Sunday, July 31, 2011

Final Words on the Debt Ceiling Debate

Pogo said "We have met the enemy and he is us." He may have been talking about the current debt ceiling talks.

My view is simply this; Why even have a debt ceiling?

It doesn't cause our politicians to behave differently. Having a debt ceiling that is increased every few years is like me promising myself that I'll gain no weight and will eat only the right stuff forever more. Then I just go ahead, as always, and break my promises and then make those same promises again, and again and again. Insanity is often defined as doing the same things over and over and expecting a different result. This debt ceiling debate has been insane. Who are we kidding? For a very similar point of view, see economist Thomas Sowell in Notable & Quotable.

It's not the promise that matters; it's the subsequent behavior. On this our track record is abundantly clear. We will raise the ceiling and then go on spending like a bunch of drunks until we raise it again. Hence, the debt ceiling itself is meaningless. Not the debt but the ceiling itself.

That's because there is absolutely no doubt that we'll need to raise the debt ceiling again in a couple of years, if not before. Regarding when we'll need to raise it again, the only meaningful fact to be ascertained now is by how high we raise it this time, because the politicians certainly won't do anything in the near term to reduce our deficits, regardless of what they now say.

Pogo puts it all on us, and he's right. We'll get the government we deserve and not the one we want. It's really up to us. All of us.

So when we hit the new ceiling in a year or so, history teaches that we can expect to repeat the charade - er - fraud - er- process every few years thereafter. That's been our habit, and habits are hard to break. In other words, we haven't limited ourselves to doing what's good for us in past debt ceiling raises, and there is no reason to believe that this time will prove to be different.

And unless we the people are willing to address entitlements, taxes, encouraging entrepreneurs, the size of government, debt repayment, regulations, drilling for oil and such sometime soon, eventually our economy will collapse and things will implode. Only then will seriousness prevail, and it won't matter who's to blame. Pogo already told us about that.

To make this entire homemade silliness and tragedy even worse, the brilliant politicians have concocted something called a "baseline" budget. This simply means that they mislead us about budgets. To put it bluntly, they lie at the beginning of each year's budgeting process by increasing the "baseline" by a factor for inflation.

As an example, if 3% is adopted as the baseline inflation estimate, this year's $100 becomes $103 for next year's budget discussions. If we then decide to spend $100 next year, or the exact same amount we intend to spend this year, the politicians will say we've reduced spending by 3%. Some politicians will give themselves good guy credit for fiscal prudence by cutting the budget by $3. Meanwhile, other self proclaimed "good guys" will say that the bad guys are to blame for heartlessly gutting spending by $3, or 3%.

The truth will be that they did neither. This entire debt ceiling stuff is absolute nonsense.

Using Washington speak, if I budget, predict or otherwise believe that I'm going to gain five pounds this year, and I instead somehow manage to hold my weight the same, I tell myself that I lost five pounds. Try telling that to the scales.

We will have real and genuine deficits each year in the foreseeable future of at least $1 trillion, even after the economy improves. This year the deficit will exceed $1.6 trillion.

As for the economy, we will have high unemployment and high fiscal deficits due to ongoing slow economic growth. As a result, our already mountainous debt load will continue to grow, and our financial condition will become steadily worse. Accordingly, whether we raise the nation's debt ceiling once, twice, three or thirty times doesn't matter. And baseline cutting won't matter either. As Tennessee Ernie Ford sang, "Another day older and deeper in debt".

Our debt is merely a symptom which reveals our ongoing reckless and irresponsible behavior as a nation. We've changed for the worse.

We're in this world of hurt because of our past behavior. During the good years we borrowed to build and buy things we couldn't afford. We spent the borrowed money by borrowing from future consumption. As George Allen said about the NFL Redskins, "The future is now." It's payback time. So now we'll all pay for the "run ahead" spending of the past.

This concept of borrowing to spend now is not a permanent condition. It can't go on forever. At some point spending "reverts to the mean". That's what is happening, and that's why the economy will stay in the slow lane.

Stated another way, if in an effort to goose the economy we again incentivize people to buy today with newly borrowed money or government "stimulus" funds, it won't work, other than perhaps politically. If we buy something today, we won't buy the same thing tomorrow. We've merely accelerated our purchase. At this point future government "stimulus" attempts would be dangerous and only make things worse. And they are bad enough already.

So in a matter of days, I believe that the current debt ceiling sideshow theater will come to an end. And as a nation we'll fail to heed Pogo as we return to spending what we don't have and borrowing to pay for that spending.

The deficits and high debt levels won't magically go away, nor will high unemployment, nor will slow economic growth for years to come.

John Maynard Keynes is dead. It's time to bury Keynesianism, too.

Thanks. Bob.

Saturday, July 30, 2011

Our American Future; Public Policy, Government and Economics

Government and economics are two entirely different subjects, aren't they?

No, they're not, at least not in America. Let's talk about NORMATIVE ECONOMICS, public policy and what kind of country we'll choose to be in the future.

The kind of government we choose will determine our economic system and vice versa. And that choice will determine our general well-being and prosperity, too. Free market capitalism requires limited government, and free consumer choice is predicated on free market capitalism. On the other hand, expansive command and control governments limit what the consumer can buy as well as what price he must pay.

PRICE DISCOVERY is a market based term which means that individual prices are determined through the interaction of buyers and sellers in the marketplace. Buyers and sellers align to establish the price of a product or service. Pricing is market based.

Government run economies don't have price discovery. Government sets the price, what's produced, how much is produced and so forth. No market and no customer choice.

Limited government, capitalism and personal freedoms served as the foundation for our free and free market American society. This alignment of limited government, capitalism and personal freedom was then and generally still is unlike prevailing conditions in most of the world.

In other words, the more government entitlements we choose, the less free we will be. The less free we are, the less free market prosperity we'll experience. And the less general prosperity we have, the less economic growth we'll experience. So more government requires more taxes, which results in less growth, which generates less prosperity and so forth.

The Debt Ceiling and the Pursuit of Happiness argues that our unique brand of American Exceptionalism rests on a moral foundation as well as an economic one. Accordingly, the argument today about the proper size of government and entitlement programs is really a fight over the decades long trend toward statism. The article makes the moral case for the personal benefits of self-reliance, hard work, earned success and limited government. It therefore concludes that the current national financial debate about the debt ceiling is inextricably linked to the right to life, liberty and the pursuit of happiness. In other words, it's about what the Founding Fathers had to say about what kind of country we would be.

Simply stated, the debate over the debt ceiling is really an argument about NORMATIVE ECONOMICS and public policy.

The case for less government is moral and based on the belief that our "unalienable" rights contained in the Declaration of Independence will encourage us individually to pursue our chosen dreams through things such as self-reliance, sacrifice, earned success and hard work. These are essential to a free society.

Unlike other countries, the Founding Fathers chose to put all this down in a written constitution. In our Constitution, "We the People" are the explicit source of all governmental powers and government is our servant. What the people say the government must do. A simple and straightforward statement.

Thus, today we the people aren't merely faced with an economic problem in need of solution but, even more importantly, a moral issue which must be addressed. Will our country continue to honor as ideals self-realization, individual opportunity and earned success? Or will we choose to go farther down the path of income redistribution, guarantees and leveling?

The choice is ours to make. The Founders saw to that.

The "progressives" of today talk about fairness and what "ought to be". Bigger government is the result, if not the stated goal. Things like the new health care legislation are presented as "should be" basic American rights. Similarly, preserving the social security system "as is" is sold as what "should be". And so on.

Do we want our kids to be self-reliant or government dependent? Do we choose to embrace equal opportunity or move away from merit and toward equal results?

The editorial puts it this way, "Consider a few facts. The Bureau of Economic analysis tells us that total government spending at all levels has risen to 37% of gross domestic product today from 27% in 1960--and is set to reach 50% by 2038. The Tax Foundation reports that between 1986 and 2008, the share of federal income taxes paid by the top 5% of earners has risen to 59% from 43%. Between 1986 and 2009, the percentage of Americans who pay zero or negative federal income taxes has increased to 51% from 18.5%. And all this is accompanied by an increase in our national debt to 100% of GDP today from 42% in 1980."

What used to be the American way needs to be argued for loudly in moral and not just economic terms in in the months and years ahead. Otherwise our personal freedoms will dwindle and our general well-being, security and world leadership will continue to wane.

Thanks. Bob.

Friday, July 29, 2011

"Mandatory Spending" and Positive Economics

The Road to a Downgrade is obligatory reading as it describes our current American reality resulting from at least fifty years of governmental financial mismanagement.

