Wednesday, January 26, 2011

Obama's SOTU: Sputnik, Skutnik and 'So What?'

It would be difficult to name many great lines from any presidential SOTU or 'State of the Union' speech, especially now that every one of them sounds pretty much the same and have the obligatory introduction of a real American hero somewhere in the middle of it.

(Quick: name the first time a President singled out a 'true American hero' in his SOTU:

Correct: Ronald Reagan introduced the nation to Lenny Skutnik in 1982 after the CBO federal worker jumped in the icy waters of the Potomac after the horrific Air Florida crash into the 14th Street Bridge and dragged a victim to safety)

You typically don't hear a great line in a SOTU like JFK's 'Ask not what your country can do for you....' or FDR's 'day of infamy' speech post-Pearl Harbor.

Face it: the one line you might remember this weekend from President Obama's SOTU speech was the 'Sputnik moment' reference referring to his call to all Americans to innovate their brains out and invent things so we stay America and not, say, become Malaysia.

We thought a 'Sputnik' moment was when someone we were afraid of (The Soviet Union) did something that scared the living bejesus out of us (put the first satellite in space in 1957) and threatened our very existence (like by having control of space so they could train nuclear missiles on the US from the moon).

So we will forgive the slightly altered analogy for the moment and let it go...for now.

Let's give you a memorable line that, had President Obama said it, you may have dropped your guacamole and chips all over your lap and had your eyeballs bugging out like those characters you used to see on 'Tom and Jerry' cartoons':

"You’d really be amazed at how much Government you’d never miss.”

Go ahead and admit it. You would have been shocked to hear these words come out of President Obama's mouth. But you would have remembered it because it is absolutely true.

These prophetic words have actually come out of the mouth of current Indiana Governor Mitch Daniels whom you should keep an eye on as a possible Presidential contender in 2012, which has already started for all intents and purposes. He was a White House liaison under Reagan when we were on Capitol Hill and served as OMB director under Bush 43 before running for governor in Indiana.

He has read the entire federal budget. Apparently, President Obama and perhaps 99% of Congress people have not. Because if they had read the entire federal budget, 2400+ pages of it page-by-page as we have done several times over by now, they would know exactly what Governor Daniels has prophesied.

We are issuing a challenge to every reader of this article here today. Go to the following link which is the electronic version of the US Federal Budget, Appendix, where all the gory details are exposed for the entire world to see.

Pick out any number between 1-1420...and then go to that page, regardless of what budget function it falls in. Read the entire page and perhaps the one before it and the one after it since there are lots of charts cluttering up the pages.

And if you can not find at least 1, and perhaps 5 or 10 line-items or descriptions of federal programs that you think are outdated; outmoded; archaic; wasteful; or just plain stuck in there as pork for one specific congressional district, then we will jump in the icy waters of the Potomac next time we are up there and try to swim across it before hypothermia sets in.

Here's what particularly galled us in the President's SOTU: "I am calling for a freeze in discretionary spending which will save $400 billion over 10 years.' One report says it would save more like $200 billion.

We are never going to scoff at saving 1 red copper penny of federal taxpayer money. But saving less than $40 billion per year out of a close to $3.5 trillion federal budget is like popping a pimple on the backside of a pachyderm.

It would be precisely like you saving 1 cent out of every dollar you spend each year.

Put it another way, we could save this $40 billion per year out of discretionary funding....and still have over $1.5 TRILLION in annual deficits for the next 5-10 years! We will still take it...but it is next to nothing!

Put it one more way just to be crystal clear about the magnitude of the uphill struggles we face in getting a handle on our runaway spending right now, we could eliminate the ENTIRE federal discretionary budget each year for the next 10 years...and still have annual deficits of over $1 trillion. Per year.

The structural problems of the budget and deficits are deeply rooted in the entitlement programs: SS, Medicare and Medicaid. And until we get serious about it, from the President on down to the 91 freshmen Congressional representatives who were just sworn in, and start having an adult conversation about changing those 3 main programs plus cutting out unnecessary spending in the defense budget (it is in there by the billions as well), we are just deluding ourselves into thinking we are making progress.

Or worse, we are letting our leaders off the hook by allowing them to delude us again and avoid doing the job we elected them to do, which is to make these tough decisions, set priorities on spending scarce and precious taxpayer revenue...and then go home.

