Many years ago the girl I was dating told me her friend had just got her MBA. So I asked this new MBA who was going to be a clothing buyer what she would do in her first meeting with a supplier wanting to sell to her. She proceeded into a technical explanation of how she evaluated and I told her no. She shifted to another technical explanation and again I said no. After the third rejection she asked me exasperated what I would do. I said simply I would look the person in the eye, size them up and decide if I could trust them. It’s pretty simple. If you are involved in complex dealings with someone you cannot trust you’re going to get screwed. Not having an MBA I learned this in the school of hard knocks.
Yesterday on Fox Business Network John Stossel did a show on entitlements and generational theft. At several points he was sitting with young children playing with toys and taking them from them saying he needed them. It was an entertaining illustration of generational theft, especially with the looks on the children’s faces. In classic Stossel form he started out showing Bernie Madeoff and talking about social security being a Ponzi scheme. He even had a guest attorney on who helped people with net worth exceeding half a million dollars get medicaid. I have a few points about how bad things are, but my primary point is that we establish trust based on prior history. As such I would say Bernie Madeoff has a better chance of reform than congress.
Of course the first point of all this is that the programs of social security, medicare, medicaid, unemployment and such are social welfare. No one can argue against the compassionate reasons for these programs, though it could be argued that like income tax they really should have been done with constitutional amendments as there doesn’t seem to be anything in congress’ enumerated powers to support them. Am I arguing against them? I think it best to remain silent and instead hear from Benjamin Franklin, one of our most respected founders and the man who gave us the post office, the library and the fire department.
I am for doing good to the poor, but I differ in opinion of the means. I think the best way of doing good to the poor, is not making them easy in poverty, but leading or driving them out of it. In my youth I traveled much, and I observed in different countries, that the more public provisions were made for the poor, the less they provided for themselves, and of course became poorer. And, on the contrary, the less was done for them, the more they did for themselves, and became richer.
I think that says it nicely. Currently many people are saying that the individual mandate in the health care take over is unconstitutional. I agree, but we have this odd judicial habit of ignoring the constitution if we can show precedence for having violated it previously. As a self employed person I have to pay unemployment insurance on myself. People who do road construction get laid off and collect unemployment during the winter and think nothing of getting their money back. Should I be mandated to insure my employment and should the government be the insurer? Ironically there is also precedent for getting out of government programs. The Amish are exempted from social security. They don’t participate because they are conscientious objectors. You only need to show your personal beliefs are in conflict to get exempted, but you probably need to convince a judge in court. You see if everyone who wanted to exempted themselves from these social welfare programs… well it seems moot because we can’t. However I say there is another problem.
This year social security will need to borrow money from China to pay. That’s nine years ahead of when the president’s OMB (office of management and budget) predicted. Oops! Orzag scores again. He also made a trillion dollar error on the 10 year budget. Hey, that’s only a million million. Here’s the point. When you review government spending you will see 3 of the last 40 years that we spent less than we took in but we also have been taking in surpluses in social security for decades. Where is that surplus money? It is in the form of IOUs from congress in a filing cabinet in the capital that we thought was a lock box. I don’t know the exact number if it is into the trillions but does it matter? Currently there is only one way for congress to cope with the $1.5T deficits and $60T liability in in unfunded mandates… monetize the debt. Know what that means? Simple. Let’s say we owe $100 trillion. We crank up the printing presses and print that $100 trillion to pay it off. Brilliant, right? I mean we could pay it off without even taxing anyone. The problem is that afterward our currency is devalued. Gas could go to $100 a gallon not from scarcity, but from inflation of currency. Monetizing the debt is an attractive solution for congress. They don’t have to raise taxes and they can blame Wall Street bankers. It’s a win win for them as they vote their pay up to several million dollars a year. The big problem is that if congress raises taxes to keep up with spending they end up with tax rates from 25% on the low end to 85% on the high end.
Let’s get back to what congress has done with the money we sent them for social security. Initially when FDR introduced it there was no other way to pay other than direct transfer of wealth from the working young to the old. However not only did this not change into something more like a legitimate legal private sector retirement plan, virtually all excess has been spent. If any private sector business did this their executives in charge would be bunking with Bernie Madeoff. With 435 representatives and 100 senators plus a few presidents signing off on this for over 70 years several things are clear. First we note that as law makers somehow they appear to be exempt from any law sending their asses to jail for what is clearly unethical theft, illegal for anyone else to do. Another thing that is clear is that trusting congress with our money is like asking a heroin addict to watch your house while you go on vacation. Good luck keeping any wealth.
