Freedom, Economic Growth and Globalization ...The Long Road Ahead

The developed world is in economic turmoil.

Unemployment and debt levels are too high and economic growth is too low. The outlook is worrisome.

Conditions in Europe have reached recessionary levels, the U.S. is struggling, and Japan remains stalled. For that matter, Britain, China, India and other nations have their own very real economic problems, too.

Sovereign debt levels and annual operating deficits are clearly unsustainable. As a result, the world's financial markets are quite fragile.

The way out of this mess is through the resumption of solid economic growth worldwide. Unfortunately, that will take lots of time in Europe, the U.S. and Japan, even if policy makers make good decisions. And as we know by painful experience, that's not a given.

A projected period of slow growth and high unemployment is attributable to the ongoing and much needed process of worldwide deleveraging. Currently many countries and individual households are so far in debt that solid economic growth will be difficult to achieve at least until operating deficits, if not debt levels, begin to decline. To repeat, this will take years.

For example, in the U.S. a greater than 3% level of sustainable real growth will be required to reduce jobless levels meaningfully. Such a growth level won't happen anytime soon.

All this is reason to reflect on just what this subpar growth and high unemployment means to citizens everywhere.

For one thing, our individual freedoms may be impacted negatively by the actions of governments, even if well intentioned. Economic order, growth and stability, protectionism, joblessness and the size and role of governments will all be factors that we'll need to watch closely.

Stated another way, how our new era of globalization unfolds in the next few years will directly affect the freedoms and prosperity that we'll experience.

In theory international economics shouldn't be any different than economics within countries. National borders are political demarcations, not economic ones. Regarding globalization, economics and the freedom of others, economic activities simply don't respect political boundaries--at least not naturally.

Interference with free markets and private sector competition frequently results from a government's policies. Along with the domestic taxing authority, such items as tariffs, quotas and other governmental imposed protectionist measures all reduce economic growth and add to the prices that consumers are forced to pay. Currency manipulations are often largely politically motivated as well.

Substantially impacting a society's standard of living is the relative productivity of its citizens in relation to those citizens of other countries. The size of a nation's government as a percentage of the entire economy impacts prosperity as well.

In other words, the effects of global trade on free markets and individual freedoms are substantial and often unintentional, both positive and negative, and sometimes are heavily influenced by political decisions.

Let's consider the basic worldwide economic environment that lies ahead by briefly reviewing what the Organization for Economic Co-operation and Development (OECD) has to say. Its latest forecast of global economic growth, along with the many downside risks associated therewith, provides helpful background information about expected world economic conditions.

OECD Growth Outlook, Country by Country presents a quite subdued picture of the future with risks clearly pointing to the downside, especially in Europe, Japan and the U.S.

Here's what the summary says in part:

"In its twice-yearly report on the global economic outlook, the OECD lowered its growth forecasts for the world’s largest economies, and said the euro zone has fallen into recession. It also warned that the bloc’s debt crisis, now affecting countries previously seen as safe havens, could “massively escalate economic disruption if not addressed.” Here are some country-by-country highlights:

U.S. 2012 growth forecast 2.0% vs 1.7% in 2011. Economic recovery lost significant momentum. Equity market losses and house-price falls weighed on households. Demand to be restrained for some time. Gradual improvements seen after mid-2012. Full U.S. article

Euro Area 2012 growth forecast 0.2% vs 1.6%. Recovery stalled amid escalating sovereign debt crisis. -Swift mobilization of financial resources needed. Risks from slow growth, sovereign debt, weakness in bank system, lack of policy cohesion.

Germany 2012 growth forecast 0.6% vs 3.0%. Faces period of weakness amid lower global exports, investment. Economic activity to recover during 2012. Fiscal situation improved rapidly. Unemployment likely to remain near historic lows.

U.K. 2012 growth forecast 0.5% vs 0.9%. Weak international demand, consumer belt-tightening halted recovery. Further quantitative measures warranted. Fiscal consolidation has bolstered credibility. Growth to pick up during 2012 as exports and consumption recover. Full U.K. article

France 2012 growth forecast 0.3% vs 1.6%. May have entered short, shallow recession. Job creation prospects deteriorated. Unemployment rate to increase to 10.4% at end-2012.

Italy 2012 economy forecast to contract 0.5% from 0.7% growth in 2011. Recovery has lost momentum. Output to decline well into 2012. New government needs to fully implement emergency program. Fiscal tightening needed to ensure sustainability."

• Full OECD report

At a later time we'll try to better assess the impact of all this on America's economic future prospects. For now suffice it to say that it will take years for the U.S. and the rest of the developed world to escape the straitjacket of high debt, joblessness and slow growth.

