Tuesday, January 31, 2012

The Longevity Project

In The Longevity Project, researchers Howard Friedman and Leslie Martin take the results of an eight-decade study to provide the lessons to living a long, productive life.   The research study began in 1921 by Dr. Lewis Termin of Stanford University who started following 1,548 individuals born in the early part of the 20th century.  Friedman and Martin, among others, carried on the work after the death of Termin.

I have not read the book but saw an interview with the authors in OnInvesting, the Charles Schwab publication for investors, and thought some of their findings on longevity were interesting.

  • The old adages on what promotes longevity-getting married, exercising regularly, being happy, not working too hard- are overrated.  In certain groups of people they can actually have the opposite effect.
  • One of the best predictors of longevity is conscientiousness.  The authors define this as being prudent, persistent and well-organized.
  • The best careers were enjoyed by those people who were the most persistent.  They stuck to the things that they started and were willing to hang in there and avoided being impulsive along the way.
  • Some people are naturally conscientious or well-organized.  However, some people improved these traits over time by tackling small pieces one by one.  As that happened, their health habits and social relations also improved over time one step at a time.  
  • The people you spend time with tend to inform the person you become.  People who wanted to improve their health associated with healthy people.  People who wanted to be successful in business associated with successful business people at work.  Resilience and perseverance are not natural talents.  However, if you have the right social network, your friends can help you get back on the path if you get off track.
  • People who stay active and engage in things they are passionate about throughout their lives tend to live longer and be happier.  It was the responsible hard worker who tended to thrive.
  • Achieving financial and career success were often part of a healthy life path but money itself wasn't a primary factor for creating happiness.  People who led a successful life stayed productive and generally didn't have a lot of financial problems because of the life they led.
  • As you create a life plan remember that each good step leads to another in life.  Having a sense of what's meaningful to you and then conscientiously pursuing that path can help you succeed in every aspect of your life.
I hope you can find the time to check it out.  A well-organized, conscientious person surely will find the time.  

Sunday, January 29, 2012

Does Warren Buffett Read BeeLine?

Warren Buffett has argued that he does not feel right about paying too little in taxes.  He claims he pays a lower effective tax rate than his secretary ( I would like to see what he pays her).  I explained the likely facts and distortions behind this assertion in previous blogs, "Playing the Secretary Card" and "Pants on Fire"

In response to Buffett, Senator Mitch McConnell said that if Buffett were feeling "guilty" about paying too little in taxes, he should "send in a check".  There is nothing to prevent a a taxpayer from making a voluntary payment to the U.S. Treasury.  Buffett responded that he would gladly match any contribution made by a Republican member of Congress to pay down the national debt.

I turns out that 841 Americans actually did donate a little under $1 million to do just that last year.  Warren Buffett was not among them but Rep. Scott Rigell (R-Va) was.  He actually donated $23,103.33 in 2011 and plans to donate $26,000 in 2012 (about 15% of his salary).   Buffett, being a stand up guy, has stated he will match the Congressman's debt contribution as described in the letter below.

However, what I found most interesting was the statement at the bottom of Buffet's letter.  It sounded awfully familiar.

"We also very likely agree that spending must drop to 20-21% of GDP along with revenue increasing to 18-19%."

This is from the blog post that I wrote on April 12, 2011, "My Mother Solves The Budget Deficit".  I wrote this to lay out what I thought the strategy of the Republicans should be in the debt ceiling debate that was going to occur over the summer.  Has Warren Buffett been reading BeeLine????
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). 
Warren Buffett is now saying the same thing that BeeLine has been saying for almost a year. The same Warren Buffett that the White House loves to trot out with his statements on increasing taxes on the rich and other economic topics. It doesn't get much better than that.

The Republicans have been given a huge opportunity with this statement from Buffett to push hard for a budget deal that would force spending down to the 20% range.  They should seize on this opening immediately.  They could put the Democrats on the defensive with the words of their own oracle-Mr. Buffett.   It would also put us on a path toward a balanced budget.  Those are both worthy objectives if you are a Republican in Congress.

It is also very much to the advantage of the Republicans (and the country) to deal with the impending expiration of the Bush (and Obama) tax cuts that expire at the end of this year.  President Obama and the Democrats have little motivation to do anything about the expiration.  Taxes will go up dramatically on January 1, 2013 under current law if nothing is done in the interim.  Most Democrats will be very happy with this result. From their perspective, it just gives them more money to spend and spread around.  The Republicans need to get ahead of this issue and take the high ground.  The Buffett letter provides them the opportunity to do so.

The Republican proposal should be as follows:

1) We agree with Warren Buffett on the "necessity to dramatically reduce the deficit soon."

2) We agree with Warren Buffett that spending must drop to 20% of GDP.

3) We agree with Warren Buffett that revenue needs to increase to 18%.

4) We are sure Mr. Buffett agrees with us that fundamental tax reform must be enacted to remove many of the exclusions, preferences and deductions in the Internal Revenue Code that otherwise keep marginal rates too high (including his secretary) for individuals and harms the competitiveness of U.S. corporations since we currently have the second highest corporate tax rate in the industrialized world.

5) We are sure he also agrees that if the current U.S. tax system was fundamentally reformed that it would increase revenues as a % of GDP. The tax reform program we are suggesting would be initially drafted to be revenue neutral to current law with the expectation that the effects of the new system would actually increase revenues as a % of GDP to 18% as the economy improved.

6) However, if this does not occur, tax rates would be automatically adjusted upwards to account for any shortfall below the 18% target at such time that spending was reduced to the 20% spending target. The taxpayers deserve the same sort of assurance that Mr. Buffett wanted before he committed his money to pay down the national debt on his "challenge".  Once spending targets are reached the revenue targets will be met by automatic tax rate increases if they are necessary.

7) We look forward to Warren Buffett's encouragement of the Democrats to identify areas of spending that can be reduced to get us to the 20% target to match the Republican commitment to reach the 18% revenue target.

