Sunday, August 28, 2011

Would the '2000 Year Old Man' Be Eligible for Medicare for 1,935 Years?

Long-time readers of Telemachus know that we have been advocating a rapid and immediate increase in the retirement age for SS and Medicare to at least 70, possibly overnight.

Why? For one thing, life-expectancy is certainly far higher than it was in 1935 when FDR passed SS and set the Golden Retirement Age at 65. If truly indexed for extended life expectancy to be equal to what it was in 1935, the retirement age would have to be closer to 80 today than 66 for SS and 65 for Medicare.

The second reason is that raising the retirement ages for both of our major entitlement programs, almost twice as large when combined as the US military budget, would save trillions for the federal budget going forward and darn near be the single largest solution to correct our budgetary woes going forward.

For decades, we have been told by CBO and other respectable economic forecasting services that the single most important factor in our ‘structural’ deficits is the relatively low, by now, retirement ages to become eligible for the two major federal entitlement programs, SS and Medicare. Raising the retirement ages is the one single thing that Ben Bernanke, Alan Greenspan, Paul Volcker and even Warren Buffett can all agree on and have said so in repeated testimonies before the various committees in Congress.

Until now. And the passage of Obama Care is the reason why.

‘The Law of Unintended Consequences’ rears its ugly head once again.

Take some time to read the embedded blogs below and let this information sink into your cerebral cortex. The first is from the Incidental Economist in which the author talks about how raising the retirement age will not save as much money as previously believed, pretty much because of Obama Care coming on-line in 2014, if fully funded by a Republican Congress, that is.

The second is from Chuck Blahous, a trustee for the SS/Medicare 'Trust Fund' (sic), who pretty much clearly lays it on the line that we can't get out of this budget deficit spending morass unless we reform and repeal major parts of Obama Care immediately, like by the end of this year, 2011.

The first rule of federal budgeting policy?  'If you want to get out of Budget Hell, quit digging!'

The bottom-line is that due to the passage of Obama Care, companies can, and most likely will, dump employees into the ‘exchanges’ funded by the government and pay the $2000/head ‘penalty’ instead of providing the $7000+/person health care coverage from their company level.

So far, so good…for the company and corporation. They get to ‘save’ up to $5000/year per dumped employee.

But the taxpayer will have to pick up much of that $5000/person cost through the exchanges since it is highly unlikely the individual will be forced to pay the full actuarial cost of the health care coverage at that age.  It could be $10,000/person after age 65.

And unless a massive tornado runs through Congress to rearrange the laws and regulations governing health care in America like one that ‘magically’ runs through a junkyard and somehow produces a Boeing 777 out of all the spare parts there, there is no chance that costs to the taxpayer under Obama Care will ever ‘go down’ which is where we need them to go.

Let’s say the retirement age does increase to 70 somehow for Medicare in the next few years. (Sorry, you 64.9999 year-old workers.  It looks like you will just have to work for another 5 years to help save the republic and improve your children’s future in an act of selflessness and sacrifice no generation has had to make since the Greatest Generation saved the world from the Nazis)

Assuming Obama Care is fully operational in 2014, (again, how odd is it that this happens 'after' the next presidential election?) and assuming the retirement age goes to 70 somehow by then, people aged 65-70 will be dumped into these exchanges as if on cue by every single sentient corporate or company exec.

You may have heard President Obama say you can keep your health insurance if you like it.

Yeah, but ‘only if your employer wants to keep providing it!’ And if he can save $5000/head by dumping you into the ObamaCare exchanges, guess where the head of the 20, 200 and 2000+ employee company is going to dump you?

Into the exchanges, no doubt about it. If you can save $10 million by dumping your 2000 employees into the exchanges and you don’t do it, rest assured your stockholders will find someone who will do it in a blink of an eye.

So what’s so bad about this, Mr. Cassandra Doom-and-Gloom?

What is ‘bad’ about it is that we might not save any money for the US taxpayer or reduce the explosive budget deficits and moderate the debt by moving the retirement up to 70 or 80 or even 100!

Why? Because the people caught in the gap between working under a corporate plan and qualifying for Medicare will have ALREADY BEEN DUMPED ON THE FEDERAL DOLE! Their costs will already be factored into the budget spending projections and when they do become eligible for Medicare at 70, the so-called ‘savings’ will be rendered miniscule by this sleight-of-hand passed under Obama Care.

We just saw a very interesting article. It said that there is a person now living in America who will live to be 150 years old.  He/she might finally expire and draw their last breath long about, oh, let’s say, the year 2140.

Here’s our question: ‘Will he or she be eligible to draw federal benefits for over 85 years under what is left of SS and Medicare if we don’t ever raise the retirement age from 66 for SS and 65 for Medicare?’

The way the Defenders of the Status Quo in SS and Medicare explain it, ‘Hell, yes! That old person deserves it!’

85 years of federal assistance.

There has to be a better way. Even Chile has figured out how to blend federal entitlement programs with private market investment decisions.

Are we totally incapable of making coherent, intelligent decisions for the good of the entire nation any longer?  Think about it.

Wednesday, August 24, 2011

How Do 'Real' Jobs Get Created in the Real World?

You would like to think that someone in Washington must know how to 'create jobs' with all the talk that emanates from the White House and Capitol Hill on a daily basis, wouldn't you?

If you listen to Republicans talk, you would be led to believe that all you got to do is ‘swear on a Bible!’, spit on both hands like someone about to fell a tree with an axe and then ‘cut taxes’ and the unemployment rate will fall to 2%.

If you listen to Democrats long enough, you would be forced to think that all you gotta do is the following  3-part plan led by our esteemed government leaders in Washington: 1) ‘invest in education and infrastructure; 2) pass more stimulus packages; 3) extend unemployment benefits....and then the economy will turn around on a dime and then more people will get hired because the demand will magically rebound!’