It would be sorta like talking about the dangers of 'Sputnik' in 1957....and then building a Bridge to Nowhere in Alaska instead of NASA.

It is time for President Obama and Congress to get dead-serious about the federal budget. And all of us citizens as well.

Friday, January 21, 2011

Homer Simpson, Cleavon Little and ‘The Debt Ceiling’

You are going to hear a lot about the so-called ‘Debt Ceiling’ between now and April so you might as well try to understand it before some politician tries to trick you into thinking it is something it is not, or worse than that, ‘not all that important’.

The first thought that came to our collective consciousness was the indelible image of the opening credits to the inimitable ‘Simpsons’ show where Homer is mishandling a spent nuclear rod with some tong clamps and throws it in the air and it goes down the back of his shirt.

Hidden meaning:

‘You don’t want to mess with it if you do not know what you are doing!’

Many House Republicans have been urging that the debt ceiling be used to ‘force’ Congress to vote on some of the tough spending decisions that have got to be made to lower federal spending and these ridiculously high budget deficits and insane national debt.

Why they don't just put on a vote-a-rama every day for the next 365 days and vote on the viability of every single federal program on the floor of the House is beyond us.  They could do that without ever tying it to the debt ceiling or the singing of the Star-Spangled Banner before the Super Bowl for that matter.

This somewhat artificially-manufactured 'crisis' argument mirrors the one expressed in such a serpentine manner by former WH Chief of Staff, Rahm Emanuel: ‘Never let a good crisis go to waste!’

Except that using the debt ceiling as a ‘crisis’ is almost self-defeating in its circular logic. ‘Let's hold a gun to our collective head in Congress (in the form of not raising the debt ceiling) and then we will stop doing all the spending…that is causing the debt to go up in the first place!’

That reminds us of a scene from 'Blazing Saddles' with the great Cleavon Little where he, as the new African-American sheriff in an all-white western town, threatens to take his own life in his own hands.  Think of Congress as 'Sheriff Bart' pulling out the 'debt-ceiling gun' on themselves.

(please excuse the non-PC nature of this clip but it does capture the essence of Congress using the debt ceiling vote to reduce spending and Mel Brooks and Cleavon Little were making a sardonic comedic point about the townspeople in a Mark Twainish sorta way)

(Love the nice lady when she says: 'Isn't anyone going to help that poor man?' Just like the American voter who keeps sending the same Congressman back to represent them year-after-year-after-year.)

So what is the ‘debt ceiling’ anyway?

The debt ceiling was established by the Second Liberty Bond Act of 1917. World War I-era legislation. Close to 100 years ago. That in and of itself should be enough evidence to convince you it is archaic, out-of-date and not really applicable to current modern practices and economic realities.

It is a very simple concept birthed under very simple circumstances. Previously, whenever Congress wanted, or needed, to raise money through the debt markets, they had to pass legislation to raise the debt limit for each individual issuance of bonds. With the passage of the Liberty Bond Act, Congress could set a higher limit for debt issuances and pass multiple spending bills that would not necessitate multiple increases in the ‘debt ceiling’.

What would happen if Congress repealed the ‘debt ceiling’? We do not know and no one else does either. Maybe we should try it; it would make each and every spending vote subject to raising the debt ceiling and NO Congressman or Senator wants to be on record for increasing the national debt over 2000 times per session of Congress. NONE of them, not even Barney Frank.

It might remove one ‘free’ vote per year for conservative Members to vote ‘against this monstrous debt ceiling bill!’ and then trumpet their bravery and 'conservatism' (sic) for the folks back home. All the while they are slashing taxes and increasing defense spending and special projects for their home district that is ‘not pork, but constituent service!’ These decisions all contribute to higher debt, not lower.

There is a question that we are doing some homework on about how Congress would be forced by previous law to deal with debt coming due or obligations in the form of contracts financed with debt. If true, and unless changed, this provision would basically mean every debt obligation would line up in order on the calendar and be paid until the money runs out. Which would be like in a few weeks. And then every program from defense to Social Security would be cut by over 30%, minimum.

But let’s assume that the debt ceiling stays as is. What would happen in April if Congress does not come to some compromise on spending reductions they want to attach to the debt ceiling being raised?