8) We agree with Warren Buffet that there is a way to deal with the budget deficit program. We appreciate his guidance and look forward to working with Democrats to deal with this issue during the coming year. Electoral politics should not be an obstacle. We simply cannot wait another year. It is time to get this done for the American people and our future in 2012.

Thank you very much, Mr. Buffett.  BeeLine appreciates the endorsement.  We now only have to convince 535 members of Congress and the President it is time to start spending time on issues that mean something.

President Obama seems to be making a 30% minimum tax on millionaires the centerpiece of his 2012 legislative agenda that he calls the "Buffett Rule".  What would that do help solve our budget problems?  Almost nothing.  He is playing "small ball", to use a baseball term, when we need to be playing "long ball". The non-partisan Tax Foundation estimates that the millionaire's minimum tax would only generate $36.7 billion in revenue per year.  That is almost not noticeable compared to the $1 trillion budget deficit that is projected for the year.  It would reduce the deficit by less than 4%.  More troubling is the time and effort that will be put into arguments for and against the provision when the focus of the President and Congress should be on the real issue-an unsustainable path of federal spending.

If President Obama wants to follow the Buffett Rule then the Republicans would be well advised to move the discussions to the BeeLine/Buffett Rule.  It is time to start swinging for the fences and for the future of the United States of America.  We don't have the time to waste on dividing the country on gambits and gimmicks from the President and Congress.  We need greatness and we need it soon.

Friday, January 27, 2012

Playing the Secretary Card

Warren Buffett continues to play the "secretary" card and Debbie Bosanek (Buffett's assistant) dealt herself into the game when she appeared at President Obama's State of the Union speech.  They doubled down when Buffett and Bosanek appeared on a least one morning news program and submitted to press interviews.

Buffett argues that it is unfair for high-income people to pay low taxes and says he paid an effective tax rate of 17.4 percent in 2010.  He says Bosanek paid an effective rate of 35.8 percent for all federal taxes-income taxes as well as payroll taxes for Social Security and Medicare.

I wrote previously about how his math could work.  Let's take a closer look now that we know exactly what Ms. Bosanek's tax rate is according to Buffett.  You never know exactly what is in a tax return unless you review it, but knowing the effective rate and a few other facts, it is possible to make some educated guesses about how much income Bosanek has on her return.  Why is this important?  Buffett (and Obama) clearly are trying to make political points on the boss/secretary angle.  The impression is left that Debbie Bosanek is a hard-working middle class taxpayer and it just shows how "unfair" it is that she is paying a higher tax rate than her boss.

I have no doubt that Ms. Bosanek is incredibly hard working.  However, the tax rates that are being attributed to her are not those of a middle income taxpayer.  In fact, she is probably reporting income on her return that would put her household within the top 3% of income earners in the United States as shown below.

The first thing to recognize is that Buffett seems to be taking both the employer and employee share of Social Security and Medicare taxes and considering those "paid" by Bosanek.  Many economists argue this is the correct way to look at the burden of these taxes from an economic standpoint.  However, I doubt that most employees think of it that way.  The law is also not written this way either.  The tax is considered to levied on both the employee and the employer.  If the employer tax was repealed that money would not end up in the employee's pocket unless the employer decided to give the employee a raise.  Therefore, Buffett is stretching the truth here if he added the employer FICA tax into her effective tax rate.

However, let's give him the benefit of the doubt.  The FICA rate in 2010 was 7.65% on both the employee and employer on the first $106,800 of wages.  Wages above that level are subject to a 1.45% tax on both the employee and employer (2.9% total).

Therefore, we know that Bosanek would have a 15.3% tax rate of $106,800 of income using Buffett's assumed methodology.  That means to get to the 35.8% effective rate that Buffett says she paid she would have to have an effective rate of 20.5% on the rest of her income.

We know Ms. Bosanek is married and we also know that she owns two houses.  That means that she is undoubtedly paying interest expense and property taxes on the houses.  She is also paying Nebraska income taxes, and if she is like most taxpayers, has some amount of charitable contributions.  This all means that she is probably filing a joint return and itemizing deductions.  The story on Omaha.com linked above indicates she also has a son in college but I will not assume she is claiming him as a dependent.  Again, a very conservative assumption.

The combination of personal exemptions for her husband and herself would have reduced her gross income by $7,300 and her deductions would have to have been at least $11,400 (the amount of the standard deduction) for the year.  Let's be very conservative in this analysis and just use $20,000 for the combination of these two items.  This amount must be added to the taxable income we arrive at that equals a 20.5% effective tax rate.

To arrive at an effective tax rate on joint return of 20.5% you would need taxable income of about $157,000.  You can do the calculation using this template on www.moneychimp.com.  Since we know that she also has at least $20,000 of exemptions and deductions, this would suggest that the adjusted gross income on her return is approaching $180,000 using these very conservative assumptions.  This also assumes that none of the income is investment income such as dividends or capital gains that would only have been taxed at a maximum marginal rate of 15% (what Mr. Buffett is paying on his dividends and capital gains).  This would mean her gross income was even higher.

Only 2.8% of all individual tax returns filed in 2009 (the most recent year available) had adjusted gross income in excess of $200,000 according to IRS data. Therefore,  Ms. Bosanek and her husband most likely have income in excess of 97% of the households filing tax returns in this country.

Quite frankly, all the talk about tax rates and "fairness" is further evidence as to why fundamental tax reform is necessary.  The fairest system is to clean out all of the exclusions, exemptions, deductions on the individual side and get rid of all of the so-called "corporate tax welfare" on the corporate side.  Broaden the tax base, flatten the rate and simplify the system as I have argued for before.

Let's use the tax system to raise needed government revenue and forget about using the tax code for social and economic engineering.  Embracing that philosophy would mean that there would not be so much mistrust, distrust and disgust about the tax system.  A broad, flat and simple tax system should appeal to most reasonable people as everyone would be treated the same after a flat exemption.  It would also dramatically reduce the ability of the federal government to serve special interests and pick winner and losers.