President Obama, unfortunately, seems to have spent way too much time in the hallowed halls of academia studying constitutional law and no time in the economics, entrepreneurial studies or business administration classrooms where the basic rudiments of making fundamental business decisions are taught.

Or in the 'School of Hard Knocks' like millions of people who work on the job every day and learn more about 'marginal analysis', ROI and break-even points in practice than others who 'just study it' or 'talk about it.'

Here's a major problem with both of the current major political party-based myopic visions of business creation:
  • They all act like they are the ones who hold the key that unlocks all the job creation in America.
They don't.  Individual Americans do.  Each and every one of us has the power within us to start a business on our own.  Today.  Right now.  Do you feel up to it?  Think about it seriously.  If not, then why not? Your answer has more to do with why we are seeing such anemic growth in the economy than anything you will see or hear out of Washington, DC.

If we already have a business to run, we also have the power within us today to hire people to help sell more products or services.  Are you going to do it today?  If not, why not?  We have record low interest rates and seemingly calm inflation right now.  What is lacking and preventing you from hiring millions of unemployed fellow Americans this morning?

We have had periods of massive economic growth in America way before we had a federal income tax code to manipulate when it was made constitutional in 1913. America experienced periodic boom cycles when the level of government spending from Washington was a mere pittance compared to what it is today.  It was less than 1% of GDP for the vast majority of our 222-year history, believe it or not, and was ‘only' 3% of GDP before FDR took over the White House in 1933.

To assert that our elected politicians in Washington can manipulate job creation through the twin levers of tax and federal spending policy as the 100% sole 'determinative' factors in the process of job creation is specious at best, and merely dumb at the worst.

Look at the extremely low level of interest rates today.  In effect, 'negative' in some respects relative to inflation expectations.  For years, politicians have been railing against the dangers of high interest rates with the implication being that if they were 'lower', all of our economic problems would be solved such as high unemployment.

Well, take a look around you.  Apparently having next to zero real interest rates ain't the sole primary panacea to a burgeoning economy either, is it?

Every single business that has ever been started, or job that has ever been created, has been the result of some enterprising person who has seen the need or the niche and sought to fill it with their intelligence, talents, hard work and intestinal fortitude.

We'll go so far as to say that jobs funded by government spending or loans are the result of a single person or collective group of people who saw a need that could not be fully filled by the private sector and used public taxpayer funds to build something like the Erie Canal in 1817. These are 'real jobs' as well, just not totally sustainable on their own without continued government largess.

The reason why we delegate public sector jobs to a subordinate position vis-a-vis private sector jobs is because they are totally dependent upon private sector taxpayers making enough profit to pay the taxes to support the public sector jobs in the first place.  If you don't believe it, ask any of the hundreds of professors who have been laid off throughout the University of North Carolina system this year due to a lack of taxpayer funds flowing to the state coffers in Raleigh.

A healthy private sector based on free enterprise is the dog that wags the tail of the public sector, not the other way around as so many seem to want to believe nowadays.  (See Paul Krugman, New York Times Nobel prize-winning economist and columnist)

The thought that there is some 'macro'-economic switch that can just be turned on and off when it comes to job creation is just more than a little bit silly to us.  Every investment decision is made by some human being, not some computer or Tinker Bell tapping some building on the head with her wand and presto! milllions of jobs pour out of 'Big Bad Corporate America'.

Massive job creation in the private sector is far more complicated than a campaign slogan bumper sticker could ever convey.

And the sooner our politicians stop talking about simplistic solutions to our very complicated problems, the sooner we will get out of this forest fire of debt and unemployment that surrounds us all.

All of the tax and fiscal factors have some role to play in a complicated economy as large and as diverse as ours in the U.S. Some are more ‘important’ than others, to be sure. If you want to inflict more than a flesh wound on the US economy, raise tax rates precipitously on business and individuals.  The other way to permanently disable and cripple the US economy is to have an uneducated work force and electorate as Jefferson fretted about way back in the 18th century.

But are any of these the ‘main’ reason why certain people start businesses or business executives in charge of corporations hire more people to work for them?

We think the reasons for starting or expanding businesses are far more nuanced than any single reason or factor. We have seen people start and run successful businesses and make millions of dollars under low-tax environments and other people make many millions under high-tax environments. They make money whether the public schools are failing or the federal government is throwing trillions of dollars at the economy 'hoping' that will do the trick.

Our economic well-being and national security is completely dependent upon having entrepreneurs and business people take risks and invest their money into new technologies, products and services so the rest of us will have jobs and can provide for our families. Unless we want to return to the one Jeffersonian ideal that is not practical anymore, that is, living on farms and living off the land.

Based on decades of conversations with business leaders, both of large and tiny businesses, we have learned this cardinal, inviolable rule of business and job creation:

The answer to creating jobs and growing our economy is based on one thing and one thing only: 'Confidence'.  'Confidence' on the part of business leaders and entrepreneurs to see the future and be able to plan with some sort of high degree of expectation and assurance.

They want to know that the costs of inputs will be affordable in the next 3-5 years.   They want to know they can get credit made readily available by banks and financial institutions to be able to fund new research, growth and development of new products and services.  They want the freedom to make as much profit as their marketing and process management skills will allow.

Right now, today, the majority of business executives, both large and small, are essentially 'on strike' and won't invest in or expand their businesses until they do feel much more confident about the prospects for their future.

No matter how much President Obama demeans them or criticizes them or tries to regulate them out of business.

Tax rate levels and funding education and infrastructure are not 'the' determinative factor to whether entrepreneurs or business people borrow against the home equity in their house, max out 10 credit cards and beg and borrow money from family and friends to A) Start a business or B) Expand their existing business.

‘Confidence' is.

Why should anyone take a huge risk today in the face of all this economic turmoil and confusion and higher taxes on the horizon when the 'safest' thing to do is to maintain the status quo and merely try to stay in business at existing levels and ride this storm out?