The editorial offers a brutally honest historical overview of how we arrived at the sorry U.S. financial condition of today. It represents positive economics at its best, and deals with promises made with respect to entitlement programs and related benefits. It also details how we've neglected to adequately fund those promises.

It's a brief step-by-step history of legislated entitlements and how we arrived at our current national debt level of $14.3 trillion. The article makes it all too clear that the rose colored glasses our politicians wear today have been around for a very long time. The politicians project fairy tale costs and have no idea of what the actual costs will be. Either that or they just lie. In any event, promises are made which can't be kept, and the charade begins.

Then we proceed to pay the legislated benefits as promised, at least until the quasi Ponzi scheme is finally revealed for what it is. By then we have new politicians who pledge to make things right for the future. And if you believe that one, .............. But I believe we're getting closer and closer to the end of the scheme, and will definitely be there in another ten years. So we have time to decide what the future will hold. Let's review the pertinent history of entitlements in America.

Although our welfare state began somewhat modestly during the Depression years with social security and unemployment benefits, we really got serious in the 1960s with the introduction of the "Great Society" programs by the Johnson administration. Medicare, medicaid and a governmental health care system were enacted with totally bogus future cost estimates. Guess which way the estimates missed.

In addition to this new health care government involvement, "War on Poverty" programs were also introduced providing such things as food stamps, public housing and greater government involvement in public education. In 1972 the Nixon administration expanded social security benefits dramatically and introduced cost of living benefits for social security recipients at the same time.

Needless to say, adequately funding these programs wasn't undertaken by the congress or the administration at the time of enactment, or at any future time either. We continue that "ignoring reality" tradition today. In fact, these social security, medicare and related benefits represent what we call "mandatory spending", meaning that these benefits must be paid regardless of whether the funds are available to pay them or higher priorities for these monies would dictate that we spend the money on other things.

The above referenced editorial contains a treasure trove of facts and background about what Pogo type activities we've engaged in as a society these past fifty plus years. The facts contained in the editorial are a sterling example of reality based POSITIVE ECONOMICS (if-then). IF A, THEN B will follow is the idea. It's testable and a version of the scientific method at work.

In the current case, we could say it thusly: If we spend more than we have, we'll end up in a world of hurt. Although positive economics doesn't require that the assertion be proven true, it is a good way to find the reality and causation of end results. In my view, spending more than we have does put us in a world of hurt. That's today's big story and will be for some considerable time to come.

Deciding whether or not to continue down this socialistic path toward the Europeanization of America is ahead of us. That's where NORMATIVE ECONOMICS (should be) will take center stage. That means only that value judgments come into play, and some say we "ought to" raise taxes, others say cut we "should" spending and so forth. In other words, it's not testable but dependent upon our values and beliefs.

Therefore, positive economics deals with finding reality and normative economics is about value judgments and what ought to happen. People shouldn't disagree about reality, but normative values are usually in conflict between individuals and groups, too.

We now have government schools, government health care, government retirement benefits and government nursing home care, among other things. At some point in the very near future, we'll either elect to raise taxes by ~25%, 50% or more or we'll begin to unwind these underfunded commitments by reducing future benefits.

No matter what we opt to do about the future, we'll still be part of a country called America. But just as today we live in a different America from what once was, hopefully we'll choose to be part of a different America from what we now are.

That's why the debt ceiling discussions are a sideshow. An interesting and sometimes exciting one, but not even close to the main event. That's ahead of us.

Thanks. Bob.

Thursday, July 28, 2011

TWO WAYS OF GOVERNING -- Top Down China versus American Subsidiarity

I've always liked the word subsidiarity. It's the best way to manage any enterprise, including business and government organizations.

Subsidiarity represents the simple idea behind our system of federalism and is guided by the principle that a central authority should have one or more subsidiary functions. As a result, the central authority should perform only those tasks which cannot be performed effectively at a more immediate or local level. Stated another way, subsidiarity is simply an organizing principle which argues that matters should be handled by the smallest, lowest or least centralized competent authority.

Our concept of federalism as contained in the Constitution embraces subsidiarity. Solutions to problems by individuals, families or private organizations outside of government should be encouraged. When government action is appropriate, the COMPETENT local government should first act instead of the state government, which in turn should come before the national government. That's subsidiarity in action.

This principle of governance stands in sharp contrast to what's done in countries like China. The tragic Chinese train wreck of a few days ago, and the reaction of the Chinese government thereto, will help us to contrast the local rule subsidiarity based American way to the centralized top down command and control Chinese way of governing. Quoting from China's Train Wreck in pertinent part, "The deeper issue is Chinese institutions' inability to develop and administer complex systems. Like a multinational corporation with a long supply chain, a high-speed rail network depends on individuals at multiple levels of command taking responsibility for effective local operations. China's predilection for top-down organization makes it difficult for information to flow horizontally and for subordinates to take the initiative to make improvements." See also China Escalates Train-Crash Response.

Before getting too carried away with our American subsidiarity, however, let's focus on what is meant by "matters should be handled by the smallest, lowest or least centralized competent authority". In plain words, we should not delegate to incompetent authority, and subsidiarity requires that we do not do so.

The Tenth Amendment to the Constitution states: "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people."

That brings us to Hercules, California. Stadium Plan Puts Hercules in Bind details what serves as a good example of an "incompetent authority". Simply put, many of our current community leaders can't be trusted by taxpayers to act in a fiscally competent fiduciary manner. In what appears to be the "incompetent" example of Hercules, this relatively small community of 24,000 planned to build a baseball complex costing $20 million. City officials engaged consultants and paid them ~$500,000 prior to even acquiring the land for the baseball complex. Then they couldn't get the land. I could go on, but you'll have to read about it to get the full flavor of what happened.

When citizens elect people to spend their money wisely and then trust them blindly, who is to blame? Pogo knows. I wonder how many other examples there are throughout our great country where the taxpayer gets ripped through the incompetence of the elected local officials. Too many, I'm sure. If subsidiarity is to work, citizens have to work, too.

We all like to criticize the politicians in Washington, and they deserve to be criticized, for sure. But how about the state and local politicians, including those leading school districts? Subsidiarity requires responsible, attentive and competent management. And this is true regardless of whether we're describing government or business organizations.

Thus, we the people need to take the time to oversee and when necessary harness the proposed actions of our elected officials. They have only OPM to spend, but for taxpayers it's MOM that they're spending. And even if the money doesn't come from us initially, it comes from a lender who will demand repayment down the road. And that makes it ours at the outset.

Then there are the fifty states. Prudence dictates that we spend only what we can afford, and we have to take into account all aspects of compensation when setting the "price" of labor. In Higher Taxes Yield to Budget Cuts in States, the pay differential between a state or local government worker and a worker in private industry is reported to be $12.44 per hour, thus representing a huge discrepancy. Most of that difference is attributed to the governments' higher costs for benefits such as pensions and health care. Money is money.

A big piece of demonstrated competency is in the area of financial responsibility. While a politician isn't elected for a thirty or forty year term, his decisions while in office will impact costs directly and meaningfully that far into the future. Taxpayers need to provide meaningful oversight to ensure local government competency.

Only then can we enjoy the benefits of subsidiarity as the Founders intended. And we'll like what happens when we do so. It's the American way, and it's very much unlike China's way.

Thanks. Bob.

Wednesday, July 27, 2011

Post Offices and Book Stores

Recently the postal service announced it may close 3,653 post offices, mostly in rural communities, out of a total of 32,000 offices nationwide (Small Town Post Offices Threatened and 'Village' Plan Offers Opportunities, Postal Service Says). My question is this: What about the remaining 28,000+?

The post office is reportedly an "independent arm of the federal government", according to postal officials. It's also losing between $8 billion and $9 billion in 2011 and has maxed out its $15 billion line of credit with the federal government.

We all know why the post office isn't viable. E-mail and the internet, along with Fed Ex, UPS and so forth have acted to make it a money loser. But will it close down? Don't hold your breath.

Now let's turn to Borders book stores, which will be forced to separate 10,700 employees and close the remaining 399 stores it owns. Talks to Save Some Borders Stores Fail details a last ditch attempt to sell some 30 of the 399 stores to Books-A-Million, an effort which also failed.

Will these book stores close? That's a very good bet, unlike the postal situation.

Whereas competition from Amazon and such has forced the closure of Borders, e-mail and the internet couldn't force a similar result with respect to the post office system.

The government bureaucracy and politicians will keep the postal service open for years to come. It will be death by a thousand or perhaps a million or even a billion cuts. And the taxpayers will pay and pay and pay.