In the same SOTU address that President Obama was calling out Ms. Bosanek he was also saying,
It’s time to apply the same rules from top to bottom.  No bailouts, no handouts, and no copouts.  An America built to last insists on responsibility from everybody."
That sounds like a call for a broad, flat and simple tax system.   The Republicans ought to tell President Obama they are ready to get started on Monday using those principles.

Wednesday, January 25, 2012

No Bailouts, No Handouts, No Copouts (And No Hope)

"Let’s never forget:  Millions of Americans who work hard and play by the rules every day deserve a government and a financial system that do the same.  It’s time to apply the same rules from top to bottom.  No bailouts, no handouts, and no copouts.  An America built to last insists on responsibility from everybody."

This is one of my favorite quotes of the year so far.  Who said it?  It sounds a lot like Ron Paul in its emphasis on individual responsibility.  Rick Santorum was an opponent of the TARP bailouts so it could very well be his quote.  On the other hand, Newt Gingrich has talked about all that he did to reform welfare so the "no handouts" sounds like him.  Mitt Romney, now that I think about it, has really emphasized the hard work of the private sector and the fact that we need the federal government to get out of the way.  It must be him.


This is an exact quote from President Barack Obama in last night's State of the Union address.

It reminds me of a something that Andrew Carnegie once said,

As I grow older, I pay less attention to what men say. I just watch what they do. 

How does what President Obama has done compare to what he said last night? A few glaring comparisons of what he said and what has been done.

"Millions of Americans who work hard and play by the rules every day deserve a government and a financial system that do the same"
  • Most hard working Americans have to live within their means and on a fixed budget.  The federal government is borrowing 40 cents of every dollar it is spending.
  • Hard working Americans do not have the ability to print money as the Federal Reserve has done to fund the federal deficit and to bail out large financial institutions.
  • Retirees who saved their whole life and played by the rules are not receiving any interest on their savings accounts, CD's and treasury bonds to bail out the federal government and the financial system.
  • The rights of secured creditors in the auto bailouts were summarily ignored and their property rights were stripped away and given to the auto workers union.
"It's time to apply the same rules from top to bottom."

  • 47% of Americans pay no income taxes.  How is this applying the same rules top to bottom?
  • The top 10% of earners are currently paying 70% of the total federal income taxes.
  • The United States already has the most progressive tax system in the industrialized world and President Obama wants to raise tax rates even higher on higher incomes.  Of the entire tax burden in the country, the top 10% of income earners pay almost half of all taxes but their share of income is 33.5%.
  • Public sector income and benefits substantially exceeds those of the private sector.
  • He consistently has supported unions in opposing right to work laws at the expense of workers who want to work without joining a union.
"No bailouts."
  • President Obama supported the bank bailouts, auto industry bailouts, auto union bailouts and substantial funding in his stimulus package to bail out state and local governments.
"No handouts."
  • There are more people on food stamps that at any time in history.
  • Unemployment benefits have been extended to 99 weeks which is longer than any period in history.
  • Tax credits have become "refundable" tax credits for those who don't have any federal taxes to offset to make it a direct handout rather than a tax credit.
"No copouts."
  • Of course, everyone now knows that every problem President Obama has was created by President Bush.  He has told us at every opportunity.
  • All problems the last year have been due to the House Republicans according to the President.
    ( He can only use that copout over the last year because Democrats controlled all of Washington for the first 2 years.)
  • The rise in the price of gasoline this year was due to the Arab Spring.
  • The failure of the economy to get on track last year was due to the Japanese Tsunami.
"An America built to last insists on responsibility from everybody."
  • Last year, 72% of all black children in this country were born out of wedlock.  Until the 1950's, black children were more likely to live with two parents than were white children. What has President Obama done to try to address this problem?
  • We know that if an individual does just two things--graduates from high school and marries before they have children they will almost certainly not end up in property.  In fact, a Brookings study in 2009 showed that if an individual does these two things along with having a full time job they had only a 2% chance of winding up in poverty and a 74% chance of ending up in the middle class.  Young people who did not follow those norms had a 76% chance of ending up in poverty.  However, we provide welfare benefits to able bodied men who made their own decision to drop out of high school and we provide this and a host of other benefits to single mothers (we actually provide more money for every additional child the mother has) who have children out of wedlock.  How is this insisting on responsibility from everyone?
  • We have over 10 million illegal immigrants in the country who broke our laws to come here, who have broken the law again to work here and yet are not considered to have responsibility for being here.
  • When it comes to voting, President Obama will not support requiring voters to have the responsibility to produce a photo to prevent voting fraud.
It is almost beyond my ability to comprehend the disconnect between President Obama's rhetoric and the results.  It is almost as if he is running against his own record with that statement.  

He wrote a book, "The Audacity of Hope", before he ran for President.  I will give him this...he has the audacity part covered.  He still needs to work on the hope part.

This is a very important election year for our country and our future.  I can only hope that H.L. Mencken was not correct when he observed,

"The men the American people admire most extravagantly are the most daring liars; the men they detest most violently are those who try to tell them the truth".

Monday, January 23, 2012

Stone Age or Smartphones?

President Obama has made a lot of questionable statements and decisions in his time in office.  He was going to close Guantanamo and move the foreign terrorists to federal prison in the United States.  He was going to try Khalid Sheik Mohammed in federal court in New York City.  He was going to pass a costly cap and trade program that the CBO estimated would cost the average household an extra $1,600/year (in 2006 dollars).  He did ram through a health care reform bill that he claimed on the campaign trail would "bring down premiums by $2,500 for the typical family".  He has apologized to almost every country in the world based on what apparently is his view that the U.S. is a flawed nation.

However, it is hard to see that any decision or statement he has made was so misguided or illogical as his refusal to approve the Keystone XL pipeline project.  He has argued that it is because there has not been enough time to review "environmental" impacts.  However, over the last three years Keystone has  had 2 EPA reviews done, a State Department environmental review and a positive recommendation by President Obama's own energy advisors.  The project was a "go" from all concerned except the President and his environmental extremist friends.