One other element of entrepreneurship and business development you hardly ever hear anyone talk about is the 'natural' business/job creator.

We don't think the young high school computer geek goober Bill Gates or the young basketball player who was cut as a sophomore from his Laney High School team in Wilmington, North Carolina, Michael Jordan, were pouring over the intricacies of the US tax code circa 1978 before embarking on careers that would bring both fame and fortune that any Roman Caesar would have envied.

Bill Gates wrote computer code and Michael Jordan played basketball.  That is what they were 'born to do', apparently. They both were internally driven to do each activity better than anyone else on the face of the planet at the time.  They probably would have done so had they not been headed towards becoming fabulously wealthy one day in the future because, quite simply, who could have seen the riches that were before them, including both Bill Gates and Michael Jordan?

No, there is just something 'different' about such people who are driven to be the best and do their very best in whatever they choose to do.  That is 'just what they do' and as a result, thousands of others have been able to become gainfully employed in the wake of the Microsoft Miracle and the Air Jordan Phenomenon.

There is probably a young person right now working on some project in their basement or garage that will bring about the 'Next Economic Revolution' in America much like the Internet Boom has transformed everything in the last 2 decades and the Industrial Revolution changed the world in the 19th century.

We sure hope so. Don't you?

We remember hearing the strident and not-so-prophetic words of Republican House Majority Leader Dick Armey predict the ‘Economic Armageddon’ that would erupt if the tax hikes of President William Jefferson Clinton were passed into law in 1993.

It didn't.

Fact is, within a couple of years of passage of the 1993 Dastardly Bill Clinton Tax Hikes that Bush Cut in 2002 and Obama Extended in 2010, the following companies were started:  Amazon, Yahoo and Google.

Some 600,000 new businesses per year are started, even in an economic downturn like the past 3 years and still counting.  Sometimes especially in an economic downturn: people get laid off; disputes happen over how to keep a company alive in tough times and good employees leave to start a new company.  It happens time and time again.

American free enterprise is like a cockroach convention.  If we could just quit trying to kill them all, business, both new and old, will proliferate like mad and people will get hired again by some enterprising nut working out of his garage just like Bill Gates, Jeff Bezos or Sergey Brin did.

That is how you get new jobs created.  Not by having a President pounding his fist on a table in Washington and demonizing the private sector and playing the class warfare card by attacking corporate jet use. Not even by waving a tantalizing tax cut in front of the country and putting our nation even further into debt because tax cuts NEVER are accompanied by commensurate spending reductions.  EVER!

Someone makes those corporate jets here in America.  Ever think of that, President Obama?

Thursday, August 18, 2011

Some Questions For Warren Buffett

Warren Buffett caused a stir recently with his editorial comments in the New York Times on Monday where he asked Congress to ‘stop coddling superbillionaires’ like him.

It is a little hard to take on a superbillionaire such as Mr. Buffett since in America, and throughout history, it is presumed by many that the ‘richest’ citizens are somehow the ‘smartest’ people in the country.

Especially when it is someone such as Warren Buffett who has allowed even normal, moderate wage-earning investors the chance to ride his expertise in buying companies over the years. We had an investment advisor recommend putting money into Mr. Buffett’s Berkshire Hathaway stock way back when it was ‘only’ in the high 4 digits.

We thought our advisor was certifiably loony.

Last we saw his Berkshire Hathaway stock was in the low 6 figures. So God Bless America and Warren Buffett!

Still, we have to take issue with his comments about higher taxes for the wealthy because they seem a bit supercilious to us and off the mark when it comes to the root causes of our deficit/debt issues from Hades.

So here are some honest questions for Mr. Buffett and any other person who just ‘insists’ that higher taxes are the answer to our fiscal problems:

1). If Mr. Buffett doesn't mind paying more taxes, then why does he continue to hire top- flight tax accountants and lawyers to shelter ANY of his money...ever?  Why not just fire them all and pay the marginal and effective tax rates as written into current law for a man in his super-ultra high income category? (Just fire them for your own personal tax planning please, not for Berkshire Hathaway common stock holders who have benefited from such great similar tax advice over the years.)

2) Mr. Buffett can pay any effective tax rate at any time he wants to...14%; 25 %; 38.5%. He can pay 100% effective tax rates today and pay $100 million more in taxes each year if he wants to just by stroking a check to the US government. Why don’t you do just that starting tomorrow morning, Mr. Buffett?

3) Instead of setting up a charitable trust with Bill Gates to manage his wealth of $35 some-odd billion going forward post-mortem, why didn't he just write 'The US Federal Guvmint' into his will? That way, he could give those great decision-makers in all the bureaucracies his money to spend the way 'they think would be a good way to spend it all' and not him or his heirs? ($35 billion would last about 36 hours before it would all be spent to pay for the current amped-up operations of the US government)

4) Better yet, why not bring President Obama and Congress into the Buffett boardroom and ask Mr. Buffett what he should do with his money and how much he should pay in taxes each year?  He seems to imply that every single program now in operation is spending our taxpayer’s money in precisely the most optimal and efficient manner possible. Obviously, (to him at least), the government knows better than he does how his tax money should be spent.

So just let the federal government make the decisions from the very beginning, not after he has made a profit from making a risky investment.

5) Finally, there is this somewhat obscure and seldom-used line-item in the current US federal budget where any taxpayer, including you, the reader if you are so inclined, can send a check to the US Treasury and make a 'gift' to help pay down the $14.7 trillion national debt.

Seriously. Go to this website, Bureau of Federal Debt and see how you can make a gift donation to help pay down the federal debt of $14.7 trillion and counting.

If you make the average donation of $500, it will only take you and 29.4 billion other people making the same 'donation' to pay off this huge Visa credit card debt we now have.

There are only 7 billion people on Planet Earth right now, of which only 125 million are US federal taxpayers.

