revolution, France's future foreign minister was forced to take refuge in the United States after his countrymen started cutting off heads.
    Accordingly, the Framers rejected a parliamentary system of government, where power is concentrated in the legislature and very often in one house of the legislature. There truly are winners and losers in such political systems, and governmental policy can indeed be transformed immediately after a new government takes office.
    By contrast, our Constitution diffuses power both vertically among the federal government and states and horizontally among the three branches of the federal government—and then again within Congress itself. Change, even good and necessary change, is always difficult. It must be based on consensus.
    The result this week is not what I wanted.  Nor is it what President Obama wanted.  Or John Boehner. Or Harry Reid.  Or even the angry callers to the conservative and liberal talk radio shows.  However, this is exactly the way it was supposed to work.  This is particularly the case with the way the House led the way.   The Founding Fathers would  be very pleased.  The system that they set up worked exactly the way they wanted it with the branch the federal government most attuned to the People proving to be the biggest obstacle for government as usual.
    Rarely in our system do the participants, whether in the House, Senate or White House, achieve all or even most of their goals in a single political battle. Sunday night, a debt-ceiling deal was reached that will raise the federal debt ceiling and permit continued borrowing to fund federal government operations through 2012 rather than just for another six months. The hard questions—taxes and spending cuts—have largely been postponed.
    But the key point has been made. Few now suggest that we can continue on our current spending binge. That is the beginning of a consensus, and a good start towards genuine change. Postponing the difficult questions also means that the electorate can have its say in the 2012 elections, and represents significant political risks for all parties.
    The Framers would be pleased at the "spectacle."
    It was Ugly.  It was supposed to be Ugly.  The Founding Fathers would call it 'Beautiful".

    Michael Ramirez from Investor's Business Daily keeps it all in context.