Joseph Schumpeter labeled the free market capitalistic process "creative destruction", meaning simply that new competition is often quite harsh for the incumbent losers. And in a free market based capitalistic framework, there are always going to be losers as better ways of doing old things are repeatedly found.

The idea behind the process of creative destruction is profoundly simple but genuinely effective at improving the way things are done throughout a free market society. To create we must first destroy. Old ways are replaced by new and improved ways. The customer and the market decide who stays and who goes. Failure is very much an essential part of the process of the overall system of improvement.

It's the MOM method of investment for shareholders, lenders, communities, suppliers and employees alike. As they say in sports, win and stay to play another day. Lose and go home.

Not so with government. The politicians decide who stays and who plays based on politics and OPM.

So the Borders employees will soon be without bookstore jobs, shareholders will have lost their investment, suppliers will have lost a customer and many communities will soon be without stores. It's harsh, but it's fair. It's the free market at work.

As for the postal service, it's simply not fair to the owners, those owners being the taxpayers. Why can't we make that connection?

Thanks. Bob.

Tuesday, July 26, 2011

Public Education, Bill Gates and Disruptive Change

Change is always and everywhere. Change is constant. Change simply is.

Although change is usually viewed as an unwelcome threat, it shouldn't be. Sometimes change is good, it's always inevitable, often necessary and never optional. It is with us as well as ahead of us at all times.

In sum, tomorrow is never today twenty four hours later. It never has been, and it never will be.

There are two basic kinds of change. One is incremental and one is disruptive. Incremental change takes place within an existing system and is reflective of the process of continuing improvement. It is associated with the habit of getting better each and every day in small ways which add up over time. Marginal improvements continuously, in other words.

Disruptive or discontinuous change reflects big and abrupt changes to how things are done. Discontinuous change brings about a change in the basic system itself. When we introduce disruptive changes, we're working ON the system as opposed to incremental change which occurs while working IN the existing system. Disruptive change occurs rarely, is intended to bring about huge benefits and is associated with a new way of doing old things. Like what we need for public education, social security and medicare, for example.

To recap, incremental change happens while working IN the existing system and is beneficial but often small, while disruptive changes result from working ON the basic system itself, and represent the real game changers.

Both types of change are appropriate in different circumstances. Tweaking is always good but ineffective if we have the wrong system in place. After reading the referenced interview with Bill Gates, it's easy to conclude that government dominance in our educational system is the wrong approach and must be changed. In public education, we need disruptive change, and we need it now.

Gates, the founder of Microsoft, through his foundation has donated $5 billion to public education initiatives over the past ten years. Unfortunately he also evidently believes that incremental change is all we're going to get with respect to public education in the years ahead. He doesn't see the appetite for big changes to the status quo among the current "leadership infrastructure"of today, and he doesn't appear to want to rattle the "establishment" cages. He takes this apparent position even though his learnings these past ten years suggest strongly, at least to me, that cage rattling is very much in order.

In Was the $5 billion Worth It?, Mr. Gates, the businessman turned philanthropist, discusses his efforts the past ten years to deal with the many challenges in our American public school system. Gates concludes, as have many others, that individual teachers are the critical path to success. He also volunteers that parochial schools, private schools, charter schools, smaller schools and the like all have positive effects on outcomes with respect to student learning. He essentially acknowledges that the current public system is broken and that teachers are not properly incentivized to focus entirely on student learning. The public schools are adult centric instead of being student centric. Gates doesn't attempt to defend public teacher unions, but he doesn't really take them to task either.

That said, he makes it extremely clear that we have a very, very long way to go if our public education system is to be successful in its mission of preparing our future leaders.

Here's a good one. Our various governments spend $600 billion annually on public education. Thus, Gates rightfully says that the $5 billion he's spent these past ten years, when considered in the context of the ~$6 trillions spent by governments, amounts to a rounding error. It appears that the government education monopoly will make every effort to "crowd out" any meaningful attempts, as it's done in the past, undertaken by well intentioned outsiders to improve in disruptive and dramatic fashion our public education system. The status quo not only has a staunch defender in the teachers' unions, but it has governmental taxing power on its side, too.

But why doesn't Mr. Gates endorse vouchers? Well, he says he doesn't because the public negativity about vouchers is too high. The Waltons of Wal-Mart take the other side of this issue, and Gates admits that they probably are correct about vouchers as being a major part of the solution. Yet curiously he takes a hands off approach, arguing that the "establishment" is not yet ready for vouchers.

As with all disruptive change solutions, the defenders of the status quo never will be ready for vouchers. Nevertheless, this type of disruptive change is absolutely essential if we are going to improve our educational system meaningfully.

The article cites another legendary businessman and friend of Gates as having this to say about public education in America, 'It's hard to improve public education in America--that's clear. As Warren Buffett would say, "If you're picking stocks, you wouldn't pick this one." But we American taxpayers and parents own the American "public education" stock. All 100% of it.

In sum, the one constant we have throughout our American educational system in all fifty states is a government monopoly provider and in most places, but especially urban locations, a very dysfunctional public school system as well.

Despite what Gates says, why settle for poor results forever? Why not try vouchers now, and why not give parents the freedom to choose their children's teachers along the lines of a free to choose market based approach? We have nothing to lose and everything to gain. And that includes the very many good teachers out there, too.

Thanks. Bob.

Monday, July 25, 2011

A Market Based Approach to Publicly Supported Education ... Vouchers and Incentives Just Might Work

Public education spending for grades K-12 accounts for 20% of the average state's budget. Approximately $150,000 per student has been spent by taxpayers at the conclusion of the student's high school years.

{In addition the average state spends another 10% of its budget on state colleges and universities.}

Since an informed electorate is essential to a well functioning democracy, our society's commitment with respect to equal educational opportunity for all is a given. $150,000 per student represents that public commitment in a meaningful and measurable way.

That said, our educational system isn't working well for the money being expended. It's time to consider alternatives, even though the educational establishment, and especially the unions, won't welcome any attempts to introduce market economics into the existing monopolistic system of government and union control.

As an alternative to today's woefully inadequate system, it's proposed that we support public education through a system of individual "input" vouchers coupled with "output" incentives for both students and educators.

In an individual "input" voucher payment system, the parent from time to time would freely and without restriction choose how and where to educate the child. The child would attend whatever institution, if any, selected. At regular intervals, the student's academic progress would be validated by using a standardized testing methodology such as the various achievement tests now in use. If the child is deemed to be "on track", funds would be released as appropriate.

As an illustrative example, we'll assume that $150,000 represents the average per student total "input costs", and that the desired "output" is the successful completion of high school. Successful completion means that the student has been fully prepared for entering college or trade school, as the case may be.

Upon "graduation" from 12th grade, the remainder from the initial $150,000 educational voucher, less cumulative input costs along the way, would be made available to the child and his family. Accordingly, any remaining funds in the "account" from the beginning $150,000 could be used for college or whatever else the student and his family would choose.

Through this voucher and cash upon completion approach, the child and his family would be incentivized to achieve high levels of educational attainment rapidly and in the least costly manner. Educators, whether acting as entrepreneurial individuals or as members of selected institutions, would be motivated appropriately as well. A meeting of the minds between the student buyer and the teacher seller about the importance of the individual's education would be the result.

If for whatever reason the child did not attain on track achievement levels at periodic checkpoints, no funds would be made available for disbursement other than to the educators for previous efforts. As an example, assuming the child is several grade levels behind upon reaching the age of 16, he and his family could either elect to pick up the pace or drop out, as the case may be. If the child did drop out before achieving college preparedness or its trade school equivalent, no funds would be "earned" by the student.

This approach would properly incentivize the child and his family to do the academic work in a serious manner in order to prepare for success at college or a trade school. When adequately prepared, the student could further choose between attending college, trade school or receiving a cash payment representing "earnings". The "earned" amount, whether it be used for college, trade school or otherwise, would be $150,000 less the cumulative expenses incurred.

Of course, there are perhaps many problems with the recommended free choice and incentive based methodology. That said, a free market, family friendly approach to education makes sense to me. But then, I don't have a vested interest in perpetuating the status quo.

While using a market centric formula for education versus the central command methodology that's in effect today would represent a totally different way of doing things, what we've been doing all these years simply hasn't worked. In my view, it's time to try something new, and a market based approach just might work. It's time to innovate, and it's very much the time to slay some sacred cows. We'd be doing it for the well-being of the future taxpayers of America, aka the kids of today.

Thanks. Bob.

Sunday, July 24, 2011

Running Government Like a Business

If a business is losing money, its leaders must take timely and appropriate remedial action. Either that or it will soon be forced to close its doors.