And here is the real kicker to the teeth of any well-meaning soul who does contribute to this fund:

It doesn't actually go towards 'reducing existing debt'. It goes towards 'reducing the amount of debt that might have otherwise been borrowed' which in effect means all of these donations have been 'spitting into the wind' over these past two decades.

So you can thank Mr. Buffett for bringing this important issue to light.  If we thought every single penny of the federal budget was being spent to help someone in desperate need in order to feed themselves and stay alive, we might be inclined to consider additional taxes.

If we thought every single penny of the US defense budget was being spent optimally to keep us safe from the terrorists such as Osama Bin Laden's henchmen instead of puffing up some employment figures on an obsolete weapons system in a powerful defense committee chairman's home district or state, you might be able to convince us to pay more in taxes to defend our nation against all threats as it says in the US Constitution.

But unfortunately, we have read every single page of the US Budget, (so you don't have to plow through its 2400+ pages of almost indecipherable writing) and we know both of these hypothetical situations above are not true.

We suggest maybe Mr. Buffett could be persuaded to sit on the Super Commission and help them plow through the books like he must do whenever he buys a huge stake in a company such as Coca-Cola, The Washington Post or Goldman-Sachs.

Maybe he could help them cut spending before offering to pay higher taxes. That is where we need his financial and budgeting expertise right now...on the spending side, not the tax revenue side of things.

He would be appalled at what he saw in the current spending stream of the federal government. You would too if you read it all stem to stern.

Sunday, August 14, 2011

Visualize Whirled Peas

You are going to be hearing an awful lot about 'spending this' and 'not spending that' over the next several months from President Obama, Congress and the 'Super Commission' charged with the responsibility to do what Congress should have done for the past decade, truth be told.

Achieving 'World Peace' might be an easier objective.

We thought you might appreciate the following 'cake charts' as opposed to 'pie charts' since these charts from CBO look like those big birthday cakes you can get at any supermarket nowadays.

The only thing missing are the 14.7 trillion candles that represent our collective debt nowadays and 'just won't seem to go out' when you blow on them and hope your wishes come true.

It won't be that easy this time around, will it?  Nope, it won't.  We have already tried to do the 'easy things' to get out of this fiscal jam we are now in and it just did not work, did it?

So now the hard work has begun...with the following exception this time around:  If our elected politicians don't do the 'hard work' we have elected them to do and make the tough decisions for the betterment of our American Republic, the financial markets have already spoken and told us all that they will make the next decisions for us.

The question now is: 'Do we want to make the decisions where we keep control of our future and destiny or do we want to let foreign investors and lenders decide for us what level of interest rates and inflation they are going to force the United States into accepting as a cost for not being fiscally responsible like adults are supposed to be?

Here are some charts to keep in mind or on your computer as screensavers or posted on your refrigerator doors or plastered on your walls as wallpaper.  You need to memorize these charts and keep them and the following comments in mind so you will not be completely hornswoggled and lied-to by the politicians and their spinmeisters in Washington DC when they start screaming about how reducing spending in any part of the federal budget is going to mean 'the end of western civilization as we know it':

I.  Total Federal Spending

This is a picture of our total spending out of Washington today.  What is the largest part of the federal budget, class?  Correct.  'Mandatory. Spending'.

What is that anyways?  Social Security, Medicare, Medicaid and some other 'entitlement' programs which are presumed to be 'mandated' that anyone who meets the minimum qualifications for each program become eligible for them in perpetuity no matter what.

Unless we run out of money to pay for them, let's say.  In which case, Congress has every right and duty to go in there and change them so we do have enough money to pay for the 'legitimate' beneficiaries of each program.  Congress has regularly changed entitlement benefits and eligibility for decades under a process known as 'budget reconciliation'.  We have seen it done dozens of times so don't let any politician fool you into believing these programs can not be touched, amended, modified or improved.

That just isn't so.

Notice the deliberate use of the word 'legitimate'.  For the life of us, we can not conceive of one solitary great or even good reason why Warren Buffett or Bill Gates or any other super-rich person on the face of this earth who is a citizen of the United States of America should be 'entitled' to receive one penny from any social welfare program which includes Social Security and Medicare.

None whatsoever.  Both are sham trust funds with no cash reserves on hand to redeem when needed.  Did anyone catch the slip-up by President Obama at the end of July when he stated that he was not sure he would have 'enough money on hand to pay Social Security benefits?'

That was no 'slip-up'.  That was the 'truth'.  There is no trust fund waiting to be cashed-in for anyone in SS or Medicare. It is all on a 'cash-and-carry basis' meaning what money comes in during the morning in terms of payroll taxes and what we can still borrow from the unsuspecting Chinese lenders (for some odd reason), gets paid out that afternoon in the form of benefit checks to the recipients.

We think the government's prime objective should only try to help support those people in dire need of assistance our national welfare programs.  People who can afford to take care of themselves should do so and not rely on any federal subsidy in any way, shape or form, including SS and Medicare.

II.  Entitlement Spending

Out of all the entitlement spending coming out of Washington, 37% goes to Social Security; 23% goes to Medicare and 15% goes to the federal share of Medicaid (the states pay close to a 40/60 match for  Medicaid)

20 years ago, the share of mandatory spending allocated for Medicare was probably half that or around 12% of all entitlement spending.  

This is where the heart of the problem lies not only in health care but for the entire federal budget deficit dilemma.  If overall health care cost inflation could be reduced by approximately 1/2, our budget problems would abate almost overnight.

But medical costs have gotten more expensive every year due to a myriad of factors, not the least of which is the fact that more Boomers are becoming senior citizens every single day by the thousands.  And when a Boomer gets to be a senior, he or she wants to live the 'good life' just like we have all enjoyed for the bulk of the rest of our relatively pampered lives, save this disastrous economy of the past 4 years now.

Think about it:  44 years ago in December 1967, the first heart transplant operation took place in South Africa under the skilled hands of Dr. Christiaan Barnard and the world stood still for a moment and marveled almost as much at that feat of science as when Neil Armstrong and Buzz Aldrin landed on the moon 2 years later on July 21, 1969.