So stay tuned and keep your fingers crossed. Let's all practice hoping for the best while planning for the worst.

Thanks. Bob.

Government Growth, Public Sector Unions, Democratic Party, Productivity and Affordability

'The New Tammany Hall' is based on an interview with Fred Siegel, often referred to as the economic historian of the American city.

Siegel's strongly held view is that our very real problems of outsized and unsustainably expensive government began in the late 1950s and early 1960s.

It was 1962 when President Kennedy granted federal employees the right to unionize but not to bargain collectively.

Cities and states took an earlier and somewhat broader view of the matter. New York City granted bargaining rights to city employees in 1958, and Wisconsin was the first state to allow collective bargaining in 1959.

From those beginnings, the introduction of the many liberal Great Society programs of the 1960s eventually led to government unions dominating today's state and local politics.

Here's an encapsulation of Siegel's views on the growth of the American welfare state. He attributes its rise since the 60s to the increasing dominance of dedicated state and local public-sector unions throughout our country:

"He links the liberalism of the 1960s, not any excess of the free market, to today's crisis. The Great Society put the state on growth hormones. Less widely appreciated, the era gave birth to a powerful new political force, the public-sector union. For the first time in American history there was an interest dedicated wholly to lobbying for a larger government and the taxes and debt to pay for it. . . .

Thanks to union clout, he notes, salaries and benefits for teachers, bus drivers and city secretaries have outgained the private sector during this sluggish economy. "Spending is never ratcheted down. It's unconnected to productivity. That can only be sustained by a boom or these extraordinary subsidies we're getting now from the Federal Reserve. But that's gonna stop at some point. And then what happens?""

In other words, since something that can't continue forever won't do so, the unaffordably expensive U.S. big government spending problem will be solved in time. We just don't know when, especially since the Democratic Party depends heavily on its public-sector union allies for critical political and financial support.

Since our own U.S. problems aren't nearly as severe as those faced by many European countries, we just need to face facts and muster the political will to clean up our act. As that happens, we will get the job done.

The Siegel interview gives recent examples of successful transitions which have occurred under center-left leaning governments:

"Other countries have managed to find a way out. During its own "lost decade" after 1993, Canada shaped up its finances and it has weathered the latest economic crises well. New Zealand's Roger Douglas in the 1980s and Germany's Gerhard Schröder in the early 2000s cut into expensive welfare states. In all these cases, Mr. Siegel notes, center-left parties carried out painful reform. "They did this out of necessity." Sooner or later, American politicians will face the "unavoidable" reckoning, he adds. "It's not the mean tea partiers who force this. It's the facts on the ground.""

Having strong public sector unions doesn't make sense in a self governing free market based society. In fact, the idea of public unions in the 1930s didn't make sense to many New Deal Democrats either:

"It is often forgotten how many New Deal Democrats were skeptical about public-sector unions. Franklin Delano Roosevelt called the idea of strikes by government workers "unthinkable and intolerable." New York Mayor Fiorello La Guardia said, "I do not want any of the pinochle club atmosphere to take hold among city workers." But union organizers would eventually tap into the language of the civil rights movement to present collective bargaining as another overdue "right."

New York Mayor Robert Wagner extended collective-bargaining rights to government employees in 1958. He saw early that, says Mr. Siegel, "public sector unions are displacing political machines as the turnout mechanism for the Democratic Party. They are the new Tammany Hall." Coming off a nail biter of an election, President John F. Kennedy saw this future as well. In 1962, he signed Executive Order 10988 to give federal workers the right to unionize, though not to collectively bargain. By 1980, half of all delegates to the Democratic convention worked for the government. Government-employee rolls kept growing through the Reagan years. During the presidency of George W. Bush, the number of government workers who belong to a union surpassed the number of unionized private workers.

Mr. Siegel observes that public-sector unions have "become a vanguard movement within liberalism. And the reason for that is it's the public sector that comes closest to the statist ideals of McGovern and post-McGovern liberals. And that is, there's no connection between effort and reward. You're guaranteed your job. You're guaranteed your salary increase. There's a kind of bureaucratic equality."

In turn, he continues, "this vanguard becomes in the eyes of many liberals the model for the middle class. Public-sector unions are what all workers should be like. Their benefits are the kind of benefits everyone should get.""

The bottom line? Democratic and public sector union officials, beware!

America can no longer afford to be inattentive to productivity gains throughout society, if we ever could.

Ongoing substantial productivity gains are absolutely essential to our nation's future health, growth and prosperity, as well as the country's private and public sectors, and including U.S. based union and non-union workers one and all.