Immediately, like within nanoseconds, the entire federal budget process would shift to a ‘cash-based’ system. Meaning, any cash that comes in the door in the morning would get spent on only the top priorities in the afternoon.

We already know that interest on the already extant national debt of $9 trillion held by the public and foreign sovereigns will be paid. First. It has to or else we declare bankruptcy and the US greenback dollar will become as radioactive as the spent nuclear rod in Homer Simpson's shirt.

(Remember, the so-called SS debt of $5 trillion is entirely fictitious and has no economic value or reality according to the CBO. It will never be ‘paid back’ in the traditional sense of the words; it will be ‘paid’ by higher taxes on our children and/or lower SS benefits to us in our dotage)

Next, what do you think gets paid? Defense costs or Social Security? We think SS gets the nod here, to be paid in full because of the clout and fear of the AARP. They are more ‘scary’ to any Member of Congress than the terrorists overseas. Why? Because the AARP can get seniors to vote against incumbents to the tune of 44 million voters per election, that is why.

So out of every dollar, we will have paid about 12 cents for interest on the national debt; 28 cents on SS; 23 cents on defense and why not throw in the 21.4 cents on Medicare we know will never be cut for the reasons stated above?  And Medicaid…there’s another 10.5 cents right there.

On the night of the debt ceiling not being raised, 95 pennies out of every single dollar sent to the US federal government by your tax payments will be consumed by these 5 programs which, for all intents and purposes, are the ‘mandatory’ parts of the federal budget.

That leaves 5 pennies out of every tax dollar sent to Washington for all the other programs you might like and love: education; environmental protection; transportation and highway improvements; agriculture and food safety protection.

So, if you really want to ‘cut down the size of government’, allowing the debt ceiling to stay the same as it is today is one big way to do it. Assuming, of course, these same brave souls who vote not to raise the debt ceiling also stop voting for increases in any program, or decreases in any taxes, of importance to them and you.

And to top it off with a cherry, SS/Medicare/Medicaid will have to start getting Marine-style haircuts just so the inherent demographic growth in each program does not throw them over the debt ceiling in 2-3 years from now.

Cause if they don’t, worldwide economic chaos will ensue as the dollar crashes; US bond instruments are dumped like hot potatoes and the Chinese yuan gets a chance to prove its mettle as the new world reserve currency.

Other than that, it is a grand idea.

Friday, January 14, 2011

…’I Would Sooner Have Become A Hog Than a Christian'

Or substitute ‘Republican’, ‘Democrat’ or any other label for the word ‘Christian’ you might want to add right now in America in the aftermath of the terrible shooting of Congresswoman Gabrielle Giffords of Arizona.

Martin Luther, the great German theologian, once observed of Christian/Jewish tensions throughout history up to his time writing in 1519:

‘If I had been a Jew and had seen such dolts and blockheads govern and teach the Christian faith, I would have sooner become a hog than a Christian.’

Dr. Luther certainly had a way with words. He also talked about God wanting us all to work hard for a living and not stand around ‘with our mouths wide open waiting for a fried chicken to fly into it!’

We did not know there was a flourishing fried chicken business in Germany in the 16th century.

Previously, in 1515, he wondered why any Jew would ever want to become a Christian Jew ‘(given the) cruelty and enmity we wreak on them—that in our behavior towards them we less resemble Christians than beasts.’ 1)

Given the current coarse level of discourse in America today, we believe you could substitute almost any label you wanted in place of ‘Christian’ and it works:‘I Would Sooner Be A Hog Than A (Republican) (Democrat) (Tea Partier) (Duke Fan)!'.

We don’t treat each other with the respect we all deserve and we want for ourselves. Because we are ‘right’ of course, and ‘they’ (our opponents) are not.

We are not sure exactly when or where the political discourse of this country passed the ‘fail-safe’ point and headed to where it is today. And quite honestly, we don’t really care when or where or how it happened.

We think it is incumbent upon every single person who cares about politics and opines in a blog; on cable television; on talk radio; or in any newspaper to start raising the level of debate from that of the ‘hogs in the pigsty’ back to a more lofty perch in civilized society.

‘How can I do that?’ you might ask.

For one thing, you can consider having coffee, lunch or a beer with someone on the opposite side of any issue you are particularly exercised about. It is impossible to ever discuss any possible solutions to any problems, as in your marriage, for example, if you never sit down to talk with the other person involved.