Similarly, if we are to fix our problems as a country, we need to put our financial house in order now. Our national security depends in large part upon our financial strength. Beyond national security, our individual freedoms and world leading standard of living are based on our free market based entrepreneurial economy. Capitalism and freedom go together. It's as simple as that.

Our freedom and our capitalism are interdependent. Together they form the underpinnings for our American way of life. We need people, including but not limited to politicians, who are not only willing to try new things but to learn from those trials. By so learning, we can undo that which needs undoing and keep improving that which is working.

To Err Is Progress reviews the book "The Beginning of Infinity". While I haven't read the book, I recommend that you take a few minutes to read the article containing its review. The book makes the point that the scientific method of acquiring knowledge applies to government as well as to virtually everything else.

The book's author argues that for centuries knowledge virtually stood still. In the reviewer's words, "Conformity reigned, and innovation was suppressed." After the scientific method became accepted, mankind's knowledge progressed rapidly as evidenced by the scientific and industrial revolutions.

What struck me most about the review, however, was the following reminder, "We also advanced in the political realm, replacing archaic forms of governance with more just, representational systems." He goes on, "The greatest threat to continued progress ... is our belief that we can achieve--or, worse--have already achieved--ultimate solutions. We must accept that we are fallible ... and hence that our knowledge is tentative and improvable no matter how definitive it may seem at the moment."

Our forefathers did a terrific job in laying out for us the Declaration of Independence, Constitution, Bill of Rights and related documents such as The Federalist Papers. Yet we haven't achieved perfection, and I'm quite certain that our founding fathers would agree that we never will. We're not even close to perfection. Nor shall we be. Not ever, at least on this earth.

So let's admit our fallibility, learn from our mistakes and proceed accordingly. The recommended approach would be to hurry up and find what doesn't work, so we can try something else that may work, and go from there. And so on.

So why do the self described political progressives work so hard to act conservatively and perpetuate what doesn't work, despite overwhelming evidence to the contrary? And why do the self described conservatives cling to whatever's been done just for the sake of keeping things just the way they are, despite overwhelming evidence of the need for change?

The Great Society of Lyndon Johnson didn't work. and President Reagan, although he tried, didn't change us from a tax and spend society to a fiscally sound society. Under his watch, we went from tax and spend to tax and borrow. Long before that Hamilton advocated a permanently funded national debt, whereas Jefferson took the other side and believed that each generation should pay off government debts in their entirety.

As a country, we began with slavery, women not being able to vote and other inequalities while professing that all are equal. But we righted those wrongs and many others along the way to today, too.

From where we began, we've changed a lot of things for the better, and our forefathers structured the Constitution so that we could do so. We the People can change our Constitution when we deem it necessary to do so. Let us look at Prohibition, as an example. We voted it into existence and after a short trial repealed it.

Times change, people change, our knowledge changes, and we change how we do things. The national experiment with individual freedom continues today. That's our way. The American way.

My problem is this: for some reason, we have a hard time "unchanging" the things that, based on objective evidence, clearly need changing. Once something comes into existence, it's virtually impossible to vote it into extinction.

Well, you know what? That has to change, too. The scientific method has to apply. Always. Try it and if it works, improve it and keep going. And if after a fair trial we learn that it doesn't work, then let's try something else, or even stop trying. Just leave it alone and see what happens. Then proceed accordingly.

What's all this experimentation talk all about? Well, simply this. Let's start looking at our government and economy by agreeing that nobody has the final answer. Because nobody does. And let's agree that our society is at its healthiest when it is rapidly evolving as opposed to when we're in a state of equilibrium. The main idea is simply to preserve order in the midst of change while changing in the midst of order. All the time. Keep it stable, but keep it moving, in other words.

With our government's finances it's time to take out a clean sheet of paper. A zero based budget system. Let's start by asking whether what we're doing can be best done by government or outside of government and in the private sector. Maybe we should start with social security and medicare/medicaid and education.

But whatever we choose to tackle first, let's decide what to try and then move on to something else. But let's agree to pay for whatever we do as we go along. Let's not stick future generations with the bill. Jefferson was right about that one, for sure.

Today we'll look very briefly at a few simple things that we could do and that would go a long way toward solving our financial problems as a nation. It's as simple as 1,2,3.

We'll begin with two of my favorite formulas: (1) If we're doing the wrong thing, we're probably doing it poorly. (2) If we know where we're going to end up, we may as well save time and start there.

With that in mind, here goes.

(1) Increasing revenues -- Government usually tries to raise revenues solely by increasing taxes. This is often counterproductive and results in lower tax receipts than had it done nothing as its effect on private sector activity tends to reduce business activity and therefore tax receipts.

That said, one very realistic way to expand government revenues meaningfully would result from selling our services and products to more customers and in more countries. Aggressively expanding oil exploration, production and refining activities would add countless jobs and generate genuinely large government tax receipts. It would also reduce the amount of oil imports on a dollar for dollar basis and by so doing, the cost of imported oil would come down. As a result, other economic activity would expand as consumers had more money to spend. In turn more tax receipts for the government would result. Transportation costs for businesses would also decrease, thereby generating more profits and more taxes from the more profitable U.S. businesses. This is a no brainer.

Growing more food for export would also produce more income, jobs and government tax receipts. We should encourage the agricultural sector to sell its wares throughout the world at market prices. To do that, we simply need to resolve to become world class price competitive. Our costs are already quite competitive in the world.

Same with manufacturing. We need to grow our manufacturing business and exports, too. We also need to earn more domestic business from foreign competition. By taking off the gloves, we'll increase jobs, revenues and income across the board.

There it is. 1,2,3. There are many more opportunities as well. We must adopt an all out aggressive economic growth strategy. We accomplish this by adopting a world class competitive take no prisoners approach to making, growing and drilling our way to market share gains across the board.

(2) Reducing operating costs -- This is actually a pretty simple process. And it's not difficult either, assuming there is the political will to do it. Eliminate any expense which isn't driving revenue or isn't absolutely necessary as we seek to slay the sacred cows, of which there are many. The main idea is to initiate an effort to produce and sell more stuff at less expense per unit of output, and with less government involvement wherever possible. That's productivity in its raw state. Strive for less input for each unit of output.

(3) Reducing fixed costs -- Stop building government buildings for a starter. Then reduce staffing in government offices by at least 20%. Begin with the highest paid staffers, and go from there. The department of education may be the best place to start, but it really doesn't matter as long as we start.

In the end, if we adopt the attitude that anything we're doing can either be eliminated or done better, we'll be well on our way to lasting success. Our only problem is to find the will to tackle these issues in an aggressive manner now. If we know, as we do, that we'll have to face these issues sooner or later, let's opt for sooner. How about now?

Thanks. Bob.

Saturday, July 23, 2011

Entitlements and a Clash of Generations ... What's a Ponzi scheme?

We adopted social security in 1935. The normal retirement age was established as age 65, and normal life expectancy was about that same age. As a result, individual social security payments weren't going to be paid to very many people for very long, if at all. Things have changed.

Two words will explain much of the entire debt, deficits and financial dilemma confronting America today: DEMOGRAPHICS and ENTITLEMENTS. As a citizenry, we're living much longer, and we've been retiring earlier. A double whammy.

Although it wasn't intentional on the part of us oldsters, we're in the midst of pulling off perhaps the biggest generational heist in history. Comparing our situation today to an unintentional Ponzi scheme is absolutely appropriate. We'll soon see just why that's the case.

Named after the infamous Charles Ponzi, a Ponzi scheme takes place when the "investment" money paid to investors is not the result of money earned through investing. Instead the money paid out comes from money received by the "investment fund" from either the original or later investors. A pays in, B pays in, B's money goes to A. C pays in, C's money goes to B. D pays in, D's money goes to C. And on and on and on until the inevitable collapse occurs.

The original "investors" believe they are being paid as a result of the investment returns due to the acumen of the fund manager, but they actually are being paid with new money received by later "investors". For those familiar with chain letters, that's the basic idea.

In a classic Ponzi scheme, there are no investments, so no money is earned. To keep going, the scheme merely requires a good story and an ever increasing inflow of money from old and new investors. Only when outflows begin to exceed inflows will the scheme actually collapse. But it is destined for eventual collapse from the very outset. The last people to put their money into the "fund" lose their entire "investment". The next to last investor loses as well. And so on. The "investment" message is simple: if you're going to involve yourself in a Ponzi scheme, get in first and get out first. Otherwise you're destined to lose.