As Americans we're all in this together, so we need to start acting that way.

Thanks. Bob.

Cause and Effect? Government Subsidies and College Tuition Cost Increases

In the spirit of the election season, President Obama has come forward with another government-er-taxpayer subsidy to assist young people with their student loan obligations.

Meanwhile, tuition increases for public college attendance continue their rapid pace of recent years.

Any connection between the two? Is one government subsidy the cause, either in whole or in part, of the other government subsidy?

As a matter of fact, yes. In my opinion, government itself is the single largest contributing factor to the high costs of public colleges and universities.

Thus, what the president is now doing for today's indebted students won't address the real cost problem, even though it may help him get more votes from young people in the 2012 election.

Neither will it help the economy to rebound and thereby make it easier for young graduates to find meaningful employment. Nor will it help raise the quality of the educational experience at our public colleges and universities.

So what is the president really up to, other than bolstering his re-election odds? Not much.

In fact, he's ducking the real cost and quality issues harming our educational system. Both inputs (costs) and outputs (quality of education) are going the wrong way.

It's very much a chicken and egg issue. Government heavily and directly subsidizes the colleges and also provides loans and grants to students attending these institutions.

Thus, the taxpayer gives colleges money and then turns around and gives money to students so they can afford to attend those colleges. It essentially enables colleges to inflate their costs and enables students not to be concerned about those inflated costs when choosing which public college to attend.

That's a big reason why attending public colleges today is becoming less of a bargain compared to private colleges than it used to be. Tuition Continues to Climb at Public Colleges has this to say about tuition hikes:

"Tuition and fees at the nation's four-year colleges climbed sharply again this year, though rising federal grants and loans took some of the sting out of the increases.

At four-year public colleges, in-state tuition and fees for the school year beginning this fall rose by an average of 8.3% from the previous year, to $8,244, amid declining support from state legislatures, according to annual reports from the College Board, a nonprofit that conducts collegiate research. The total cost including room and board rose 6% to $17,131,

Tuition and Fees

Average published tuition and fees for undergraduates.

Sector	2011-12 costs	2010-11 costs	$ Change	% Change
Public Two-Year In-State	$2,963	$2,727	$236	8.7%
Public Four-Year In-State	$8,244	$7,613	$631	8.3%
Public Four-Year Out-of-State	$20,770	$19,648	$1,122	5.7%
Private Nonprofit Four-Year	$28,500	$27,265	$1,235	4.5%
For-Profit	$14,487	$14,040	$447	3.2%

Source: The College Board

At private colleges, tuition and fees rose by an average of 4.5% to $28,500, as total costs including room and board jumped 4.4% to $38,589.

The markedly quicker rate of increase at public schools continues a decade-long trend that has narrowed the price gap between the two. This year, the average tuition-and-fees price of a four-year public college is 29% of the private-college price, compared with 22% a decade ago.

"While the importance of a college degree has never been greater, its rapidly rising price is an overwhelming obstacle to many students and families," said Gaston Caperton, College Board president.

Yet the actual price that students are paying is often much lower than the sticker price, thanks to big jumps in federal Pell Grants and veterans benefits, combined with the 2009 implementation of the American Opportunity Tax Credit. While the published rates of public-college tuition and fees rose by a total of about $1,800 over the past five years, the actual increase paid by students after accounting for grants and federal tax benefits was only $170, according to the College Board.

In the 2009-10 school year, average grant aid jumped 20% from the previous year for the average full-time undergraduate. During the three years ended last spring, grant aid and federal loans per student each separately jumped by about 30% in inflation-adjusted dollars, the Board said."

In another article titled President to Ease Student-Loan Burden for Low-Income Graduates, Melody Barnes, Mr. Obama's spokesperson, makes it clear that the president is reacting to pressure from the Occupy Wall Street movement:

"The lower caps of the new program were scheduled to go into effect for new borrowers in 2014, but, Ms. Barnes said, “because we know the frustration of crushing loan burdens, we have to act now.”

Ms. Barnes noted that over the last month, more than 30,000 people had signed a petition on the We the People platform at whitehouse.gov, asking for relief on student debt.

“It’s a message heard loud and clear,” she said.

The high cost of college and the growing debt burden of student loans have become increasingly potent political issues in recent years, high on the agenda of Occupy Wall Street and related protests across the country.

And the annual College Board reports on college prices and student aid, to be released Wednesday, make it clear that with the weak economy, the college affordability problem is getting worse."

Later the article says this:

"This is the fifth consecutive year in which the public universities that serve most students raised their tuition at a faster rate than the far more expensive private universities. And over the last three decades, the report found, the average tuition at four-year state universities almost quadrupled."