Solution-solving, (dare we call it ‘compromising’?), happens when people find some community of interest and can work together in a spirit of respect and mutual benefit.

Sometimes, it takes the hammer of crisis and desperation to force a compromise, as in 1983 when Social Security was supposedly ‘going broke’ and the Greenspan Commission raised payroll taxes well over what was needed to fund the program for the past 26 years. (We are now in a much more ‘desperate’ financial situation with Social Security in that current revenues have fallen short of current expenses in SS benefits being paid out for the past 8 months or so)

I am more than familiar with the violence that ensues when people are on two distinctly different sides of the issue. My sister, Susan Hill, who passed away last January, was a leader in the abortion rights movement of the ‘70’s and worked for reproductive freedom for women for 36 years.

She was Target #6 on the so-called ‘Nuremberg Files’ website which is a 'hit-list' dedicated to seeing all abortion activists and doctors eliminated from the face of this earth. Susan’s clinics were fire-bombed, anthrax-ed, ricsin-ed and picketed almost daily. She was handed death threats almost weekly and had federal marshals assigned to her as a result of the FACE Act passed by Congress.

In the aftermath of her death, I have had the occasion to meet and have coffee with some of the NARAL/NOW folks who admired Susan’s courage, as did I, in the face of all these threats to her life. Here's what they said: ‘You know, this is the first time I have ever had coffee with someone from the pro-life side of this issue. Maybe we should do it more often’.

Like more than once every 36 years, I guess they meant.

Our point is that in the aftermath of this terrible tragedy in Arizona where 9 people were killed by a deranged killer and Representative Gifford’s life was put in jeopardy, think about the ways you, as a citizen of the greatest democratic republic the world has ever known and the greatest protector of free speech in history, can take positive, proactive determined steps to meet with people who may think differently than you do on any issue you want to pick out.

And go have coffee with them. Or lunch. Or a beer...or two or three. You’ll find common ground soon enough.

Illegal Immigration. Abortion. Budget Deficits. Global Warming. Greyhound Racing.

The issue almost doesn’t matter. The main thing is for you to meet with your neighbor in a civilized manner and discuss these issues out in the open without any front people or media handlers being a shill for you or your side of things.

And in so doing, you will at least help the other person not want to be a ‘hog’ instead of becoming more like you, or at least agreeing with you 1%.

How can you ever persuade anyone to agree with you when they don’t like you first? Or even know you?

courtesy of

1)  from 'Bonhoeffer: Pastor, Martyr, Prophet,Spy' by Eric Metaxas

Wednesday, January 12, 2011

A Way To Get Out Of This Real Estate Recession...

(A modest proposal..with apologies to Adam Smith)

(from time-to-time, we will print what seems to be a clever unique idea from one of our readers. This one comes from a long-time friend of ours and former chief-of-staffer type on Capitol Hill for many years, Mr. Roger France. As always, if it 'works' and helps 'save the Republic', we will be ecstatic. You can comment at the end of this posting and give us the benefit of your experience and expertise as to why this will or will not work. Roger is a big boy and can handle it)

Before we can get out of this economic slump, and return to a low unemployment, robust high growth economy, banks need to recapitalize to the extent that their capital can reflect reality. A price floor needs to be re-established under the housing market. The only way we can meet these goals is to establish a value of these assets in the absence of vigorous transactions on a daily basis. The value of houses and mortgages that the market will accept has to be determined so we can get out of this slump sooner than later.

With nearly 10% of all mortgages behind in payments and a third as many in some form of foreclosure, and maybe 23% of homeowners under water, the relationship between mortgages and home values has completely broken down.

To date, government efforts to stabilizing banking, through TARP and the mortgage market though pumping billions into Fannie and Freddie, combined with a new housing program every six months in the last 2 years have not succeeded in stabilizing the housing market or the credit markets.

This failure has to be recognized and it is time for some outside-of-the-box thinking about re-establishing credit and consumer confidence without totally separating the moral obligation to pay debt. The economy won’t grow until the housing and credit markets re-adjust. The time for band-aids has passed – even big ones.

What is required is major surgery.