Warren Meyer of Forbes debunks the environmental concerns and notes that the Keystone pipeline would have carried more energy to the United States than the total of all of the green energy projects funded by the Obama administration.  It also would have accomplished this with no taxpayer funds.

Local environmental concerns were merely the public pretext for a decision that is much more troubling. Opposition to the pipeline began to rally among radical environmental groups long before any of them had the first clue about the pipeline route. The real goal of these groups was not to protect water along the pipeline route, but to make it impossible to develop new sources of oil in Canada. Unable to stop Canadian oil drilling and tar sand extraction programs, environmental groups are now trying to block any pipeline that is proposed out of the oil producing regions.

Some would argue that these opponents aren’t anti-energy, they just want to shift energy use from fossil fuels to “green” energy like wind and solar. This is either disingenuous or unbelievably naive. The Keystone XL pipeline would have single-handedly carried more energy to the United States than the sum of all the green energy projects funded by the Obama Administration. And it would have done so entirely with private funds rather than the Administrations increasingly ill-fated and ham-handed attempts at venture capitalism with taxpayer funds. The fact of the matter is that, for the foreseeable future, opposing fossil fuels is equivalent to opposing energy use.

The Keystone decision only makes sense in the context of a general push to limit energy supply and roll back our industrial economy and all its amazing gifts. Part and parcel of this same effort has been the growing opposition to natural gas fracking. Fracking is an underground procedure that has been used safely and succesfully for decades to extend the life of older oil wells. Fracking is one reason that serial predictions of older fields “running out of oil” have been repeatedly incorrect.

It is as if President Obama has no interest in seeing the United States succeed unless it is the government that is funding and controlling energy projects.
Meyer makes another great point in contrasting President Obama's interest in high speed rail compared to a simple underground pipeline that is undoubtedly far less intrusive and with fewer environmental negatives than a rail line in California.

Does anyone doubt that had this exact same route been for high speed rail, rather than a pipeline, it would already have been approved and President Obama likely would have been proposing to throw a pile of taxpayer money at it to boot? This despite the fact that high-speed rail almost certainly has more environmental negatives than an underground pipeline. The route has always been a red herring — the real goal is reducing energy supply.

I find the contrast between the California High Speed Rail line and the Keystone XL pipeline to be simply amazing. In the case of the rail line, the Obama administration continues to try to perform CPR on an infrastructure project that makes no sense, is way to costly, and will likely bankrupt the state of California with all the taxpayer money required. In the case of the pipeline, the Obama administration killed a private infrastructure project that is widely supported, covers its own costs, and requires no taxpayer money.
It really comes down to a simple question.  Do you want your smartphone or the stone age?  As I wrote in "It Is Not A Pipe Dream" it is energy that makes our economy go.  We need it for anything we want to do.  It needs to be available and it needs to be affordable.  Energy is the engine for jobs and jobs growth.  Without it you are going nowhere in creating jobs.

You also need energy to blow dry your hair, surf the internet and charge up your iPhone and Prius.  The extremists who oppose projects like Keystone want the stone age.  Alternative energy only accounts for about 1% of total energy sources.  Hydroelectric is another 6%.  The remaining 93% is from oil (38%), coal (26%), gas (23%) and nuclear (6%).   I am all for developing all forms of energy including all forms of alternative energy.  However, we would be in the stone age without carbon based energy and this is not going to change for the foreseeable future.

The irony is that as the liberals blog away on the evils of carbon-based and nuclear energy on their iPad (recently charged by power supplied by a nuclear power plant), drinking an herbal tea (the water boiled on a natural gas stove), before they drive their child to school (of course, they could not put precious Asher on a school bus) in their Volvo (recently filled up at their neighborhood Citgo station), they are oblivious as to what really makes the world work.

Sunday, January 22, 2012

The Debt Bomb

I love graphs, charts and PowerPoint slides.  They are the most effective way to convey complicated data and numbers.  A picture is really worth 10,000 words.  Or rows of numbers or columns of statistics.

Here are five I came across this week that are a little sobering.  Compliments to the team at JP Morgan Asset Management's Outlook 2012 Report for getting me started on some of these charts.

The first is a chart which shows the percent of federal revenue that is available after taken account of all mandatory spending (Social Security, Medicare, Welfare, Federal Government pensions etc).  In the mid-1960's, almost 2/3 of federal revenues was available after paying for mandatory programs.  The last few years mandatory programs have absorbed almost all ( and sometimes more than all) of available federal revenues.  That means all of the money being spent on everything else has to be borrowed. It doesn't look any better going forward either.  Something has to give, and it will eventually.

The second chart shows gross US federal debt as a percent of  GDP.   US debt is now over 100% of GDP although the chart below just shows data through 3Q, 2011.  Four years ago it was barely over 60% of GDP.  The level of debt we have taken on is both stunning and sobering.  Of course, this is Bush's fault if you listen to Democrats.

US Debt as a % of GDP
FRED database-Federal Reserve Bank of St. Louis
Oregon Office of Economic Analysis
The final chart (from Zero Hedge) illustrates why the economy is not moving forward and jobs are not being created.  The economy needs risk capital.  It needs investors to risk capital in new ventures and it needs banks to make loans.  It is not happening.  It is really shocking to see the disconnect between banks deposits and loans.  These have traditionally moved in tandem.

This connection was broken in the Fall of 2008 when the Federal Reserve started intervening.  At that time the Federal Reserve started paying banks interest on reserve balances for the first time.   That rate is currently .25%, which is higher than 3-month Treasury bills.  They also increased the money supply substantially.  This is a chart of the excess reserves at banks produced by Donald Coffin, an Economics professor at Indiana University Northwest.  It shows that the amount of excess reserves pretty closely matches the disconnect between deposits and loans

Where did the deposits come from?  Most of that money is a result of increases in the monetary base that came from the Federal Reserve's quantitative easing program.  More simply put, the money printing the Fed has done the last few years.  You can see from the chart below from Monetary Choice that the base of money has increased by about $1.8 trillion in the last 3 years.  This also is about the same amount of the the increase in deposits and the amount of the excess reserves.