A complete heart transplant.  It is still amazing to consider being even possible.

Nowadays, people go into have double-lung heart transplants; hip and knee replacements and advanced sophisticated cancer and AIDS treatments with a regularity that is almost as mundane as 'watching another space shuttle launch into space'.

They are almost as expensive as well.  We just ended the space shuttle program mainly for cost reasons.  There is no way the American public, especially the aging Boomer Generation is going to give up getting a new knee at age 80 so they can keep playing golf or go hiking into their truly golden years.

But tort reform, malpractice insurance reform, defensive medical practices, higher co-pays and deductibles and gauging end-of-life expenses are all going to have to be considered as part of a comprehensive effort to rein in health care costs, all of which the ObamaCare Health Program effort failed to address or even seriously consider.

So get ready to dive into all the ramifications of having great health care, far beyond the comprehension of 90% of the world's population really, because we are either going to control the upward cost spiral of health care in America or it is going to control us and take our economic fortunes with it.

And if we don't control it willfully and voluntarily via our elected officials in Congress, be prepared to see the Bush Tax Cuts expire on December 31, 2012 and be fully used to cover the cost of unabated health care increases for the rest of your natural-born days.

III. Next up:  Defense Spending

We are first in line when it comes to advocating a complete audit of the DoD budget from top to bottom.  There are plenty of defense contracts that siphon money from the taxpayers at large and funnels them to the home districts of Members and Senators who sit on the Defense Appropriations Committee mostly for no other reason than 1) they can write it into law and 2) these contracts provide great high-paying jobs for their constituents 3) even when the military brass doesn't want to use any of the products in the real war theaters around the globe.

We are surprised that no one is still making Civil War-era Gatling guns in some district represented by a long-term Member of the House/Senate Armed Services/Defense Appropriations Committee.  The Joint Strike Fighter has recently come under fire for being a waste of money, mainly because no one in the military wanted it except the Members on Armed Services/Defense Appropriations in whose districts it was being built.

Tons of wasteful spending here.  Put it all on the table and vote on these programs line-by-line under the hot glare of the C-SPAN lights in the well of the US Congress from now until the end of the year.

IV. Next up?  Everything else BUT Defense Spending.

As you can see from the first chart above, non-defense discretionary spending equals almost the size of the entire defense budget.

Everything that goes into making sure your food is inspected to building highways and bridges and providing welfare for the poor is included in this very broad category of spending.

It is also the one broad category of spending that many people 'swear' at least one boogeyman of spending needs to be eliminated like:

1)  International Affairs or 'Feriegn Aid' as it is known in the South.  Congratulations!  You get rid of all international aid (Norway and Canada get some of our 'feriegn aid'!) and you have saved about $46 billion per year.  Now we only have $1.454 trillion to go instead of $1.5 trillion until we balance the annual budgets. (Still, $46 billion is $46 billion per year and what in the heck is Norway and Canada getting US taxpayer money in the first place anyway?)

2) Public Welfare Programs.  We could eliminate benefits to every 'welfare queen' Ronald Reagan spoke about and we would still be over $1.4 trillion in deficit-spending each year.

3) Highway/Rail Projects.  We could eliminate most if not all highway transportation projects each year except they are mostly 'paid-for' by gas taxes in each state and sent to the federal government only to have them return some of that money to each state based on a convoluted formula that even we don't fully understand after 30 years of looking at it all.

North Carolina, for example, has perhaps the second highest amount of linear paved roads in the Union only behind California.  It would seem at some point that every road that needs to be built 'to' somewhere has already been built.  Re-surfacing and re-paving of existing highways might be a better use of such funds going forward at far less cost tot he taxpayer.

So there you have it.  In simple-as-pie charts and colors and graphics and numbers.  Go ahead...memorize these facts and figures and emblazon them on your cerebral cortex because you are going to hear some humdinger lies coming forward from all sides once everyone returns to Congress and the Super Commission convenes to do the work Congress and President Obama should have done before they took a break for August.

The big money savings are going to have to come from the Big 4, Medicare, Medicaid, Social Security and Defense or else we are in for some more debt downgrades and stock market shocks like you will not believe.

Which do you choose?

Monday, August 8, 2011

The Sisyphean Illogic of Higher Taxes

Now that S&P has fired a shot across the bow of the United States in terms of a debt downgrade, maybe it is time for the adults to show up in the room in Washington and dictate the next steps.

If there are any, that is.

We are unabashedly for lower spending for many reasons as we have expressed over these past two years but none is more important that this unassailable fact we know to be true because we have read the entire federal budget front-to-back and back-to-front and in its original Greek and Latin languages at least 4 times:

Not every single dollar spent by the federal government is a matter of life or death for someone.

In fact, we think that there are thousands of programs that could be eliminated, reduced or reformed to bring federal spending back down in line with the average tax revenue collection equal to 18.5% of GDP which has been the average for these past 40+ years.

That is what the ‘prime directive’ of Congress should be right now as Captain Kirk would say in the Star Trek series.

But there is more to the debate than meets the eye.

Currently, the Administration and President Obama are trotting out talking heads to claim that ‘tax rates and revenues are at their lowest point since the Eisenhower Adminstration’.

Well, we have just been through the most severe economic recession since the FDR Administration so that explains the level of tax collection hitting only 15% of GDP today.  People who are 'out-of-work' or significantly under-employed don't pay taxes at the levels they used to when fully employed.

And President Obama himself signed an extension of the Bush tax cuts that a completely Democratic Congress sent to him last December after the 2010 elections! So put those talking points away because they are simply ridiculous and too hard to believe given where they are coming from.

There is an inherent illogic to ‘raising taxes’ when no serious effort has been made yet to curtail spending that we want to focus on here first. Why raise taxes at all when we have not even started to clear out the underbrush of unnecessary spending in the federal government today?