So, here goes:

1) Devote all the resources currently devoted to hounding elected officials, such as the late Ted Stevens, and yes, former Governor Blagojevich among others and go after the tens of thousands of cases of mortgage origination fraud. While the vast majority of folks in foreclosure or are now' underwater' in their mortgage values simply made bad economic decisions, some were victims of fraud.

2) As an alternative to foreclosure, borrowers (note, not 'homeowners', as most of these folks are effectively 'renters' until they pay off the mortgage) are to be offered a new mortgage, with the same length as their current mortgage but with the following new terms:

       a) the mortgage amount will be equal to the current market value of the home;
       b) the difference between:
            (i) the new mortgage amount and the eventual sale price of the home will be a ‘balloon payment’
           (ii) the interest rate will be the current low rate and will adjust once annually according to a
                simple understandable formula.

3) Mortgage holders (lenders) will be offered a one-time chance to exchange their currently 'worthless' (or unable to mark-to-market price) mortgages for a bond; the bond will be backed by the new mortgage.

4) Mortgage holders -- that is banks --will have to write down capital accordingly.

5) Federal tax law and the Fed will, in effect, allow banks to re-price their capital to reflect the new, market-based bonds in lieu of nonpaying mortgages. Unlike the mortgages, these bonds will have a price in the market. Effectively this creates a so-called ‘bad bank’, but one that is market-,not government-, priced.

6) Upon sale of a home in the future with this new mortgage when values hopefully have re-appreciated considerably, the existing mortgage will be paid off, and the balloon balance will be divided equally between the homeowner, the holders of the new mortgage bonds, and the federal treasury.

Let’s take an example:

Mr. X bought a shack in Fort Lauderdale in the ‘go-go’ days of 2004 and paid $425,000 with a down payment of $25,000 and a loan of $400,000 at 6%. Today, the home is worth only a mere $200,000 and Mr. X’s $2400 a month payments are unsustainable. Rather than go into foreclosure, Mr. X takes the one-time offer and exchanges his old mortgage for a new one of $200,000 at 4% with monthly payments of $800. Mr. X now can pay his real estate taxes, buy that new Government Motors car, a new frig, and even travel to Disney World. His mortgage will adjust up or down as the economy and interest rates change.

ChaseCitiBankofAmerica no longer carries on its books a loan which was of dubious value (certainly not $400,000) and receives monthly income of $800 on its ‘new mortgage bond’, which it holds as capital. The bank has written off $200,000 in net value (which many have done so already). However, thanks to generous tax and Fed treatment, it would only cost the bank $100,000 – for a bad loan made on a bad property. The stockholders will share some pain, but will have some reality-based stock prices return once again.

Fast forward to 2020 and Mr. X is ready to sell his home. Because the 'Great Real Estate Reset of 2011' has stabilized housing prices, and the Boomers have come back to Florida to retire in the sun and fun, Mr. X is able to sell his home for $500,000. He repays his loan of $200,000 and the balloon note of $300,000 is split $100,000 each for Mr. X, the US Treasury, and the bondholder, ChaseCitiBankofAmerica.

Everyone benefits.

Sadly, Mr. X’s neighbor, Mr. Smarty-Pants, who also bought a house in $400,000 in 2004, made all of his mortgage payments and even paid off his mortgage early because he recognized his moral obligation to do so. 1/3rd of all mortgages have been paid off and these ‘honest Americans who played by the rules’ shouldn’t be put at a disadvantage. When he sells his home for $500,000, he would walk away with $100,000 all of his own to keep. We think we should eliminate ALL federal income tax on commercial and residential property for those who played by the rules.

So, this would:

1) Stabilize the housing market;
2) Make the banks, the homeowners (‘renter’) and the Fed share the pain and share the gain;
3) Restore the credit markets;
4) Allow housing prices to rise a bit to the benefit of even the long-suffering play-by-the-rules-minority.

Why not try some different? The last 3 years certainly have not worked well.

Sunday, January 9, 2011

Is ‘CUTGO’ Gonna Be Enough To Save The Republic?

You are going to start hearing a lot more of this ‘CUTGO’ process as the GOP Congress takes hold of this raging bronco bull called' the federal budget' and tries to wrestle it to the ground like some crazy rodeo rider.

It is always amazing to watch a 150-lb man try to stay on a 2000-lb whirling dervish of sinewed muscle for 8 seconds…and keep his cowboy hat on at the same time, don’t you agree?