I don't know where it all ends but these charts are not pretty.  They are scary in addition to sobering.

There is a lot of well-founded concern about Iran getting a nuclear weapon.  However, when you look at these charts you have to wonder what type of ticking debt bomb we are sitting on right here in what used to be the good old United States of America.  I hope someone knows what they are doing.  Looking at the evidence, I have serious doubts.

Friday, January 20, 2012

Bombast, Ballast and The Bet

One year from today is Presidential Inauguration Day.  Will President Obama be able to overcome the economy and a high disapproval rate to win re-election?  Or will the Republicans be able to successfully challenge for the Presidency from the current field of candidates?

I think Romney, Gingrich and Santorum would all be worthy challengers to President Obama.  I stated well before the Iowa caucuses that I thought they were the best candidates in the field based on their debate performances.  They have each showed that they have the depth and breadth of experience to be President. I like all of them.  I am pleased that they are still standing.

Ron Paul is also still standing but recent polling data shows that only 29% of Republicans and Republican-leaning voters view him as an acceptable candidate.  By contrast, 59% of Republicans view Romney as acceptable in the same poll.  Ron Paul's support is passionate but it is narrow.  I see no path for him forward in the Republican primary process.  He is in the race to influence the policy debate and the direction of the party platform.

Tomorrow's vote in South Carolina is make or break time for Gingrich.  If he wins, he gains some valuable momentum going into Florida and he stays alive.  If he loses to Romney by double digits, he is probably done.  His feisty debate performance on Thursday night has created a lot of positive buzz.  However, if it does not translate to a victory it could actually hurt him.  Expectations have increased for Newt.  If expectations do not become results he will be hurt and Romney will benefit.

Santorum continues to be steady.  Gingrich provides the bombast for those seeking that idealized conservative candidate. Santorum is the ballast.  He is stable and unwavering and he has been the candidate that has most exceeded expectations.  Either Bombast or Ballast will likely continue beyond South Carolina and Florida to challenge Romney.  Who that is will depend on who can raise the money.

Money is the name of the game right now for everyone but Romney.  He can go the distance.  No one else can move forward unless they can attract money.  Neither will be able to attract money unless they win some states.  There is a very limited supply of money for candidates who cannot win.

Speaking of money, if you had to put down money on this race right now the only bet is Romney.  He is bringing in high profile endorsements almost every day.  The smart money that was on the sidelines is moving to him as well.

Watch South Carolina's results and then watch any endorsements leading up to Florida.  If he wins South Carolina, it would surprise me if we don't then see Jeb Bush and Marco Rubio jump on the bandwagon and endorse The Bet before the Florida primary.  In that case we could very well know the name of the next President 364 days before Inauguration Day.

Thursday, January 19, 2012

Broad, Flat and Simple

If we are to get our country back on track I believe it is critical to reform our tax system.  I speak with some experience having practiced as both a CPA and tax attorney.  I have prepared and reviewed hundreds of tax returns.  It is time to tear the current system out by its roots and take a completely new look at the tax landscape.

On the individual income tax system we should be making the tax base as broad as possible by eliminating as many deductions, credits, preferences, exclusions and exemptions as we can.  The rate structure should also be as flat as possible to eliminate the cross currents of class warfare that divide us.  It should also be as flat as possible to provide as much incentive for future work, investment and capital formation.  Finally, it should be simple enough that anyone can comply with the tax law without an accounting or law degree.

There were 145 million tax returns filed last year.  More than 3/4 of all returns are now filed electronically.  However, almost 2/3 of those returns are prepared and filed by tax preparers.  Our tax system should not be so complex that taxpayers need to pay someone else to properly file their tax returns.  It also should not have to be necessary for most everyone else to need a computer program to file their taxes to have any chance of filing correctly.

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

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

The current individual income tax system generated $1.1 trillion in the last fiscal year.  The most recent IRS Statistics of Income data is from 2009.  In that year, total adjusted gross income was almost $8 trillion.  The exclusion for employer-paid health care amounts to another $1 trillion.  When all is said and done, we have a individual total income tax base (adjusting the numbers forward to 2011) that is around $10 trillion.  However, after subtracting for the exemptions, exclusions and deductions in the Internal Revenue Code, what is considered to be taxable income is only around $5 trillion.   Almost half of the tax base is being dissipated through special provisions in the law that favor one group or another.  This means that the potential exists to cut tax rates in half if the tax base was broadened.

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

If I was designing a starting point for reform, I would suggest a flat tax rate of 15% or lower. It would apply to all income.  No special rates for capital gains, dividends or carried interest.  I would provide an exemption on the first $10,000 for every adult.  This is approximately the federal poverty level for a single person.  I would also provide an additional $5,000 for every dependent child and for citizens 65 years of age or older.    I would eliminate all other exemptions, deductions, credits and exclusions except for retirement savings.  No mortgage interest, charitable contributions, state and local taxes or medical deductions.  There should be no sacred cows.

How does this play out for someone concerned that our tax system needs to be progressive to be "fair"? The substantial tax exemption provides progressivity in the effective tax rates as shown below.  This assumes a 15% flat tax rate.

Family of Four                     15% Tax                   Effective Tax Rate

$20,000                                     $0                                  0%

$40,000                                   $3,000                            7.5%                        

$60,000                                   $6,000                            10%

$80,000                                   $9,000                            11.2%

$100,000                                 $12,000                          12%

$250,000                                 $34,500                          13.8%                      

$500,000                                 $72,000                           14.4%

$1,000,000                               $147,000                        14.7%

If this is still not considered progressive enough there are two options to remedy it.  You can increase the exemption amount which would also require an increase in the overall tax rate.  This would lower the effective rate at lower incomes.  Or you can move to a split rate.  For example, 15% on income below $100,000 (pick your number) and, say, 20% on income above $100,000. This would increase effective rates at higher incomes.  These are not ideal tax models but either approach would still be vastly superior to the tax system we have now.