However the really significant aspect of all this goes back to what Ben Franklin said. If people have to take care of themselves they do better. Remember the question if you would take a penny doubled every day for 30 days or a million dollars. Do the math. Only a fool would take the million dollars. Likewise if you were 20 years old and invested $1,000 if you could double it every four years you would have a million dollars from only a thousand when you were 60. Imagine if you put $1,000 a year into investments or even savings before we got to this wacky ultra low interest trying to avert financial disaster. There are two spheres our money can go to, public and private sectors. in the private sector it finances business growth and creates jobs. It creates wealth and raises our standard of living. In the public sector they have no ability to create wealth so all their money is siphoned off the private sector. Therein lies the problem. The more money taken from the productive economy the less it creates and produces.
Let me put this in contrast. If we were taking Ben Franklin’s view then our government would not be risking bankruptcy, our taxes would be lower, more money would be flowing into the private sector, a booming economy would make investments pay handsomely and anyone who had invested a fraction of their entitlement taxes wisely would retire wealthy. Instead we keep giving money to a government who will make our money worthless and impoverish us in order to give us cradle to grave social benefits. Have we really become such a nation of suckers?
Am I against all social welfare programs? Pretty much, but I can’t bring myself to take the tough stand that as a nation we cannot provide some assistance. However statistically unemployment goes up whenever it is extended. It seems counter intuitive people would stay on longer just because they can, but some do. My point is any assistance from the government would need to be means tested, limited and have an expiration. In the end I think charity does that best and even in these difficult economic times we are seeing $300 billion a year going to charity. Imagine if our economy were to explode and out taxes go down.
Now of course we have a new entitlement that is scheduled to have over 100 new agencies, dictatorial control from Washington by the HHS secretary on what we must buy and 16,500 new IRS agents to make sure we are in compliance. When we set up medicare we projected the cost in 1990 and it turned out to only cost nine times as much. In fact the total fraud in the system is close to the projected cost at a whopping 10% or so. Just another reason to distrust a congress who is fiscally answerable to no one and as law makers will never indict themselves for their criminal activities. Congress truly fits the bill as crooks and nannies. Today congressmen and presidents look to get their name on landmark legislation with far more concern to their egotistical vision of their place in history than whether we will have a future or how horrible their legislation is. The best thing we could do as a nation is to observe and reflect Franklin’s thoughts and roll back our welfare state.
Too Much Economic Static
Sunday, March 28th, 2010Today I celebrate a birthday and I’m almost old enough to throw my hands up and say everyone else can worry about their messes. To my friends who are celebrating a glorious victory for our exalted leader, I love you. Enjoy the moment, much as a young man would after marrying a woman he hardly knows. As my grandfather used to say, marry in haste, repent in leisure. She may seem beautiful the day after, but give it a few years and you might be trying to slit your wrists with a rusty tin can lid. If you don’t believe me that our elected representatives haven’t read the bill just search youtube for Jason Matera who has interviewed a number of congressmen and asked them about specific paragraphs in the bill like rehabilitation for sex offenders. There have also been admissions of this being socialism and our president, while mocking the opposition, said it was a step toward universal health care. You might like the idea but I don’t see why I should be forced to do what you want and I certainly think our president should be our president, not your president mocking me. I wouldn’t mock you. Mocking presidents is a long tradition made easier when they demean the office.
Right after this bill was signed we found that the pre-existing conditions for children is not an immediate benefit even though the president repeatedly said it was. Oops. I guess they didn’t read that. This last week we found out that various companies are going to be out some money because of the bill. Mark Steyn does a nice piece which leaves me feeling ill and wishing he were not so damned smart and perceptive. The key factor here is a footnote adjusting a tax incentive to help companies cover retirees for prescriptions. It costs us $665 per person and they decided to bump it up to the 35% corporate tax rate. Hell Sweden only has 26.3%. Sweden! If these companies dump these people into medicare the cost per person for us jumps to $1,200. AT&T estimates it will cost them $1 billion but the total first-quarter hit to S&P 500 firms will be $4.5 billion according to the Wall Street Journal. Companies are considering what to do. One company that produces medical equipment is looking at laying off as many as 1,000 people. In case you don’t know, companies aren’t really designed to absorb all new costs. They either minimize them or pass them on to us.