Let's compare a Ponzi scheme to our social security "insurance" system. If we begin a social security "insurance" retirement system where few individuals are eligible for benefits initially, but many others are paying into the fund in order to provide those few benefits, the retirement payments can be funded indefinitely because of the new money "contributed" by the many workers.

As decades go by, more people retire and more benefits are paid, but lots of cash is collected each year, so the cash contributed is greater than benefits paid. So far, so good.

Eventually, however, new investors catch wind of the scheme and begin to wonder if they will ever receive a satisfactory return on the monies they're "investing" in the scheme. They begin to doubt if they'll ever receive anything from the fund.

At this point they stop investing, and the beneficiaries stop receiving payments. The original beneficiaries have died, but the game is now over for those still playing. There's no new money coming into the fund.

It's at this end point that "investors" learn that there have never been any investments. Just a Ponzi like stream of new money used to pay those who are receiving benefits from the scheme - er- social security insurance fund.

Now let's go back in time to 1935, then move forward to the beginning of the post World War II baby boom period and finally we'll look at the situation today.

In brief, demographics have played a huge part in getting us to the sorry financial state in which we find ourselves today. The sad part is that this has come as no surprise to those charged with running and funding the social security system. We've been calling the post World War II demographic shift the baby boom generation for several decades now, so it's not a surprise. We've definitely seen it coming for a very long time.

In 1935 we had a population suffering through the Depression. Life expectancy wasn't much beyond age 60. The retirement date for the newly enacted social security legislation was established as age 65. We began paying monthly benefits in 1940 when Ida May Fuller received her first monthly check for $22.54. Since she had paid into the fund a total of $24.75 during the three preceding years, she received more that the total she'd contributed when she received her second monthly check.

Ida May lived to age 100 and collected a total of $22,888.92 in social security payments. Not bad for a total investment of $24.75. The demographics at that time, meaning many working for the few retired, acted to make things great for Ida and not even onerous for her fellow citizens. So far, so good. But free lunches always look good, at least until they're not.

When World War II ended, the baby boom generation entered the picture. The boomers grew up and then went to work in the 1960s. Now in the 2000s they are entering their retirement years.

What the baby boom segment says about demographics is dramatically different than the circumstances that were in effect in Ida May Fuller's day. Baby boomers worked and provided many workers for relatively few retirees in the 1970s, 1980s and 1990s. Now that's all changing.

And in large part, that demographic change, along with the similar impact of medicare/medicaid, is why we have an unfunded entitlements liability of ~$100 trillion today. What will we do about it? That's the question.

The unintentional but very real effects of our Ponzi like scheme for entitlements funding haven't been in the spotlight until now. There were no baby boomers in 1935, and the boomers were a helpful part of the "many" working in the latter part of the 2oth century. Only now are the boomers retiring in big numbers and by so doing also leaving a hole in the "many" working segment of our society.

Relatively speaking, we'll go from many workers to fewer workers, and at the same time we'll go from few retirees to many retirees. In a nutshell, that's the demographic effect on the entitlements issue confronting America. The party's over.

So what have we been doing to fund those baby boomer benefits? Not much, if anything at all. We're getting older, but we're still using the cash basis of accounting in government, just like all good Ponzi schemes are prone to do. As a result, we have no real money to pay future social security benefits other than current payroll contributions. President Obama's comments in What About the Trust Fund are meaningful, to say the least.

The oldsters have been running a Ponzi like scheme, albeit perhaps largely unknowingly. We're now sticking the younger generations with the bill. In my opinion, it's a straightforward case of generational theft. Or baby boomers behaving badly, if you prefer.

Whatever we call it, it's simply unfair. Now that we know about it, what will we do to alleviate the problem, if anything? Well, that remains to be seen.

The youngsters didn't vote to give the oldsters the benefits. The oldsters did that. Should the youngsters now trust the oldsters to try to do the right thing? We'll see.

Thanks. Bob.

Friday, July 22, 2011

Monopolistic Public Sector Unions, FDR and JFK

FDR opposed public sector unions in 1937. George Meany, president of the AFL-CIO in 1955, agreed with FDR, "It is impossible to bargain collectively with the government."

Their thinking went along the following lines: Unions were viewed as a way to get workers more of the profits that they helped generate. Government workers don't create profits. They simply negotiate for more tax money. If government workers strike, they strike against taxpayers. As a simple matter of common sense, FDR and George Meany had it right.

Yet in 1962 JFK endorsed public sector unions for federal government employees, following Wisconsin's lead in 1959. That meant a government monopoly in which the unions could negotiate, and unions thrive on monopolies. It also enabled union membership to grow exponentially and lots of new union dues, too. In addition to monopolies, unions thrive on growing membership dues as well.

Now we have 40% of the public sector employees belonging to unions (50% in Wisconsin). And lots and lots of dues paying public employees who pay the salaries and benefits of their union officials. Unfortunately, this also means that voters don't have much to say about the wages, benefits and working conditions of public employees. Those things must be negotiated with the unions by elected taxpayer representatives.

In my view, this is the worst of all possible outcomes for taxpayers. And the biggest problem is not with the unions. They just do what they always do. Get the best deal they can by leveraging their negotiating strength. The problem is with the elected officials who negotiate with the unions. Both sides of the bargaining table are using OPM, of course, but the elected officials, unlike their union counterparts at the negotiating table, really have nobody to whom they are accountable. Taxpayers are widely dispersed and "rationally ignorant" about what's going on, to say the least. It's a condition ripe for exploitation, and that's what the unions have done.

In addition, the union is often negotiating indirectly on behalf of those public officials sitting across the table from them. In other words, as the wage and benefit situation improves for public employees generally, it often indirectly brings about improvement for the elected officials serving on the public's bargaining committee. And even if not, these taxpayer representatives probably won't want to make their neighbors upset, and those neighbors often are the very public employees represented by the union. Obviously it's a situation that's ripe with conflict.

When these types of conflicts of interest exist, the taxpayer inevitably pays and pays and pays some more. Making a bad situation even worse is when pension benefits are considered. That's because when the "cash basis" for government accounting is used, the general public won't see the adverse financial impact of pension improvements for many years to come.

So here's the simple solution. We need to repeal collective bargaining for public employees. If the public employees can't or won't trust their fellow taxpayers to set policy and pay at appropriate and competitive levels with comparable jobs in the private sector, they can always seek employment elsewhere. The taxpayer will be better served if parity exists between the private and public sector compensation programs. So will the public employee.

Today there are countless examples where the public interest isn't properly being served by public employee unions. For instance, Notable & Quotable sets forth the California teachers' union current position on a choice between accepting a shorter school year versus teacher layoffs. The union will get more dues if no layoffs occur, but the students will learn more if the school year isn't shortened. Guess which route the union endorsed.

Then there are the Project Labor Agreements, or PLAs. To boil it down, PLAs are an easy way for unions, and an expensive way for taxpayers, to increase union dues paying members. According to Project Labor Revolt, there is a growing movement in many states and cities to void these taxpayer adverse PLAs, despite President Obama's strong support.

In any event, these PLA mandates require state and local governments to award construction contracts only to union contractors regardless of whether a non-union contractor has a lower cost, higher quality or greater capability. We used to call this type of thing discrimination, and that's exactly what it is. It makes no sense unless you're either a union official or a Democrat seeking political office and union support.

Why do states and localities have PLA rules? Well, unions collect more dues from growing memberships when PLAs are in effect. On the other side, there is incontrovertible evidence that taxpayers get less in the way of a finished project while spending more (Boston's Big Dig, for example) -- often very much more -- to get that lesser result, if you know what I mean. When taxpayers get to vote, they vote against PLAs, but they usually don't get to vote.

Taxpayers would be better advised to just send the union officials sacks of money which they could then spend as they wished. This would end the charade of representing members and take the place of membership dues. Then we'd just proceed to pay public employees fairly, since they're our fellow taxpayers and neighbors, and eliminate all the convoluted ways, including union dues, now used to get money to union officials.

FDR and George Meany had it right. Down with public employee unions and up with equal pay, benefits and working conditions for public employees.

Thanks. Bob.

Thursday, July 21, 2011

Unions Thrive in Monopolistic Conditions

The percentage of employees represented by unions is far greater in the public sector (40%) today than in the private sector (8%). That represents an enormous change from fifty years ago. What happened?

The answer is straightforward. The government is a monopoly and has no competition. It gets its funds from taxation.

Meanwhile, competition in the private sector has intensified these past fifty years. This has happened largely as a result of globalization's effects.

To get a sneak peek into what happened to private industry as well as what may lie ahead for the public sector, let's look at the automotive industry's recent history in America.