It would be nice on the part of our President and the Democrat leaders in the Senate if they would be 'honest' about what they really want which is to play the same old tired political card that has been with us since time immemorial, 'class warfare', which they play solely for political purposes.

If they were totally 'honest' about it, they would just clearly state they want, in return for allowing budget cuts on entitlement, an 'acceleration of the expiration of the Bush tax cuts from 12/31/2012 to tomorrow morning'.

That is, in essence, what they really wanted in this last debt ceiling go-round.

Anything above that level, when taken into conjunction with the new taxes now in play from the passage of ObamaCare last year, would truly be taking the nation back to the high pre-Reagan tax rates that we dismantled in the 1980s.  These dramatic lowering of the marginal tax rates helped contribute to the massive expansion of the United States economy from the $2 trillion GDP of 1980 to the over $14 trillion GDP of today even after 3 years of the most difficult economic recession we have had since the Great Depression.

The Greek mythological character Sisyphus is the best character we know to represent the 'illogic' of trying to raise taxes to solve our current budget problems.

Sisyphus was a king who was condemned by Zeus to roll a stone up to the top of a hill with great effort only to have it roll back down the hill each time for all eternity for his trickery in escaping death previously.

Have you ever had such a day, week, month, year or decade? We all know what Sisyphus must have felt like. Here’s why trying to raise taxes is such a Sisyphean task nowadays:
  1. Truly wealthy people pay what they want to pay in taxes.  They can afford the very best tax accountants and lawyers to protect their assets and income whereas a middle-and-lower income taxpayer can not. Raising taxes on them is unlikely to ever be collected in the future in total.
  2. There are not enough wealthy taxpayers on which to raise taxes to balance the budget anyway.
  3. If every taxpayer had to pay enough new taxes to balance the budget at current and future spending levels, each taxpaying household would have to pay $10,000 this year, next year and every year after that just to raise another $1 trillion per tax year in incoming tax revenue…and we would still be $300-$400 billion short of balance each year for the foreseeable future.
But beyond those cold hardened facts, here is the real Sisyphean kicker to the chops of every tax-hiking advocate nowadays:

The taxes on not only the highest-earning taxpayer but millions and millions of upper-income, high-income and yes, even middle-income taxpayers are ALREADY GOING UP! They are built into current law!

You don’t believe me? Go to this CBO site and read it for yourself…..pp. 12-13.

You see, when President Obama and the Democrat Congress extended the Bush tax cuts last December, all they did was extend them until when, class? After his hoped-for re-election in November, 2012, just like he wanted the debt ceiling to be extended to after the election as well.

Does anyone see a pattern building here? ‘Bueller, Ferris Bueller?’

If President Obama wins re-election to a second term, which is still a better than 50/50 proposition nowadays, these Bush tax cuts will expire per current law on New Year's Eve, 2012. What does that mean?  It means a return to the tax rates of 2001 before Bush took office. It means a complete restoration of estate (death) taxes to as high as 55% on net wealth that could have otherwise been passed on to your heirs.

But the most insidious and wicked of all tax expirations would be the dreaded AMT, the Alternative Minimum Tax. Why is this so nasty?

Because up to close to 24 million new taxpayers, including many who are reading this post right now, would be pushed into much higher tax rates and categories on January 1, 2013 and would pay from many hundreds to many thousands of dollars more per year to the federal government.

Less than 4 million American taxpayers are subject to any sort of AMT tax bite today. 24 million new people hit by the AMT represents almost 20% of the entire number of people who voted in the 2008 presidential election.  You want to see a 'mad' electorate and a 'revolution'?  Let the AMT go into full effect and unindexed for inflation.

After that, perhaps as many as 10 million new taxpayers PER YEAR will be pushed into higher marginal income tax rate categories subject to the AMT if not indexed for inflation.  There could be over 125 million taxpayers paying the AMT by 2025 or sooner up from less than 4 million today.

Take a very close look at the CBO report mentioned above. Under their ‘current law’ baseline scenario, tax revenues are expected to reach 21% of GDP by 2021. Up from 15% today.  Up almost 3 percentage points of GDP from the historical average of 18 % for these past 40+ years. Up to 23% of GDP by 2035.

The primary reason? No silly, not because the rich will be paying more taxes. We all know they won’t because they can shelter it all.

Because those 24 million more normal income-earning people will be paying the AMT, that is why!

And you can rest assured and bet your bottom dollar that there will still be screams for the ‘rich to pay their fair share!’ even if tax revenues hit 23% of GDP because federal spending will have then out-raced tax revenues to consume 30% of GDP by that time!

So the rock that King Sisyphus was condemned to push up that hill back in Greece really could be the tax burden that American taxpayers will be forced to pay from here on out unless something drastic and dramatic is done right away in Congress to curtail the upward cost spiral in federal spending, mostly in entitlements.

We just had a brief taste of what can happen if we don’t take bold action as exemplified by the S&P downgrade of US bonds. Are you ready for a whole boulder to come crashing down the hill on you in the form of higher interest rates, possible out-of-control inflationary pressures and a dollar that continues to depreciate against every other currency in the world?

We didn’t think so.

We strongly suggest Congress get back to Washington this afternoon and start whittling, reducing, whacking and Weed-Eating away at federal budget spending from stem-to-stern.

It has got to be done.

(selected text on long-term outlook for tax revenues from CBO book to focus on:

The Long-Term Outlook for Revenues

Federal revenues have fluctuated between about 15 percent and 21 percent of GDP over the past 40 years,averaging 18 percent. Just as mandatory programs have accounted for a growing share of spending during that period, the composition of revenues has shifted. Receipts from payroll taxes have grown faster than GDP, producing a larger share of total revenue.

At the same time, the shares contributed by corporate income taxes and excise taxes have declined.