This is where I point out a big problem with the congressional budget office when they scored this bill for cost. You see they do what congress asks them and they use something called static scoring. What’s that you ask? Well it assumes that no matter what you do tax wise it will have no effect. For instance let’s say you asked them to tell you how much money you would get raising the top marginal tax rate 25% on everyone making $1 million a year. That’s $250,000 more in revenue per person, right? Suppose at $1.5 million a year you are at 75% but at $800,000 a year you are at 50% Nearly doubling your income nets you $375,000 instead of $400,000 for a loss of $25,000. The argument for soaking the rich is that they can afford it. Let me ask you a question. If you could make more money producing half as much why would you hire the extra people and bust your ass? This is why the Laffer curve explains optimal tax revenues are obtained well below the soak the rich level.
And here is where out problem gets ugly, because if companies want to save that $4.5 billion in taxes they dump those people into medicare and that makes over $4 billion in additional costs. That spread is over a $9.5 billion dollar error due to the insane premise of static scoring. So why use it? Well with dynamic scoring you have to make additional judgments and it’s more work with supposedly less certainty. However any rational person understands the truth. If this kind of error is showing up while we’re still in the honeymoon and the CBO needed to multiply their original estimate for medicare by nine times things aren’t so good. Especially when we are in so much debt that by 2018 our interest will be more than we spend on defense, $800 billion. Of course that assumes that somebody will still be loaning us money and that our AAA rating won’t be gone which will more than double that interest payment. By 2020 America will look like a 1971 Oldsmobile pinging, surging and trailing the think white smoke of motor oil leaving everyone watching wondering when it will seize up and stop. It’s already not looking so great.
If you are still drunk on the thrill of making us into a European disaster you might be angry at those companies for crashing your party. After all they can afford to lose money… lay people off, things like that. I can tell you that representatives Henry Waxman and Bart Stupak are upset. So upset in fact they have written to the heads of these companies with an invitation to appear at congressional hearings. That’s never fun, but hey… Here’s what you need to keep in mind. Those companies are required by law to publicly declare such losses when they are aware of them. Yeah, it’s called Sarbanes Oxely and ironically it has made it so expensive and complex to do business that the next year after it was advanced tech companies going public nearly stopped. In fairness it was right after the dot com bubble burst, but it added substantially to the cost of going public. The point is, people are now going to be harassed by congress for adhering to a law congress wrote that makes it more expensive to do business over exposing another law congress wrote makes it more expensive to do business.
For those people who lament we are losing our manufacturing base and jobs are being shipped overseas I submit to you it is not greed causing this. Why the hell would you leave the most educated and talented workforce in the world where you can maintain complete control unless you had to do so for fiscally defensive reasons? So let’s consider the issue of static scoring and ask ourselves the simple question. How many other stupid decisions made by congress are making it more difficult for business. You can say they are all evil and to be honest I’m not overly fond of the big faceless corporation. In fact I’d rather get a root canal without anesthetic than try to fit into the corporate world… But I do understand economics.
Recently we got some growth numbers, but it looks like our projected growth for the remainder of the year is around 3%. Ordinarily that would not be bad, but to realize a 1% drop in unemployment this year we would need 5%. Oops! And in some places over a third of home mortgages are under water. Remember how we got here? So skipping over the debt rant and going to jobs we need to see about 100,000 hires a month to stay even with population growth and we’re still negative. If we were to see a 1% decline it would still leave us between 8% and 9%, closer to 9%. When we sunk $860 billion into a stimulus that Joe Biden keeps telling us is working we were approaching 7% and we were told we wouldn’t go over 8%. The presidents office of management and budget says… no appreciable decline in unemployment for the next 2-3 years. What are we doing?
One of the most amazing things I’ve heard in the last year is our president saying that jobs and the economy are tied to health care. This week we find out he is right. Clearly we can already see more jobs going away, more debt being accrued and more doctors leaving the profession, with something near 80% less excited about medicine. Do you even want to know where they said they would get the rest of the money or how much it would really cost? Remember your household owes something like $400,000 for entitlements right now next to the $60,000 in government debt. If you have children this is where you look at them and hang your head in shame and apologize… then tell them to get a good job and pay your medicare!
The thing that strikes me as most blatant is the hypocrisy of calling in head of companies reporting losses under SOX as they must by law simply because the Democrats in those house committees don’t like what they are saying… that they have to say by law. Gut check. Do those representatives care about the truth and how it affects ordinary Americans, their jobs and our economy… Or are those representatives just throwing a hissy fit over someone exposing the trail of bovine excrement coming from their sacred cows?
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