Approximately 50 years ago, what were then called the "Big Three" companies of General Motors, Ford and Chrysler dominated U.S. automobile sales. GM by itself sold more than 50% of the cars in the U.S., and the three companies combined sold ~75% or more.

The United Auto Workers (UAW) union represented bargaining unit employees at all three companies. Thus, the industry had three dominant companies and one dominant union. All headquartered in Detroit. One big monopolistic family, if you will.

Today the monopoly is over for the three companies, the city of Detroit, and for the UAW union, too. These three companies are now called the "Detroit Three" in A Fall Classic: The Auto Workers vs. Ford. The simple changing of the one word preceding 'Three' from 'Big' to 'Detroit' says a lot and is a story worth reviewing.

The above referenced article analyzes the potential outcomes of negotiations this fall between the UAW and the three Detroit based auto companies. It concludes that there will likely be no strike upon contract expiration in September. But that's not really important, at least to the story I want to tell.

The article points out that the union now owns a part of of both GM and Chrysler, thanks to recent federal government bailouts, and the writer raises questions about whether GM and Chrysler will, as a result of those ownership stakes, receive favorable treatment by the UAW over Ford in the upcoming bargaining talks. Of course, the union holds no ownership position in Ford (other than representing members who have lots of jobs).

While the fall negotiations may be of some slight passing interest to Toyota, Nissan, Honda, VW, Hyundai and other competitors, my guess is that these non-Detroit, non-union, non-U.S. companies really don't care all that much about what happens in Detroit this fall. The old monopolists are no longer running the competitive show all by themselves, and that includes the UAW, too. They haven't been successful organizing employees of the new players. Not even once.

Accordingly, there is no longer a monopoly including GM, Chrysler, Ford and the UAW union, and the real question for them now is how many will survive over the longer term. Competition nails those companies and organizations, perhaps including unions, that don't adapt to the times at a continuing and rapid pace. That's simply the free "consumer choice" market at work.

But what about the UAW? Well, it's no longer a part of an industry monopoly. The non-Detroit players are all non-union. And since a union needs a monopoly so it can thrive, the union has big competitive problems of its own.

In simple terms, a union's basic function is to "tax" its members in the form of dues. Those dues begin as employee wages paid by employers. To repeat, member dues are the source of a union's funds, and the source of member dues are the wages paid by employers. These wages are made possible by the sales and profits of the company.

Thus, it all starts with a sale, and monopolies have no problem making sales or charging high prices. For non-monopolies, however, there's competition, and that's an entirely different story.

To repeat, union dues are similar to taxes. Without dues the unions have no money. Unions thrive when they are able to negotiate with employer monopolies. (HINT: The government is a monopoly.)

Since redistribution first requires something to distribute, that something means profits in the private sector and taxation in the public domain. Let's stay with the auto industry for now.

Let's not forget the co-conspiratorial role played by the auto companies in the automotive debacle that played out over the past 50 years. The Big Three acted like a permanent monopoly in complete alignment with the UAW in the 1960s and beyond. It's rather obvious that the union and the companies treated labor and productivity as non-competitive factors in that each company paid essentially the same wages and benefits and used the same work rules as well. The "pattern" bargaining simply meant that the UAW negotiated with a target company and then the other two companies adopted the same agreement negotiated by the target company and the UAW. Everybody was paid the same, and nobody had to work too hard to make a sale or get paid for whatever work was done and whatever quality levels were achieved. A nice cozy monopoly when times were good, and there was "plenty" to share. And when negotiations took place every few years, even more sharing of the plenty took place for everyone.

It lasted until Toyota, Nissan, Honda, VW, Hyundai and others entered the picture. Then competition came to the U.S. and to the automotive industry. And the competition didn't bring any unions with them upon arrival. Just competitive cars and such and a thirst for growth.

So the Big Three now is the Detroit Three many years later.

In simple terms, the entire historical Big Three arrangement was predicated on the fact that there would always be plenty to share among the monopolistic industry and its union partners. Therefore, the employees would do well, too. As long as the monopoly lasted.

But upon arrival the foreign transplants threw sand in the monopoly's gears. Domestic market shares and profitability took a nosedive, and the monopolistic arrangement didn't react to the competition. Not for a long time.

Unions don't far well when competition is present. And people who belong to unions are not incentivized to excel. Everybody seeks the lowest common denominator, and a dumbing down process takes place due to the absence of competition.

That's because pay is equal for all in a particular job category, or if unequal, pay differentials are based on seniority and not individual or small group performance. Imagine paying everybody the same thing on a professional sports team or in a PGA tournament, regardless of who won or what the score was. But that's the effect of union monopolies. And all other monopolies, too, for that matter.

We'll get to the public sector soon.

Thanks. Bob.

Wednesday, July 20, 2011

Economic Growth is Job #1

Economic growth is the single biggest long term issue facing America. It's absolutely Job #1.

That said, neither political party appears to be focused on growth as the single most important problem we're facing. In our current environment, the debt ceiling talks have taken center stage. Hopefully, we'll get to the end of that discussion soon, and we can then get genuinely serious about the goal of growing our economy and what it will take to do so. Focusing America on Job #1 can't happen soon enough.

Democrats act as if they believe there's an ever flowing private sector money tree which will spew forth abundant tax revenues. According to their playbook, all we have to do is "stimulate" the economy with enough government spending. This quick fix but ineffective Keynesian deficit spending approach simply doesn't work. Meanwhile, Republicans act as if reducing government spending alone will somehow solve the growth problem and balance the budget at the same time. Neither party is even close to the truth.

Here's the real deal. The debt ceiling talks are a sideshow and growing our economy is THE fundamental issue facing America today. Along those lines, the ~$100 trillion in unfunded medicare and social security obligations (see yesterday's post) will prove to be largely empty promises, as will many other commitments we've made as a country, if our economy doesn't grow sufficiently in future years. Sustainable economic growth is the only money tree we have, have had or ever will have.

We need to get really serious about the things that will enhance the future well-being of both America and our fellow Americans. All of us must make a sincere effort to understand why the private sector needs constant nourishing and why risk takers who pursue business careers are patriots, too. In simple terms, we need to cause a business mentality to be adopted in the corridors of our nation's capitol. And if the existing politicians can't get with the grow America program, we need to elect some new ones.

Let's talk about transparency.

America's Debt-Ceiling Opportunity argues persuasively that a business-like accounting approach should be an integral part of any government budget debt ceiling deal. If it were, we'd be better able to see things as they really are. Getting to a better reality is always essential to problem solving, so knowing what's what is a necessary ingredient of our budding grow America effort.

If we come to know all about the ~$100 trillion unfunded benefit picture, our politicians will have to become knowledgeable in order to talk to us about it. {And the talk show hosts and the rest of the pundits will have to become knowledgeable as well. They already know how to talk.} Then we'll make some hard nosed and informed choices about what to do with entitlements. In sum, it's vitally important that we possess the required knowledge to make informed decisions as we transition from a "nice to have" to a "need to have" government system.

Now let's briefly cover the fundamental differences between government and business accounting, and why making the government adopt a business accounting system would make everything so much clearer for we the people with respect to entitlements and other related tradeoffs and choices. Redistribution and taxes are two sides of the same coin, so let's treat them as such.

Here's in part what "America's Debt-Ceiling Opportunity" has to say about government accounting transparency and informed choice: "One of the longstanding problems we have in understanding the nation's true fiscal picture is the government's arcane "cash basis" budget methodology. As "USA Inc." observes, government budgets only record long-term liabilities such as entitlements when they are paid, whereas corporations must reflect the net present value of liabilities as they occur. This leads to short-term distorted thinking --- citizens and politicians believe the country is in much better financial condition that it really is, and that it is therefore able to take on even more obligations." How true.

Accordingly, we can grasp the essence of the ~$100 trillion entitlements saga very simply. We've made promises to pay benefits, but we don't record the cost of that promise until after we've made the payment. That's nuts and would be analogous to an individual taking out a 30 year $200,000 home mortgage with required monthly payments of $1,000 but not accounting for the $200,000 obligation as a liability. Or in the case of entitlements, $100 trillion.

As we now know, being the accountants that we've become, ignoring the debt itself is exactly what the government does when it uses the cash basis accounting methodology. Much more realistically, the accrual method of accounting for private sector companies mandates that companies establish liabilities as they are promised. Companies then take steps to fund those liabilities over time, unlike our government.