After totaling nearly 18 percent of GDP in 2008, federal revenues fell sharply, primarily because of the severe recession, and were less than 15 percent of GDP in both 2009 and 2010. CBO expects revenues to remain near 15 percent of GDP this year.

However, under the current-law assumptions of CBO’s baseline, revenues would rebound over the next decade with expected improvement in the economy, the scheduled expiration of tax cuts enacted since 2001 (and most recently extended in 2010), and sharp growth in the number of taxpayers subject to the alternative minimum tax.

As a result, revenues would reach nearly 19 percent of GDP in 2013 and nearly 21 percent in 2021.

Under the extended-baseline scenario, revenues would continue to rise gradually thereafter, reaching roughly 23 percent of GDP by 2035.

That increase would occur largely because, under current law, real growth in income would push people into higher tax brackets over time, and inflation-related increases in income would make more income subject to the AMT.

The excise tax on certain high-premium health insurance plans that was enacted as part of the March 2010 health care legislation would also contribute to the increase. All told, average tax rates (taxes as a share of income) would rise considerably, and people at various points on the income scale would pay a larger percentage of their income in taxes than people at the same points do today. In addition, the effective marginal tax rate on labor income would rise from about 25 percent now to about 35 percent in 2035.

For the alternative fiscal scenario, by contrast, CBO assumes that tax law will be changed over time to continue certain policies that are widely expected to be extended and to keep revenues at a percentage of GDP more consistent with past patterns.

Specifically, for this scenario, CBO assumes that all tax provisions scheduled to expire in the next 10 years—other than the reduction of 2 percentage points in payroll taxes for 2011—will be extended through 2021. Most important, the tax cuts enacted since 2001 are assumed to continue, the reach of the AMT does not expand, and the estate tax is extended with the rates and exemption amounts scheduled to be in effect in 2012 (adjusted for inflation).

Most payroll tax revenues come from taxes designated for Social Security and Medicare; the rest come mainly from unemployment insurance taxes.

Beyond 2021, CBO assumes unspecified changes in tax law that keep total revenues at the same share of GDP as in 2021.

Under those assumptions, revenues would increase to 18.4 percent of GDP in 2021 (rather than to nearly 21 percent under the extended-baseline scenario) and would remain at that percentage in later years. Thus, the revenues projected under the alternative fiscal scenario are lower than those under the extended-baseline scenario by more than 2 percent of GDP in 2021 and by about 5 percent of GDP in 2035.)

Saturday, August 6, 2011

We Hate To Say 'We Told You So'....

But we told you so.

The S&P downgrade of US debt securities for the first time in modern history last night is just the first step in the repercussions we will see from the profligacy of our American government for lo these many years.

The stock and bond markets will lurch about, perhaps wildly on Monday morning and probably throughout the rest of this summer as investors digest not only this 'bad news' but also the terrible news in Europe about how the EU is going to have to restructure their government spending and debt structures as well.

The chickens, and pigeons, always come home to roost when the piper has to be paid, to mix a few metaphors.

What will happen next?

We don't know. And neither does anyone else in the known world right now since this is uncharted territory to which your elected leaders from President Obama and President Bush to Congress for the past 10 years at least have led us.

These are problems caused by the blind fixation that we Americans can spend whatever we want to and not balance our books between revenues and expenses and make the tough public policy decisions on a regular basis to achieve that end.

As we have been warning for these past 2 years, the effects of running rampant budget deficits and incurring ridiculously high levels of debt during relative peacetime periods can cause real economic damage to all of us in the form of inflation, higher interest rates, depreciating value for the US dollar, all of which are far beyond the reach Congress to just 'legislate away' when they feel like it.

Such macroeconomic and international financial forces can make Congress and the US President look like insignificant pawns on the great chess game of world finance and stupid ones at that.  Our debt holders get to start making decisions that our elected leaders could have made long ago in terms of forcing us to finally reduce the upward cost spirals in our entitlement programs and especially in our federal health programs, Medicare and Medicaid.

This S&P 'downgrade' is not a 'mistake'.  We are surprised it has taken this long to get here.

Now, we are the first ones to wonder out loud:  'Why in the world would anyone listen to S&P, Moody's and Fitch rating agencies when they so blindly kept giving all of the major banks and financial institutions a 'clean bill of health' and Triple A+ ratings for their debt instruments including the deriatives that brought the economy to a grinding halt in 2008?'

Seriously.  Why these rating agencies are even still in business makes us wonder if even this downgrade to AA+ is a 'valid' rating made by a disinterested unbiased professional bystander. All of the ratings agencies were completely compromised by the fees they were paid by the banks and Wall Street such that they fell into the same human trap of greed and failed to do their jobs to fairly evaluate risk for the rest of us who continued to invest in Wachovia, Bank of America and Merrill Lynch like there was nothing wrong with them.

Maybe the 3 ratings agencies are receiving fees, indirect and direct, relating to the issuance of US bonds. Perhaps that is a prime reason why they have been so slow to issue this downgrade, we don't know. As President George H.W. Bush was prone to say: 'Wouldn't be prudent at this juncture to speculate.'

But something is rotten in Denmark and in Washington, DC. Don't let anyone try to explain this away as some 'aberration of statistical methodology' as White House defenders started to put out last night after the downgrade announcement.  This tepid downgrade finally 'proves' that something ain't right anymore.

One very simple suggestion: Seriously consider voting and working against any person who is now serving in Congress and and has been there since before 2000. They, of all of them, deserve the brunt of the blame for getting us into this fine mess we are now in simply because they 1) saw it coming; 2) did nothing to deal with it when we had time to deal with it and 3) have basically lied about the seriousness of the impact of their faulty decision-making.

We would like to say that perhaps every single Member of Congress now serving should be ousted next year in the 2012 elections along with President Obama in the White House who has failed to lead us in this time of crisis. George Washington, Abraham Lincoln, FDR, he is most definitely not, as much as people had hoped he would be a 'transformative' president.

