Thursday, April 26, 2018

The Scariest Budget Chart You Will Ever See

(first published in North State Journal 4/25/18)

Every single tax dollar collected by the US federal government in 2039 will be used to pay for just 4 things in the budget:

  • Medicare
  • Medicaid
  • Social Security
  • Interest on the national debt

This includes 100% of all individual and corporate income taxes; OASDI (Social Security) payroll taxes; Medicare payroll taxes, estate taxes and excise taxes.

Every dollar we spend on other federal programs will be borrowed from foreign governments such as China or Saudi Arabia; corporations and high net worth individuals.

That includes national defense, homeland security, environmental protection, welfare, subsidized housing, Pell grants and any other federal program you can think of or benefit from.

What does this ‘crowding out’ effect mean?

We can already see what it has done over the past 60 years. Non-entitlement discretionary funding, essentially the ‘guns-and-butter’ part of the budget, accounted for 68% of the 1962 federal budget.

Today, those same programs account for 32% of the budget. You can argue all you want about the need for more money to be dedicated to education, housing or welfare but the truth is, as a percentage of the federal budget, those programs have already been hit proportionally hard since 1980 by the slow but steady expansion of entitlement programs.

‘Why not raise taxes on the rich and corporations?’

‘Because it won’t work’ is the honest answer.

We have raised and lowered taxes on everyone and everything over the past 40 years. What has been the upshot of it all?

The American public has paid about 18% of GDP to Washington per year under all tax plans, regimes and disciplines. For whatever reason, either through aggressive tax-planning or deliberate underpayment of taxes, the American taxpayer has been remarkably consistent in paying taxes amounting to about 18% of GDP since 1970.

The only responsible way to run any budget for any government, corporation, organization or household is to control the rate of growth in spending or reduce it responsibly.

The sad, and odd, thing is that virtually all of our fiscal budget deficit and national debt issues today could have been avoided with a few legislative changes to both Medicare and Medicaid as far back as 1990. Had growth in both programs been held to the rate of inflation in the economy rather than allowed to grow at double or triple the rate of inflation annually since then, we would be talking about massive annual surpluses today and virtually zero national debt.

Annual tax cuts would have been the norm rather than the exception.

Social Security could have been reformed as well by changing the ‘bend point’ in calculation of benefits, which would have contributed to a further flattening out of federal spending as well.

Instead, after experiencing a too brief period of adult leadership and sensibility about the federal budget from 1997-2001 when 4 budgets produced surpluses instead of deficits, we now have to contend with the implications of dealing with rising interest rates on servicing national debt of $21 trillion and rising fast; critical national security concerns around the world, a burgeoning senior population due to millions of Boomers now retiring and a plethora of other public policy issues that have not been solved by either political party.

What can we do to solve our budget dilemma?

Congress can cut spending. Which it should.

Congress can try to raise taxes. But it won’t work as we have seen over the past 40 years.

The economy can expand at a 3% annual rate for 10 years instead of the desultory 1.9% average rate of growth under President Obama for 8 years.

Some believe we can grow at 4% per year or perhaps even 5% for some period of time.

If American economic growth out-runs our fiscal irresponsibility, it will be the greatest escape act since Harry Houdini.

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Wednesday, April 18, 2018

What To Do About College Athletics

(first published in North State Journal 4/18/18)

Big-time college athletics is out of control. But should universities lose their historical mission to educate young people as a result?

College athletics, primarily football, has been a lucrative way to make money for the school and get publicity for the university.

Wallace Wade was head coach of the Alabama Crimson Tide in the 1920s and led them to 3 national titles in 3 Rose Bowls. He started the Alabama dominance of college football.

Duke University Chancellor Preston Few was looking to bring much-needed publicity to the new campus that opened its doors in Durham in 1924.  The Alabama program under Coach Wade was doing pretty well so Few contacted Wade for his suggestions for a new head coach.

Coach Wade surprised everyone, including Chancellor Few, by saying he was interested in the job under the following conditions: he wanted to be head football coach, athletic director and intramural program director since he believed in using athletics to build men out of boys.

He got all three plus a generous salary during the Depression and a cut of the gate receipts. When he filled up Duke Stadium with 50,000 spectators to watch the Blue Devils play national powers such as Pittsburgh and go to 2 Rose Bowls, Duke University got the nationwide publicity Chancellor Few wanted and Coach Wade went to the Hall of Fame.