Reforming the tax system is the foundational issue which must be won if the restoration of America is to be successful.  It should be the centerpiece of any Republican platform in 2012 and its legislative strategy for dealing with the impending expiration of the Bush (and Obama!) tax cuts at the end of this year.  Making taxes simpler has enormous political appeal and that should be the primary mantra of Republicans on this issue.  Herman Cain almost single-handedly propelled his campaign forward on one issue-his 9-9-9 tax platform.

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

Monday, January 16, 2012

INTERESTing Insights

When someone loans you money they expect it to be paid back.  They also expect to receive a return on the loan (interest) while the loan is outstanding.  Details, details, details.

Europe is staring straight into the reality of what occurs when potential lenders start to get concerned with getting their loans repaid.  First and foremost, it makes them unhappy to think that a loan will not be repaid.  Second, they tend to not want to extend another loan if they are uncertain about getting their first loan repaid.  Third, if they do provide funds they want to be paid a very large risk premium in the form of a much higher interest rate.

There are some $7 trillion sovereign loans that need to be repaid and refinanced this year by the G-7 countries (U.S, Japan, U.K., Germany, France, Canada and Italy) that appears in this article in Zero Hedge.    That is a sizeable sum of money.  Additional amounts are needed by Greece, Spain, Portugal and other countries that have been living beyond their means. Where are the funds going to come from?

The risk profile of sovereign debt has changed a lot over the last year.  The United States lost its AAA debt rating last summer and on Friday nine European countires that included France, Spain, Italy and Austria were also downgraded.  John Mauldin points out the risks of peddling goverment bonds that are perceived as risky in his most recent newsletter, "The End of Europe?".
Now, government bond investors are a curious breed. They invest in government bonds because they actually think there is not supposed to be any risk. They want their money to be safe.
If they wanted risk, there are lots of opportunities to invest with the potential for more reward.
The moment that government bond investors begin to think they might be at risk, they leave. And history suggests they tend to leave seemingly all at once. It is the Bang! moment. Someone fires the starting gun, and they all head for the exits. They start selling their bonds to speculators at discounts, which makes the effective interest rates in the market rise, sometimes by a lot.
That means that if a country wants to borrow more money, it will have to pay the effective price in the market, or maybe as much as 15-20% IF – a big IF – it can even get someone to buy the bonds, which of course makes it even more difficult to pay their debt as interest costs rise.
This brings us to the United States which is living on borrowed time as well as borrowed money. See my earlier post "Living on Borrowed Money and Borrowed Time. The Federal Reserve bailed us out of what could have been a day of reckoning with its QE2 program last year.  Just as that ended, Europe fell apart and provided another reprieve.  We may have our problems but Europe's are much more visible right now.  A lot of scared money has moved to US government debt as a result.  All the while time is running out to get our fiscal house in order.

On December 31, 2011 we had federal debt outstanding of just over $15 trillion.  $10.5 trillion of this debt is held by the public and the remainder is held in intragovernmental accounts (the largest amount of which is owed to the Social Security Trust Fund).  The average interest rate on all this borrowed money was 2.826% at year end.  For the fiscal year ended September 30, 2011 the total interest cost was $454.4 billion.  This chart from the Viable Opposition blog shows the trend in the average interest rate on federal debt since 2000 (as of September 30 of each year).

If we went back to September 30, 2000, the average interest rate was 6.639%.  However, debt outstanding was a mere $5.7 trillion at that time. It cost the federal government $362 billion in interest cost to service that debt.  Therefore, even though we have added almost $10 trillion of federal debt over the last 11 years, the interest costs on that debt has increased by less than $100 million over that time! ($454 billion this year on $15 trillion in debt compared to $363 billion on $5.7 billion in debt in 2000.

This is why we are living on borrowed time.  Historically low interest rates are effectively giving the federal government what amounts to a free ride on its borrowing needs right now.  It is as if they have gale force winds at their backs.  Our policy makers have unprecedented breathing room to get something done and yet they do nothing.  The wind at our backs can just as easily start blowing in the opposite direction.

If we had the same average interest rates today as in 2000, the annual interest cost to the federal government would be almost $1 trillion-an additional $550 billion over current costs.  This is equal to what we paid for Medicare in 2011.

Let me put $1 trillion in interest costs in perspective for you.  In 2011, total individual tax collections only amounted to $1.1 trillion.  In other words, we are just a few interest rate increases away from needing all individual income tax collections just to pay for interest on the federal debt each year!  This also means that we would be in the position of paying all of our hard earned taxes today (and tomorrow) for borrowed federal government costs of yesterday.  Bear in mind that this also assumes the federal debt is static.  In reality, it is increasing at $100 billion a month.

We are very close to the point of no return in dealing with our deficits and debt.  Keep a close eye on what is happening in Europe.  We have the good fortune of being able to see someone else have to storm up the hill first.  I hope we are paying attention.  It is going to be a very hard climb from where we are today and it is likely to be right into the teeth of the gale winds of increasing interest rates.

Tuesday, January 10, 2012

Mitt, Marilyn and Mr. Paul

I am a numbers guy.  Forget the anecdotes, opinions and subjective judgments.  Give me facts, hard numbers and objective evidence.

One of the knocks we keep hearing about Mitt Romney is that he is not conservative enough for Republican voters and he will suppress enthusiasm in the Fall election.

We also hear that Ron Paul would be an utter disaster as a nominee in that he would not appeal to anyone beyond fringe Republican voters.