You have to be 1) brave enough to try to do it in the first place and 2) possibly a little ‘touched’ in the noggin as well to even think about succeeding, we think.

Same as with the federal budget nowadays that has been spinning out of control for these past 10 years or so.  We might start calling the federal budget ‘El Diablo’ to put it on par with these spectacular Brahman bulls on the rodeo circuit.

Anyway, one of the things the new GOP majority has said they are going to do in the 112th Sitting of Congress is to institute the ‘CUTGO’ budget mechanism…’Cut-As-You-Go’.  Meaning specifically, if any Member of Congress wants to ‘increase’ spending in one area of the budget, say education for example, they also have to produce a corresponding ‘decrease’ in spending in another part of the budget, say, agriculture, to balance it out.

‘So far, so good’, you might say.

We are mighty partial to the old ‘PAYGO’ mechanism passed in the 1990 Budget Agreement that so many assailed President Bush 41 for signing, ostensibly for allowing any tax increases to be included which, in effect, ‘broke’ his now infamous campaign pledge of 1988: “Read My Lips!  No New Taxes!”

Maybe he should not have been so emphatic but the 1990 Budget Agreement set the boundaries for what became balanced budgets from 1998-2000, perhaps the last 3 we will ever see in our lifetimes….ALL of us.  Think about that for a moment.

PAYGO instituted the most comprehensive of all deficit-fighting efforts in that it forced every bright Congressman or politico to answer this simple question when introducing a bill or an amendment on the floor of Congress:  “How are you gonna pay for it?”

If we heard that one time, we heard it 10,000 times from 1991-1994 while serving in Congress and for the 6 years thereafter before Bush 43 and the GOP Congress quietly started to put PAYGO on life support and pulled the plug out from it ever being effective again.

PAYGO meant that if you wanted to increase spending somewhere, you had to cut it elsewhere to balance things out in a ‘deficit-neutral’ manner.  And conversely, if you wanted to increase an entitlement (think: ‘the $10 trillion net present value liability embedded in the passage of Medicare Part D 2003), you had to raise taxes to pay for it OR cut entitlement spending somewhere else of a commensurate amount.

And on top of that, if you wanted to pass a massive tax cut such as the Bush tax cuts of 2002/03, you had to either: A) cut entitlements or B) increase taxes someplace else to keep it budget-neutral in deficit terms.

The heck of it all is that, in terms of keeping the budget deficits and national debt relatively tame, PAYGO ‘worked’! What PAYGO did is exactly what a balanced budget amendment to the Constitution would force Congress to do:  Make reasoned decisions and set priorities about spending our taxpayer money and find the income (taxes) to pay for them. Period.

Three balanced budgets out of the last 60 years? Are you kidding me? The balanced budget years of 1998-2000 represents ‘success’ in anyone’s books. Anyone who is still sane, that is.

But CUTGO? We dunno. We have our doubts.

We are thrilled beyond measure that discretionary spending increases in certain programs have to be balanced with spending cuts in other programs.

That is a major, major step in the right direction after the past 10 years, the last 2 especially, when zero spending discipline has been exhibited by either party in Washington, DC.

But will CUTGO apply to everything, including the Wars in Iraq and Afghanistan where annual supplemental bills are passed routinely outside of the annual budget and appropriations process to avoid having to cut spending or raising taxes to pay for them? Will it apply to entitlements…ever? Health care reform…is it an entitlement or a discretionary program or some hydra-headed monster of both?

Our biggest concern is that under CUTGO, Congress could conceivably cut taxes to absolute zero on the Kelvin scale….and it would not violate the CUTGO principle. Taxes could be cut, cut and then cut again…and the deficits would just increase, increase and increase exponentially over time as the accumulated debt generates $1 trillion+ in annual interest service costs that are sure to come when interest rates return to their normal level of 4-5% or so.

Which they will…you know it and I know it and so does every Member of Congress. It is just a question of: ‘WHEN?'

So think on these things as we head into the new year. CUTGO seems like a step in the right direction but is it just a baby-step when we really need a Jolly Green Giant step?

Like now?

Wednesday, January 5, 2011

‘It Is Too Late To ‘Privatize’ Social Security!’