If the government were to adopt the business sector's "accrual" method instead of the cash method of accounting for entitlement promises, our government debt problem would instantly multiply severalfold. We'd then be forced to acknowledge the extent of our total obligations, and we could either fund those obligations or alter the promised benefits for future retirees. Either way transparency would reign. Today government just ignores the issue, perhaps hoping it will go away or at least not rear its ugly head until a new group of politicians is in office and can blame the old gang. Funny how that political stuff works.

Unfortunately for the young people of today, the issue won't go away, and they'll be asked to pay someday. Either that or shove Granny off a cliff. In that case, I wonder who's really doing the shoving, but then the current politicians will be long out of office when the dreaded day of reckoning does arrive. Unless, of course, we decide to do the honorable thing, face the facts now and choose what to do for or to that distant future taxpayer and beneficiary, one way or another.

The central point we've argued, and which is also set forth in today's referenced article, is that driving sufficient future economic growth is job #1. To quote from the article, "If we sustain average growth in excess of 5% for the next decade, we would balance our budgets, obviating the need for a debt-ceiling debate. The challenge is achieving such a lofty target given that average growth for the past 40 years has been 2.83%, but it is a noble goal."

In my view, the 5% goal is indeed noble, but it's hardly realistic. In fact, and as you'll see below, the historical average of 2.83% doesn't appear all that easy either. The odds against achieving anything close to 5% growth anytime soon are staggering. That's almost an "impossible dream" for now. Why so, you ask?

Here's why job #1 has to be economic growth. We now have at least three genuinely large obstacles, or headwinds if you prefer, to returning anytime soon to ~3% real growth levels, let alone 5%. Each barrier to "normal" growth is big. Considering the three as a whole makes it really easy to see why economic growth must take center stage.

Both (1) individual and (2) government debt levels are so high that this will inhibit our ability to grow "normally". The recent and highly regarded book "This Time Is Different" concludes that after a debt induced bubble has burst (such as occurred with housing in 2007), growth is reduced by ~1% annually as the resumption to "normal" levels takes many years. Suffice it to say for now that people have been burned, are busy paying back debt and therefore reluctant and perhaps unable to spend on big ticket items (cars, houses, appliances and such) for a long time.

Beyond the bubble with housing in the private sector, the government piece of the economy has grown over time. We've copied Europe with our entitlement programs the past few decades. And if that's not enough, government debt will continue to grow as our deficits will continue for the foreseeable future. Government growth necessarily reduces private sector growth. That reduces overall economic growth, because all growth is not equal. One kind is good and the other kind is not so good. Guess which.

For all these reasons and more, receipts from taxes will be reduced substantially due to higher government spending resulting from lower than "normal" economic activity and higher than "normal" unemployment levels.

(3) Finally, and very importantly, we've lost many U.S. manufacturing and related jobs over the past twenty years, and without a workable plan to get these back, employment will suffer for many more years.

One, two, three. Historically high levels of individual debt, government debt and a loss of manufacturing competitiveness. We are stuck with all three growth inhibitors, unlike previous recessions.

If we are to get the economy growing again, we need to shrink the size of government relative to the private sector. That will require a restructuring of our government, its size, its expenditures and its programs. That's what private sector companies do, and that's what the public sector must learn to do, too.

We'll discuss this run it like we're serious about growth approach later.

Thanks. Bob.

Tuesday, July 19, 2011

Follow up to Earlier Post and Comment

In a comment on today's earlier post, I optimistically referenced a portion of a referenced article in which a woman is interviewed about the possibility of losing benefits that are currently promised to her husband and her.  This is the referenced excerpt:

Ms. Pisacreta, a 36-year-old drug-company representative who with her husband earns about $200,000 a year, isn't banking on Social Security and Medicare. "I just assume things will be taken away and I just assume I'll be paying more," she says.

The earlier post and linked articles make a clear case for the inevitability of the participation of the "middle class" in the mix of additional revenues and reduced spending the government must find in order to find a sustainable fiscal path.  Another "middle" group, the independent or "swing voters," the name the comedian in the attached video uses, will likely determine the chosen balance between spending reductions and additional revenues.

As the comedian in the video observes, the "swing voters" make up the great majority of the "political spectrum," just as the earlier post observes that the "protected" economic middle class consists of the great majority of voters.  Obviously, a many swing voters belong to the middle class, the same middle class that will ultimately bear much of the burden of providing the revenue to operate its government.

I hope the swing voting middle class chooses to serve its fellow citizens through predominantly local, private methods, rather than centralized, public structures.  People will take better care of those they know and love and those with whom they share community bonds.  As with any private endeavor, doing a better job will mean doing it in a less expensive, more sustainable way.  Ms. Pisacreta's quote and the Stand Up Economist's assessment of the "clueless" swing voters suggest that we will reject the fantasy of the current path, one awakening, currently clueless, swing voting member of the "politically protected middle class" at a time.

Note:  The video was discovered from Greg Mankiw's blog by an Augusta Metros student, Matt Miller.

debt ceiling talks are just a sideshow

The debate about raising the national debt ceiling is a political sideshow. We will pay our bills. That's not the problem, at least for now.

Besides, the $14 trillion we admit to owing as a nation is dwarfed by ~$100 trillion in additional unfunded medicare and social security promises. Although this ~$100 trillion unfunded entitlement obligation makes the $14 trillion appear to be insignificant, medicare and social security aren't being given much attention in the political debate now taking place. Charles Ponzi of Ponzi scheme fame comes to mind.

Other than the unfunded entitlement debt obligations, the continuing weak economy and high unemployment levels are quite troublesome, too . Although we're now two years into the economic "recovery", a relatively weak economy accompanied by high unemployment are likely to remain big problems for years to come.

The central issue which needs a solution is not our existing debt levels but what to do about our ongoing annual deficits and growing unfunded entitlement burden for future generations. We must address how we can achieve a resumption of healthy economic growth, which in turn will bring down the rate of unemployment.

In sum, it's not the debt that is causing our problems now. Debt is the result and not the cause of what we're doing. Accordingly, achieving meaningful and sustainable economic growth is the single biggest issue facing Americans today and will be for the foreseeable future, too.

For a sobering analysis of why we must cease emulating Europe's welfare state, The Disappearing Recovery is worthwhile reading. It makes a persuasive argument that by emulating Europe on labor costs, taxes and entitlements, we have seriously restricted our prospects for resuming necessary and historical economic growth levels of ~3% over time.

In sum, the tradeoff between economic growth and government mandated entitlements is the most difficult problem facing America. And that's why the debt ceiling talks are a sideshow.

Republicans, led by the sentiments of tea partiers, want no tax increases and less government spending. That's fine as far as it goes, but they don't want to talk about a substantial reduction in future medicare and social security benefits. Something has to give.

Meanwhile, the Democrats say that social security and medicare cuts are largely off the table as well, but they want the wealthy, defined by them as the top 2% of earners, to pay more taxes. That tax the 2% approach wouldn't seriously address the debt issue, but it likely would inhibit growth. Something has to give here, too.

As defined by Democrats, those below the top 2% of earners are members of the protected middle class. If that's the case, by using a normal distribution curve we must also conclude that only the bottom 2% of earners are poor. According to this twisted logic, albeit perhaps politically ingenious, that leaves ~96% or so belonging to the "middle class", or almost all of the voting public.

So both parties want to take special care of the "middle class", the elderly and students. Yet neither party wishes either to pay for the entitlements or, in the alternative, reduce them to a financially responsible level.

A realistic look at the many longer term financial and political issues facing Americans is the subject of Budget Solution: Squeeze the Middle. Therein the top earners are categorized as the 10% of households earning more than $163,200 annually. The middle class grouping consists of the next 50% who earn between $33,500 and $163,200 annually, and the remaining 40% are those lower income households that earn below $33,500. That 40% group pays less than 3% of the federal income taxes. Guess who pays the other 97%.

No matter how the politicians try to spin it, in the end we'll all pay the tab. And one way or another, the now "politically protected" middle class will be among those paying. To paraphrase what Willie Sutton said when asked why he robbed banks, the 60% falling in the top and middle earner categories are where the money is. That's why the middle class, along with everybody else, including those at the top and bottom, will pay more, too.

So why are the politicians not telling the truth or addressing the real issues in a forthright manner? Well, for now let's just say that they either don't understand the basic problem or don't want to deal with it. Either way, we're in for lots of interesting times in the months and years ahead.

For certain it's all a bit nauseating. But the debt ceiling talks are still a sideshow. The real show is ahead of us. All of us.

Thanks. Bob.

Monday, July 18, 2011

North Dakota's College Success ... Is it the climate or the market?

Running a business, private or public, is about matching capacity with demand by managing the four P's --- people, pricing, product and productivity. Of course, matching capacity with demand is never easy to do, but that's always the basic objective.