Coach Wade and universities offered athletes a free education with room and board which they could use to become doctors, lawyers or businessmen if they went to class, did their homework and did well on exams.

Which is the original purpose of higher education in the first place, right?

Back then, the allure of pro sports was not what it is today. College football players drafted in 1939 got paid $100/game to play against older men who had other jobs to make ends meet during the year.

Today, an elite athlete could make tens of millions of dollars if they go right to the pros from high school in basketball or leave after 3 years in college football.

However, such lucrative contracts are only given to approximately 1.5% of all college football or basketball players. 1 out of every 1860, or 0.054%, high school basketball players ever make it to the pros.

Going to college to get a free education plus room and board for 4 years is a good deal for almost every college athlete who plays football, basketball, baseball, lacrosse or soccer.

Especially benchwarmers.

The NCAA should consider the following proposal which is based one thing on which all Americans can agree:

Freedom to choose.

Any high school basketball phenom who wants to go right to the pros can choose to do so just as any high school baseball star can do right now.

Any player has 4 years of playing eligibility at any college from high school graduation. If they get cut from the pros after 1 year, they have 3 years of eligibility remaining; after 2 years, 2 years of eligibility remaining and so on. They can be recruited by any college at any time from the NBA to the G League to the Turkish League overseas.

If the goal of higher education is to give young players a great education in return for entertaining the rest of us who wished we could play basketball at their superior level, there should be no barriers to entry to any college if they flame out in the pros.

Coach Wade used to tell every prospect he recruited: ‘Duke University is going to do more for you over the course of your lifetime than you will ever do for Duke on the football field, young man. Take advantage of this marvelous gift of an education’.

Why not heed that same advice in the 21st century?

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Wednesday, April 11, 2018

How Many Business Regulations Are Enough in North Carolina?

(first published in North State Journal, 4/11/18

Does anyone in North Carolina know how many regulations exist in the North Carolina Administrative Code (NCAC)?

More importantly, is there anyone in the state of North Carolina who has read all of them and understands all of them and what their collective impact is on North Carolina business both good and bad?

If you guessed 109,350 restrictions in the form of regulations consisting of approximately 8.7 million words, you win.

Mark Twain estimated he wrote between 1400 and 1800 words per day on his way to becoming the most famous author in American history. At that rate, he would have had to write for 15 years straight to match the number of regulations now on the books in North Carolina.

According to the Mercatus Center at George Mason University, it would take 483 hours, or 12 weeks straight at 40 hours per week reading at a rate of 300 words per minute to read all existing North Carolina state regulations.

That is not too bad. They estimate it would take a person 3 years to read the 112 million words in the US Code of Federal Regulations (CFR), all of which affect businesses in North Carolina as much or more than state regulations do.

If you ever want to understand why so many business executives complain about the heavy hand of government bureaucracy, look no further than the 120+ million words in federal and state regulations.

What does it mean in practical terms for any business ranging from small businesses to the very large corporation?

It means that people must be hired to make sure the business complies with the state and federal regulations. It means time and effort must be diverted to complying with every regulation instead of selling more product. Any law or regulation opens the door for litigation which further depletes money and human capital from the primary objectives of the company which is to sell more product and produce a profit for the shareholders.

It means money from sales revenue or investment capital has to be diverted to pay for people who do not do anything more than read regulations and make sure the company complies with them which adds costs to the final product bought by the consumer.

Are all regulations ‘bad’?

Certainly not. Labor safety laws and environmental protection certainly have their place in the modern world of commerce and manufacturing.

But when is the number and scope of regulations ‘too much’ and in dire need of repeal or revision?

The National Association of Manufacturers (NAM) published a report in 2014, The Cost of Federal Regulation to the U.S. Economy, Manufacturing and Small Business’, that estimated federal regulation compliance alone costs businesses roughly $2 trillion per year, or about 12% of GDP annually. Federal regulations cost about $10,000 per employee with small businesses being more adversely affected than large corporations because of fewer employees over which to amortize the cost of compliance.

Added together with the costs of state regulatory compliance, the cost of complying with regulations to any business are enormous every year.