So to the opponents of such a measure for the past 45 years, congratulations!

‘You. Win’! (sic?)

Converting or transitioning to a combined private/public Social Security program has been one of the ways reformers have sought to improve the system for every single recipient from the minimum wage earner up. It has been steadfastly opposed by those who have bought into the status quo and swear on a stack of Bibles: ‘Everything is OK with Social Security!  No changes need to be made, EVER!

Those opponents remind us of the Kevin Bacon character, Chip Diller, who, at the end of ‘Animal House’, stands in the middle of the sidewalk after the parade in his ROTC uniform and screams: “Remain Calm! All is well!’ ...and then is stampeded into the ground by the maddened crowd and reality.

Anyway, according to the most knowledgeable person we know on the face of Planet Earth when it comes to Social Security matters, Chuck Blahous (see his great new book: ‘Social Security: The Unfinished Work’), we have almost passed the point of no return when it comes to being able to convert SS to a truly funded system that would offset much of the huge costs heading for us.


Because when privatization of some form was first discussed, we had at least 25 years to plan for the huge pig in a python’s throat that would occur when the Boomers started to retire with full benefits in 2012. In 1985 when we started work on Capitol Hill, advocates of such change realized at least that people at age 40 or below then could have started diverting a fair amount of their SS payroll tax each month into a true investment fund and earned dividends and interest compounded for the next 2.5 decades.

Now, we have virtually no time to transition.  No time to invest and build for the future. With the first wave of Boomers now reaching the magic golden age of 66 and being eligible for full retirement benefits, plus those behind them who wisely opt to start benefits at age 62 (how do you know for sure you are even going to make it to 66, huh?), we are entering the maw of the entitlement hurricane that everyone was worried about 25 years ago. Now, we could still fund personal accounts even at this stage, but it would probably take some additional tax revenue to do it.

The most prevalent comment back then? ‘Don’t worry. We’ll never get to the point where this will be a problem. It will all be taken care of by then.’

By whom?  The Tooth Fairy?  Tinkerbell?

There is a way out, sort of. But it entails several mind-bending changes of beliefs that everyone will have to undergo before it will work.

Here they are:

1)  SS is not a ‘real’ investment trust fund…never has, never will be in its current form.
2)  SS is currently taking in less revenues than it is paying out in current benefits.
3) There is no ‘trust fund’ with trillions of dollars spilling out of it in a Wall Street brokerage house.
4) There is no 'real 75-year actuarial balance for SS'.  When you hear someone say that, all they are really saying in Greek or Pig-Latin is this:  'If you are under the age of 50 or so, your taxes are going up by about 35% and/or your SS benefits are going down by 25% or some combination of both.  That is the only way to 'balance' anything in SS going forward.

The time has come to recognize SS for what is really and truly is: A payroll tax paid by current workers to pay for the benefits for the current generation of retirees.  Nothing more/Nothing less.

Once you grasp that simple fact, the following solution will make more sense to you and be devoid of all the propaganda and salesmanship finesse you have been fed by politicians of all stripes and commentators for years and years and years.

We don’t need to means-test SS based on income or household wealth, which is a complicated proposition anyway. We don’t even necessarily need to raise the retirement age, although we still strongly support the raising of the SS and the Medicare retirement age to 70 on an expedited basis since we are all living so much longer than our fathers and grandparents did.

According to Mr. Blahous:

‘You COULD very easily draw a new ‘bend point’ in the benefit formula, and then slowly phase down the bend point factors above it.  Basically phase down to a flat minimum benefit for everyone – above that minimum poverty-protection benefit that everyone is eligible for, you don't get any more if you have higher income. If you went all the way there, you could probably still fund a small personal account. Or, if you just wanted to scrap the account or were willing to put in some more tax revenue, you wouldn’t have to phase the factors all the way down to zero.

You could solve the entire shortfall that way.’

Now, you’ll have to buy Mr. Blahous’ book to get the full comprehension of what a ‘bend point’ is along with his other very well thought-out and thoughtful solutions. (We think we can even get him to autograph it for you)

But a ‘bend-point’ is defined as follows by Mr. Blahous:

‘The Social Security benefit formula is rather like a system of tax brackets in reverse. Whereas the income tax system imposes higher tax rates on those with more income, the Social Security system delivers lower benefit returns to those with more wage income.