Consider those perspectives and match that up with this recent CBS News poll (January 9) in hypothetical match-ups between the Republican hopefuls and President Obama.   Romney is the only candidate right now who is shown as leading the incumbent.  Ron Paul is surprisingly competitive head-to-head with the President.  What I find most interesting are the internal splits on preferences by party affiliation.
Mitt Romney polls better among Republicans than any of the other candidates.  He polls almost 10 points better with Republican voters than Ron Paul, Newt Gingrich and Jon Huntsman.  How is this possible if Romney is not conservative enough for Republican voters?  I think the answer is that he is still viewed as the strongest candidate to beat Barack Obama and that is the most important issue with most Republicans.
Each of the candidates has about the same appeal to Democrats.  They all draw 8-10% of the vote.  It does not seem to matter who the Republicans nominate insofar as this group is concerned.  It is a non-factor.

However, Romney is favored by Independents by 6 points.  Ron Paul does even better by beating Obama by 7 points with Independent voters.  All other Republican candidates lose this group of voters. Santorum and Huntsman are down 2-3 points but Gingrich and Perry trail by 7 points in these important swing voters. 

Looking at the hard numbers of this polling is very favorable to Romney.  He polls the best among Republican voters and he also polls well with Independents.  That is a winning combination.

On the other hand, the candidate that really needs to court Republicans voters is Ron Paul.  He is actually polling better among Independents and Democrats than Romney is.  However, he has to convince a lot more Republicans or he will never get through the primaries.   

A Gallup poll (January 10, 2012) provides another perspective that is different than the opinions that are often circulating around on television.  Mitt Romney is the only candidate right now that is viewed as "acceptable' by a majority of Republicans or Republican-leaning Independents.   59% state that he is acceptable (31% say he is unacceptable).  On the other hand, only 29% of Republican say that Ron Paul is acceptable and a staggering 62% find him unacceptable.  This shows just how steep the climb will be for Ron Paul to vie for the Republican nomination.

One final poll that puts it all in perspective is this US News and World Report poll in which the question was asked of Americans what news event they most feared in 2012.   The most feared headline was Obama is Re-elected with 33%.  By contrast, only 16% feared the opposite result-Obama Defeated.  31% stated that Taxes Will Increase was their worst fear.  Therefore, 64% either fear Obama being re-elected or taxes are going to increase.  Does this sound like a good year to be running as a Democrat?  In the final analysis, it might not make a big difference who is the Republican nominee looking at these numbers.

The complete list of most feared news events from the poll.

As we enter the presidential election year of 2012, what potential news event do you fear the most?
President Obama wins reelection 33%
Taxes will increase 31%
Iran will get a nuclear weapon 16%
Obama will lose reelection 16%
North Korea will attack South Korea 4%

Source: The Synovate eNation Internet poll was conducted December 29-January 2 among a national sample of 1,000 households by global market research firm Synovate for US News and World Report.


On the subject of data, I also came across these interesting facts about Marilyn Monroe recenlty.  A number  of her personal effects and wardrobe were auctioned off in two separate auctions. One by her own estate and second by the estate of Debbie Reynolds who had an extraordinary collection of Hollywood costumes of Marilyn and other stars.   These are summarized in this article from Bloomberg and this one from Slate.  The facts on Marilyn from the Bloomberg article..
We should never again hear anyone declare that Marilyn Monroe was a size 12, a size 14 or any other stand-in for full-figured, zaftig or plump. Fifteen thousand people have now seen dramatic evidence to the contrary. Monroe was, in fact, teeny-tiny.
 The auction’s top-ticket item was Monroe’s famous white halter dress from “The Seven Year Itch,” the one that billowed up as the subway passed. It sold for almost $5.66 million (including the buyer’s premium) to an unknown phone bidder. Sharing a rotating mirrored platform with Hedy Lamarr’s peacock gown from “Samson and Delilah” and Kim Novak’s rhinestone- fringed show dress from “Jeanne Eagels,” Monroe’s costume was displayed on a mannequin that had been carved down from a standard size 2 to accommodate the tiny waist. Even then, the zipper could not entirely close.
But that’s just one dress. Perhaps the star was having a skinny day. To check, you could look across the room and see that Monroe’s red-sequined show dress from “Gentlemen Prefer Blondes” was at least as petite, as were the saloon costume from “River of No Return” and the tropical “Heat Wave” outfit from “There’s No Business Like Show Business.”
In fact, the average waist measurement of the four Monroe dresses was a mere 22 inches, according to Lisa Urban, the Hollywood consultant who dressed the mannequins and took measurements for me. Even Monroe’s bust was a modest 34 inches.
That’s not an anecdote. That’s data.
The Slate article by Simon Doonan who inventoried and auctioned all of the clothes in her personal estate sale puts it all in perspective.
When you look at Marilyn on-screen and—armed with the information I have just provided—you realize that the busty, ample gal brimming over Tony Curtis in Some Like It Hot is literally one-third your size, you have every right to become suicidal. If she looks like that—zaftig, almost chubby—what on earth would you look like under similar circumstances?

Conventional wisdom says that the camera adds five pounds. After my Marilyn experience, I would say it’s more like 500 pounds.
On second thought, perhaps it is sometimes better not to be a facts guy.  Having no facts make life much easier.

Monday, January 9, 2012


 "For God so loved the world that he gave his one and only Son, that whoever believes in him shall not perish but have eternal life."  (John 3:16)

Tim Tebow and the Denver Broncos beat my Pittsburgh Steelers on Sunday.  It was a great performance by a young man I have a lot of admiration for.  I read his autobiography several weeks ago and he is undoubtedly someone who has God-given athletic talents.   However, he also is someone who has worked incredibly hard and is a true competitor.  He has also proven that he is a winner.  Florida won two national championships in his four years at the school.  He now has gotten Denver into the playoffs for the first time since 2005 and led them to a first round win.

He is a young man who has also not been afraid to fully embrace and demonstrate his Christianity in a very public manner.  He wore eye black with Bible messages when he was in college.  The photo above is from the 2009 BCS Championship game.  The NFL bans eye-black messages but I found it pretty interesting to see some of the statistics from yesterday's game.  It seems that Tim still got his message across even without the eye black.  Yahoo Sports summarizes Sunday's Tebow Time.