The North Carolina Administrative Code should be thoroughly examined and reviewed with the goal to remove as much administrative burden as possible from North Carolina business operators and entrepreneurs. Surely there are regulations that no longer apply to the current modern economy.

The Texas legislature, for example, has a one-year session but dedicates the off-year to a thorough review of one agency to determine whether it is efficient and achieving its stated intended mission. If they find antiquated regulations and laws on the books, they repeal them the next session.

It would be a surprise to find less than 25% of current NCAC regulations that could not be repealed with bipartisan support. It is worth the effort to find out.

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Wednesday, April 4, 2018

'I, Bowtie'*

Augusta Stripe Bowtie by High Cotton
(first published in North State Journal, 4/4/18)

‘I, Bowtie, simple though I appear to be, merit your wonder and awe. If you become aware of the miraculousness which I symbolize, you can help save the freedom we want in America.

Not a single person on the face of this earth knows how to make me. This sounds fantastic, doesn't it?

A bowtie appears simple. There's cotton or silk, dye, thread, a bit of metal and a printed label.

I, Bowtie begin with a bale of cotton, grown in the South. Think about the tractors and combines used in harvesting and taking the cotton to a nearby gin operation in New London, NC. Think of all the people and numberless skills that went into the fabrication of those magnificent machines: mining ore, making steel and its refinement into complicated machines and motors; farm hands that planted cotton seeds and tilled the soil and looked after the crop all summer long.

American cotton is shipped from the cotton gin to a spinning operation in Thomasville to be spun into usable thread. American cotton thread is shipped to weaving operations in England or Portugal to be woven into fabric that my Southern creators have designed, fabric which might come back to any one of the thousands of people involved in this miraculous journey in the form of bowties, long ties or cummerbunds if they order them on-line.

Thousands of workers transport fabric on ships or by air freight back across the Atlantic to a cut-and-sew operation in Pilot Mountain. Dozens of seamstresses take turns sewing bowties after this precious fabric has been cut to precise specifications. Then it is shipped to a fulfillment center in Butner where dozens of employees pack and ship bowties to individuals and retail stores across the globe.

No single worker does any of this work because he himself individually wants a bowtie.

There are many among this vast multitude who have never seen a bowtie nor would they know how to tie one if they had it. Each of these thousands of people sees that he can exchange his tiny know-how in the process for the goods and services he needs or wants even if it is not me, a simple Southern bowtie.

There is a fact still more astounding: the absence of a master mind, of anyone dictating or forcibly directing these countless actions which bring a bowtie into being.

Instead, we find the ‘Invisible Hand’ at work.

I, Bowtie, am a complex combination of miracles: cotton, metal, weaving and so on. An even more extraordinary miracle has been added: the configuration of creative human energies—millions of tiny know-hows configurating naturally and spontaneously in response to human necessity and desire and in the absence of any human master-minding!

Man can no more direct these millions of know-hows to bring me into being than he can put molecules together to create a cotton plant in the first place.

If one is aware that these know-hows will naturally arrange themselves into creative and productive patterns in response to human necessity and demand—that is, in the absence of governmental or any other coercive masterminding—then one will possess an absolutely essential ingredient for freedom: a faith in free people.

Freedom is impossible without this faith.

The lesson I have to teach is this: Leave all creative energies uninhibited. Merely organize society to act in harmony with this lesson. Let society's legal apparatus remove all obstacles the best it can.

Permit these creative know-hows freely to flow. Have faith that free men and women will respond to the ‘Invisible Hand’ of freedom and personal self-interest, integrity and fairness.

This faith will be confirmed. I, Bowtie, seemingly simple though I am, offer the miracle of my creation as testimony that this is a practical faith, as practical as the sun, the rain, a cotton plant and the good earth.’

 *adapted from the classic "I, Pencil" essay by Leonard Read (1898-1983) who founded the Foundation for Economic Education (FEE ) in 1946 and served as its president until his death. 

"I, Pencil," was published in the December 1958 issue of The Freeman.

High Cotton website:

(My wife and sons started High Cotton in 2010 and have been an amazing example of how the free enterprise system works when people do the right thing with integrity and honor. It has been a privilege to walk alongside of them and this post is a tribute to their hard work and discipline and success)

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