Currently, there are three benefit brackets— 90 percent, 32 percent, and 15 percent—the borders between which are indexed for national wage growth. The 90 percent bracket delivers high returns to the lowest earners; the 15 percent bracket delivers low returns to the highest earners.’

One solution? ‘Bend’ the benefits formula down to the point where everyone gets the minimum poverty protection benefits and then phase-down the formula to where no benefits are paid above a certain amount. Doing so could even leave some revenue left over for personal accounts – though very small ones.

Social Security would then truly become the ‘security’ program, the ultimate ‘safety net’ everyone wants for themselves and their parents and grandparents when they reach their golden years. Donald Trump and Warren Buffett would not get anything over the basic poverty protection benefits level...and we would propose an ‘opt-out’ for anyone who does not want to receive any SS benefits since they have made it on their own during a prosperous life.

Isn’t that really what we all want for the future of this nation and our children? A program to protect the elderly poor from being thrown into the streets and into the poor houses like in a Charles Dickens novel?  Instead of a ridiculously high and growing national debt and a bankrupted SS program?

It is time to start thinking along these new lines.

courtesy of

Monday, January 3, 2011

How About A Real Social ‘Contract’ We Can All Agree On?

For some reason, 2010 was the year for learning more about contracts than we ever wanted to know, both written and implied.

We are not lawyers and we don’t play one on a courtroom drama.  But we sure felt like lawyers this past year and don’t plan on ever doing so again.

Long-time readers of Telemachus will know that we think the current Social Security system is due for a massive modernization and update. None of us are driving around in 1935 model-year cars (unless you are an antique car buff), so why should we have a national retirement plan based on the demands and financial pressures of the Great Depression era?

We agree that some sort of system needs to stay in place to help the people who truly are in poverty and can’t take care of themselves for one reason or another.  But do we honestly need to keep supporting a universal system for ‘retirement’ purposes that sends $3500/month checks to the likes of super-billionaires Warren Buffett, Bill Gates or Donald Trump when they retire?

That is categorically ‘nuts’ in our humble opinion. They can take care of themselves and a few of the smaller populations of states such as Rhode Island or even Alaska in retirement.

We think we should not include the super-billionaires in ‘universal coverage’ for any ‘entitlement’ program and have said so many times before. Reform the system from the ‘bottom-up’ meaning ‘create a system that meets the current needs of the poor elderly first and foremost using current tax revenues and then release the wealthy and super-wealthy to fend for themselves.’

And then do the following:

‘Allow a ‘real’ social ‘contract’ to be signed by every American citizen at age 18 when they become eligible to vote as to whether they want to be in the Social Security system going forward or contribute to their own retirement plan out of those same funds.’

We have had a couple of go-rounds with some very smart people who insisted that there is some sort of ‘social contract’ embedded in stone tablets brought down from Mount Olympus in America circa 1935.

Here’s our question to you: ‘Have you ever signed this mythical ‘Social Contract’? And if not, why not?’

After all, no Congress can bind the hands of any future Congress or living generation in terms of laws or federal programs. Why is it that Social Security is held separate from this doctrine while every other part of the federal government is changed on a regular basis?

We think everyone would be far better off if they had the choice to voluntarily join Social Security at the same age they become eligible to vote, which has a nice sort of symmetry about it all.

Sign the contract and then there would be no question about what your contributions will be to the SS system and what your benefits will be when you retire.

‘Hey! Wait a minute! Isn’t that just ‘privatization’ of SS just like W proposed and got crushed on?’

Not really. This would be a full and open transaction conducted between the US government and every single legal citizen of this nation. And signed with a legal signature in acceptance of the terms from both sides.

That is what a real contract looks like. Not a fake ‘social contract’ that seeks to make everyone feel guilty if they don’t follow it lock, stock and barrel. Like we have collectively done for the past 75 years.

There are questions and concerns about the ‘transition costs’ of such an improvement which we will deal with later. The main thing is to start the debate for going to a real retirement system based on investment and returns. Allowing everyone the chance to make their choice at age 18 by signing or not signing the contract is the place to start.

After all, you can go to war and vote at age 18…why not make this important retirement funding decision as well at the same time?

(Even though you can’t buy a beer legally….which is another weighty issue to ponder)

courtesy of