A private business is started only when interested investors believe they can achieve at least an adequate return on the capital they invest. A business only stays in business if over time revenues exceed costs to the extent that investors decide to keep their capital employed in the business.

Accordingly, if there is not sufficient profitability for an interim period of time, managers have to find a way to "fix" the problem by raising revenue, lowering costs, or preferably both. This is analogous to raising a bridge (revenue) and lowering the water level (cost) at the same time, thus enabling the ship (investor profit) to pass through the opening.

In a monopolistic public business, when costs go up, the public entity generally implements the "easy fix" by raising the bridge through substantial price increases. The captive customer pays the toll. The monopoly isn't especially concerned with either costs or getting and keeping customers. It has no price based or other competition.

For a more complete explanation of cost based pricing compared to price based costing, please refer to Chad's July 12 post about "Different Approaches to Pricing and Taxing".

Unlike a monopoly, a business with competitors assumes the very real risk of losing revenues and customers when it increases prices. If the market won't allow price increases suffcient to cover cost increases, the business has no choice and must seek other ways to raise revenues, lower costs or both.

With that background, let's review North Dakota's extremely successful "revenue management" approach to increasing the state's college enrollment and revenues over the past ten years.
Revenue management is a proven way of reaching acceptable levels of revenue growth and profitability through low pricing. This revenue enhancing technique is the basic business model followed by Wal-Mart and serves as a good example of the low price, low cost, high revenue, high market share, high profit and high investor profitability approach to business. There are countless other similar examples in the private sector as well.

Any business which needs to grow and has excess capacity should consider using revenue management to achieve market share gains and increased volumes, thereby achieving greater profitability. This aggressive market share oriented strategy is often an excellent way to increase an enterprise's profitability. {We won't get into the tradeoff between price decreases, excess capacity, competitive reactions and revenue increases at this point. The idea of focusing on marginal costs and marginal profits through more competitive pricing and volume gains is a topic for another time.}

Now let's return to the North Dakota public college system and its revenue management winning approach. More than ten years ago the state had to either downsize its educational system or enroll more out-of-state students, since resident high school graduates were declining rapidly.

The state adopted a growth strategy by attracting out-of-state college bargain hunters looking for affordable colleges to attend. North Dakota started pricing aggressively instead of charging out-of-staters as much as they possibly could through a more conventional premium pricing strategy for out-of-staters. Contrary to the practice of most other states, North Dakota chose not to price gouge these potential "customers".

Since North Dakota residents graduating from high school were in decline (almost 20% fewer North Dakota high school graduates in 2010 than 2000), the only way to achieve a meaningful increase in enrollment was to look beyond the state's borders. So that's what they did and as a result, the state's college enrollment has grown by 38% in the past ten years, led by a 56% jump in nonresidents. Nonresidents now account for 55% of North Dakota's college student population. By enrolling these out-of-state college bargain hunters, North Dakota has proven to be a great place for attending college. Frigid North Dakota is A Hot Draw For Out-Of-State College Students tells the story in detail.

Most out-of-staters can attend a North Dakota university for $7,000 annually in tuition and fees. In contrast, out-of-staters attending college in California are charged five times that much, or $35,000 annually. In fact, North Dakota charges less for out-of-state student tuition than residents pay for in-state tuition charges in such heavily populated states as California, Illinois and Pennsylvania. Similarly, neighboring Minnesota charges its own residents 28% more than North Dakota charges those same Minnesota residents if they attend a North Dakota college.

As marketplace competition begins to heat up for college student enrollment, there will be both winners and losers among the states. The winners will compete hard by managing aggressively both costs and pricing, by offering a solid product and by finding ways to grow market share. The losers will act like the monopolies they've been and continue to do what losers always do. They'll raise prices to the fullest extent possible to offset declining federal and state subsidies, they won't manage costs well, and their competitive posture will continue to weaken relative to other states who adopt a market based approach. That's the future, and that's as it should be.

By adopting a market based approach to education, the climate for college attendance is definitely looking good in North Dakota. Long live competition.

Thanks. Bob.

Sunday, July 17, 2011

the cost of college and the preparedness of enrollees

College tuition and related costs are becoming about 20% more expensive in California this year. For the first time ever, tuition paid by students will exceed that paid by the state of California. An official of the American Council on Education is quoted in California Cuts Weigh Heavily on Its Colleges as saying, "What we are seeing is the abandonment of the state's commitment to make California's education available to all its citizens."

Beyond California, and out of necessity, meaningful tuition increases are taking place in many other states as well, including Georgia and Illinois. For a discussion of the severity of the problem as well as a list of those states which will likely reduce funding to their public colleges and universities, please refer to Last-Minute Tuition Hikes Hit Students and The 36 States Where College Costs Could Rise.

In any event, the federal "stimulus" monies (monies which in reality the federal government didn't have available to lend, but that's another story for another time) of a few years ago have now all been spent, and the states have no excess funds to spend. In addition to the shortage of available funds for public education, states (local governments, too) are struggling with other costs such as public employee payrolls, pension funding, medicaid and unemployment compensation. Unfortunately, there's nothing temporary about any of this.

As a result, public educational institutions are going to have to change permanently the way things are done in this "new normal" environment. Since there is no easy or obvious short term nor, for that matter, long term fix on the horizon, let's consider a new approach to address this issue successfully and over the long haul.

More than 30% of state spending goes to public education. One third of that one third, or ~10% of the total, is spent on colleges while the other two thirds, or ~20%, is spent on K-12 education. That leads to one inescapable conclusion. Since the biggest piece of taxpayer money at the state level is allocated to public schools and colleges, that's where the bulk of an individual state's savings will have to be found.

By the time each student enters college, we've already spent ~$150,000 of taxpayer money on that student. We've also spent roughly that same amount on those students who choose not to go to college. (NOTE: The ~$150,000 total used herein assumes 13 years of taxpayer financed schooling at ~$11,500 per student per year, inclusive of instruction, overhead, facilities, debt service, transportation, meals and such. The actual number is likely to be considerably higher than the $150,000 total assumed herein.)

A recent study concluded that only one fourth of those students entering college are prepared to do satisfactory college work. Obviously this is not a good return on the ~$150,000 in "sunk cost" taxpayer money already spent, nor was it necessarily time well spent by the student while "preparing" for college. Spending too little on K-12 education is not the cause of sending unprepared students off to college. Thus, spending even more money than the ~$150,000 per student already being spent isn't the answer either.

All that said, we need better results educationally at all levels, including the attained quality of university graduates. And we need to face squarely the fact that college tuition and related costs are going to be continuously increasing unless we find a way to reduce per student costs.

Here's another related fact to consider. In the new normal world of public education, as tuition goes up, the financial burden thereof will fall disproportionately on the middle class. Even though higher tuition will also burden students coming from higher income families, those at the high end are better able to pay, especially if we factor in the existing average state subsidy of ~50% per student. As for those at the lower end of the income scale, they will pay very little, if any, of any tuition increase as they are eligible for federally funded Pell Grants and such.

So why don't we eliminate this entire issue and simply limit access to college to those students, regardless of family income, who are ready, able and willing to perform satisfactorily in the college classroom? In adopting an outcome oriented approach to entry, we could simply limit college taxpayer supported grants to those with the demonstrated ability to do the work. After all, the taxpayers have supported those who can't perform, for whatever reason, for thirteen years already and at a per person cost of ~$150,000. That's enough time and money for a fair trial.

The representative of the American Council of Education quoted earlier is wrong when he says that California is abandoning "the state's commitment to make California's education available to all its citizens." The first thirteen years in K-12, paid for by the state's taxpayers, serve as ample evidence of that commitment to public education. Let's stop separating K-12 from college when considering taxpayer support and student achievement. Maybe we should call it K-16 or some such thing.

The real questions to be asked by all state taxpayers are these, "As taxpayers, what do we have a right to expect in terms of student or school performance in return for the money we're spending? Is it reasonable to ask us to support financially everyone who applies for college, regardless of whether after thirteen years that student is prepared to do the work academically?"

It's perfectly appropriate to have equal educational opportunity for everybody. That's the way we like to do things. But when thirteen years have passed, and ~$150,000 of taxpayer funds have been spent, isn't it time to check out how things have been going before writing any more taxpayer checks?

Let's employ some much needed common sense where some reasonable prediction of academic success is a prerequisite to college funding for students. Continuing to spend an ever shrinking pool of taxpayer money carelessly and without using relevant predictive metrics is pure nonsense.

Thanks. Bob.