Tebow's passing yards    316 yards
Tebow's average yard per completed pass    31.6 yards
Final quarter tv rating for the game   31.6

Don't Shoot the Messenger-Hire More of Them!

New unemployment numbers were released last week and at first glance it appears we are heading in the right direction.  However, as I have written before in "Employed or Unemployed?", the important statistic is not how many are unemployed.  What is really important is how many Americans are actually employed.

The following chart shows the labor participation rate.  That is the % of Americans working compared to the total working age population (ages 18-64).  The unemployment rate just considers those who are actually seeking work currently.  It excludes students, housewives, retirees and those that have just become discouraged and are no longer even trying to get a job.  For example, a 55 year old who is laid off is counted as unemployed as long as her unemployment benefits are paid but is considered retired when the benefits stop.  Even though she may be interested in continuing to work she would be considered retired by the statisticians in calculating the unemployment rate.

The labor participation rate was actually at its lowest point in 27 years in December at 64.0%.   Last December it was 64.3%.   The long-term average is 65.8% since 1980 (the dotted red line above).  This would seem to be fairer measure of the level of those who actually are interested in participating in the labor force.  Using this as the baseline, the real implied unemployment rate is 11.4% rather than the 8.5% that was reported last week as Zero Hedge points out.

What is particularly interesting is that the labor participation rate for men is down to almost 70%.  This is probably the lowest level of employment by working age males in U.S. history.  This chart from the Bureau of Labor Statistics tracks the labor participation rate since 1948 by gender with males (blue), females (pink) and the overall rate (black).

Labor Participation Rate by Gender

The official stats state that about 13 million Americans are unemployed.  Zero Hedge calculates that the real number of unemployed is probably closer to 18 million if you assume the historical average labor participation rate since 1980.  That is a big difference.  In fact, as Tyler Durden of Zero Hedge points out, America would officially have a 0% unemployment rate based on the way the Bureau of Labor Statistics is calculating the unemployment rate if the labor participation rate dropped to 58.5%.  Such is the lunacy of the way the unemployment rate is being presented.  Keep your eye on the labor participation rate rather than the unemployment rate to determine whether things are improving.

James Pethokoukis of The American Enterprise also cautions that we should be very cautious in thinking that we have turned the corner on unemployment.

Those headline economic numbers are terribly misleading, hardly reflecting the devastation most Americans still see every day. An 8.5 percent unemployment rate? Please. If the size of the U.S. labor force was as large as it was when Barack Obama took office, the unemployment rate would be 10.9 percent. But since so many people have gotten discouraged and stopped looking for work– and thus disappeared by government statisticians — the jobless number has been artificially depressed. A better gauge of the jobs picture is the broader U-6 rate, which includes part-timers who would rather have full-time jobs. It stands at a whopping 15.2 percent.

This chart from ShadowStats.com shows the official unemployment rate, the U-6 rate (gray line) and the estimate of ShadowStats of what the unemployment rate would be if all long-term discouraged workers were included in the labor base pool (blue line) compared to the official rate (red line) .

Another interesting statistic buried in the job numbers was that out of the increase in 200,000 jobs in December, 42,000 were in one job category---"couriers and messengers".  There must have been a lot of helpers hired by Santa during the month.  Can this trend continue?

We need to create at least 120,000 jobs per month just to accommodate new entrants into the workforce going forward.  The 200,000 new jobs that were created in December is encouraging but there is a long way to go.  I am going to remain cautious until I see the labor participation rate increasing rather than get excited about a declining unemployment rate.

Saturday, January 7, 2012

America the Beautiful

I came across some awesome photographs this week and I thought that BeeLine could use a little beauty this weekend.

Here is a great image of MacCracken Hall at my alma mater, Miami University, taken by a Mike Zatt who is a junior at the school.  You can view more of Mike's work here.  Miami is undoubtedly one of the most beautiful college campuses in the world and this photo backs it up.

Even more spectacular is this photo taken by Angela B. Pan of the Vietnam Veterans Memorial in Washington, D.C.  You can view more of Angela's work at her blog.

Visiting the VVM is a powerful experience at any time.  However, I have never seen it captured more powerfully.

For those of you are younger, you probably have no idea of the controversy that was created when the design for the VVM was originally announced.  The design for the memorial was chosen from entries in a national contest.  Maya Lin, an architecture student at Yale who was only 21 years old, won the competition.  This is how Wikipedia describes the opposition to the design.

The unconventionality of the selected design was very controversial, especially among veterans. Many publicly voiced their displeasure, calling the wall "a black gash of shame."[5] Two prominent early supporters of the project, H. Ross Perot and James Webb, withdrew their support once they saw the design. Said Webb, “I never in my wildest dreams imagined such a nihilistic slab of stone.” James Watt,Secretary of the Interior under President Ronald Reagan, initially refused to issue a building permit for the memorial due to the public outcry about the design.[6]

Lin believes that if the competition had not been "blind", with designs submitted by number instead of name, she "never would have won". She received harassment after her ethnicity was revealed[citation needed]. Lin defended her design in front of the United States Congress, and eventually a compromise was reached. A bronze statue of a group of soldiers and an American flag was placed off to one side of the monument as a result.
Once the design was realized, the overwhelming majority of the design's critics came to appreciate the simple beauty and emotional power of the wall, and such controversy quickly evaporated. In the words of Scruggs, "It has become something of a shrine."[5]
Lin was an iconoclast.  To that point, memorials were statutes.  They were not long stone walls that blended into the earth with 58,195 names etched into the stone.  However, when it was completed, the VVM probably captured the very essence of what a memorial should really be.

A few more photos by Angela.  A great shot from the Lincoln Memorial looking down to the Washington Monument at sunrise.

A nature shot at Great Falls Park in Virginia.

Finally, a view of the Roebling Bridge in my hometown of Cincinnati, Ohio.

O beautiful for spacious skies...America is truly beautiful.  Thanks to Mike and Angela for capturing it.