The first ad you will see perhaps starting this fall running against his re-election?

'President Obama:  The First President to Preside Over A Debt Downgrade in American History! Is That Leadership You Can Trust?' 

That is not good.

We have been telling people to get ready to run for Congress and all levels of government.  During times of economic upheavals are when the majority of incumbents get defeated by new people election after election after election cycle.  There were 13 new US senators and 93 new Congressmen elected to the 112th Congress that took the oath of office in January, 2011.

Only 3-4 more elections like that and the whole list of long-termers in Congress who are mainly responsible for this mess will be gone with the wind.

We just hope the new people on the block will have the guts to make the tough decisions to get our economic and fiscal houses back in order and back in order soon enough to avoid another downgrade to A+ and then B and then, well, it won't really matter after that point.

Stay tuned to the news this week and keep a defibrillator nearby and a glass of scotch and a tranquilizer gun. This is what we have signed up for by not addressing the seriousness of our budgetary problems for decades.

Thursday, August 4, 2011

‘Satan Sandwiches’ and Divots In The Budget Fairway

Did you see the comment from Congressman Cleaver of Missouri?

He called this debt deal a ‘Sugar-Coated Satan Sandwich’.

Guess what? He is also a co-chair of the newly-formed ‘Civility Caucus’ in Congress. We kid you not.

We guess that alluding to Lucifer and Beelzebub is acceptable language in the caucus. So expect to hear cheers from each side in the future like ‘Go to Hell, Republicans!’ and ‘Go to Hell, Democrats!’ similar to the cheers at a Duke/Carolina basketball game.

We think it is always helpful to use hopefully useful analogies that put these big, weighty and many times deliberately confusing political issues in perspective.

Instead of a ‘Satan sandwich’, whatever that is, this looks more like a divot, albeit is a large divot, being cut out of a 550-yard long par 5 fairway by a not-so-very-good golfer.

This deal means that the grass on the SS and Medicare fairways will continue to grow and be irrigated and fertilized just like before. The only difference will be that the discretionary programs will be subject to some closer examination and perhaps some fumigation and weed-killer which is what a good groundkeeper always does to keep the entire golf course healthy and suitable for use for future generations of golfers.

Ronald Reagan once said: 'The closest thing to eternal life is a government program.'

There are billions and billions of dollars spent on out-dated, useless and wasteful programs in all federal programs stem to stern.  It would be a good time to ferret all of them out and eliminate those that don't work or serve any useful purposes any longer, don't you think?

The federal government is expected spend $46 trillion between now and 2021.

Uncle Sam is slated to take in $39 trillion over the same time period. This means we will be increasing our debt by ‘only’ about $7 trillion instead of the $9.2 trillion we would have incurred without this debt deal just passed.

It represents about a 5% reduction from future 'increased' expected spending levels in total in the US government.

So instead of increasing at about a 5%+ annual clip for the next decade, total federal spending will ‘only’ expand at a 3% or so annualized clip for the next decade. No actual cuts in real terms; well ahead of the expected levels of inflation for the duration, at least by CBO estimations.

Is that really and truly and honestly a 'Satan Sandwich', Congressman?  Honestly.

We will leave it up to others who are more well-equipped to explain the intricacies of the details of this most recent budget ‘deal’ such as Keith Hennessey (be sure to read all three of his postings on this because they are excellent).

Suffice it to say that in the time-honored tradition of the great compromises in American history, both sides can claim enough ‘victories’ in the agreement to go back to their supporters and say ‘I did my job!’ all the while knowing that they ‘kicked the can down the road’ for others to solve, albeit not as far as it would have been without this ‘historic’ (sic?) agreement.

Both sides head-faked and double-pumped (to use some basketball terms) to the notion of going after ‘entitlement reform’ and a much higher amount of savings, over $4 trillion in savings, versus what was finally agreed upon.

But, in perhaps the longest-running losing streak second only to Clemson’s 0-55 record on the road versus North Carolina at Chapel Hill in basketball, the US Congress once again ‘failed’ to deal with the underlying structural problems in Social Security and Medicare, both of which are on simply astounding and unsustainable growth trajectories for the future.

The answers are pretty ‘simple’: raise the retirement age for both senior programs for all FUTURE retirees, not the current ones, and adjust the eligibility for each based on income and household wealth are the two big ones along with a myriad of others.

The political reality of dealing with such momentous problems, however, are horrifying to any elected official, including now, unfortunately the Tea Party Caucus.

Why?  Because 95% of all registered senior citizens vote in every election, primary and general, off-year congressional and presidential.  The Twin Towers of SS and Medicare are prime targets for defenders of the status quo to go after anyone who dares tweak either program without offering any real long-term solutions of their own other than to 'raise taxes on the wealthy', yada-yada-yada.

That is why you did not see any ‘Grand Compromise’ on entitlements in this last deal.  When you see a Democrat President in the White House, like President Obama for example, join hands with not only the leaders of a Republican Congress but the Tea Party Members behind them and say they have reached an agreement that includes both of the two proposals above on SS and Medicare, then and only then will you know that we have taken bold actions to solve our long-term fiscal problems.

That is why this was another ‘missed opportunity’ for our nation to fix these problems and then move on to more important stuff, such as allowing the private sector to grow and expand and hire more people back to work so they can pay taxes to pay for all of the federal programs the majority of Americans have said they want.

One thing that would help, immensely, would be if Congressmen would come to their senses and at least speak the truth on such weighty matters.

We can suggest thousands of ways for the Super Commission to weed and till the federal budget going forward. Just look at this deficit-reduction book from CBO and pick out some on your own.

And then send them along to your elected representatives in Congress and tell them to pass them.

They are good places to start.

(one brief note:  Thank you to all of the over 10,000 readers who have read our musings over the past 24 months.  We hope this information has been helpful to you as you decipher this flood of news that comes at you every day on these magnificently large and important public policy issues)