And then this:

"Only about a third of full-time students pay for college without some grant aid, whether in the form of a federal Pell grant, a state scholarship or aid from the college itself.

Net tuition —the amount a student actually pays, after grants and tax savings— is often sharply lower than the published price. In fact, the College Board report said, net tuition at community colleges was low enough that, when grants and tax savings are taken into account, the average student can pay nothing out of pocket and have $810 left over for books and living expenses.

This year, the report said, full-time students at state universities receive an average of about $5,750 in grants and tax benefits, while students at private nonprofit colleges get about $15,530 and those at community colleges about $3,770."

This seems like an interconnected scheme to keep college costs rising while hitting the taxpayers with added costs. By so doing, colleges can continue to incur rising costs and students can deflect these costs by receiving grants, loans and such.

Someday, however, somebody has to pay up, and I guess that's the taxpayer, as always.

Thanks. Bob.

Raising Taxes on the Top 1% of Earners ... Why Stop There? Politics or Public Service??

We hear much these days from President Obama about the rich not paying their fair share of taxes. That means he wants to tax the top 1% of earners at rates higher than presently, in other words.

Of course, under the standard that every little bit helps, I see his point. But if he wants to address our many financial ills through taxation, he'll have to go far beyond the top 1%. How about the top 10%, top 25% or even the top 50%? In other words, why stop at 1%?

Probably because the president will start losing votes as he goes beyond the very top income earners. At least that's my guess. But why tax if it's not going to solve any of our financial problems by doing so? Just for the punishment aspect? And why single out for punishment those who earn lots of money? Anything wrong with that in America? I thought that was part of the American dream.

But rather than debate the motives of President Obama or the merits of even more income tax progressivism, let's address what would happen if taxes were raised now on the top 1% of earners. What would be done with the money, what would be the effect on our economy, and what would happen with respect to historically high budget deficits and debt levels?

What Tax Dollars Can't Buy discusses this issue in some detail. If the money were raised for the purpose of reducing income inequality, it wouldn't be a good thing to do. Here's the article's basic point:

" OVER the last 30 years, the U.S. economy has generated more large fortunes and more stress for the middle class. While the rich have grown extraordinarily rich, median wages have barely increased, the costs of health care and higher education have jumped, and socioeconomic mobility has lagged behind that of other developed nations. Americans have never begrudged the wealthy their success, as long as they had a chance to rise higher than their parents, and perhaps get rich themselves. But our era of diminished expectations is putting that in doubt.

From the drum circles of Zuccotti Park to the hustings of Barack Obama’s re-election push, a suddenly invigorated liberalism thinks that it has the answer to this angst: a renewed demand for higher taxes on America’s richest 1 percent. And if all you care about is reducing measured income inequality, then the Occupy Wall Streeters and their Democratic admirers have it right. Tax millionaires sufficiently and you’ll end up with a more equal society. The tallest poppies will be trimmed, and some of their income will find its way to someone’s else pocket."

To tax or not to tax, that isn't or shouldn't be the question. Instead let's first reform government to make our middle class stronger with additional opportunities for all members of an upwardly mobile society. If we did that, additional tax revenues would be forthcoming due to increased economic activity.

So here's one good way to raise tax revenues and create the society that best fits America:

"Rather, it should be a kind of small-government egalitarianism, which would seek to reform the government before we pour more money into it, along lines that encourage upward mobility and benefit the middle class. This would mean seeking a carefully means-tested welfare state, a less special interest-friendly tax code, and a public sector that worked for taxpayers and parents rather than the other way around."

In other words, let's agree on what are the right things to do so we don't end up doing more harm than good when we tax the citizenry and redistribute their hard earned tax dollars.

Unfortunately, that's not what happens today in our bloated public sector and generational wealth redistribution approach:

"But true social mobility and broadly shared prosperity are not so easily achieved. Remember that those tax dollars, once collected, would not be disbursed with perfect effectiveness to the most deserving members of the American middle class. Instead, they would be used to buy a little more time for our failing public institutions — postponing a reckoning with unsustainable pension commitments, delaying necessary reforms in our entitlement system and propping up an educational sector whose results don’t match the costs.

More spending in these areas won’t necessarily buy us more mobility. The public-sector workplace has become a kind of artificial Eden, whose fortunate inhabitants enjoy solid pay and 1950s-style job security and retirement benefits, all of it paid for by their less-fortunate private-sector peers. Some on the left have convinced themselves that this “success” can lay the foundation for a broader middle-class revival. But if a bloated public sector were the blueprint for a thriving middle-class society, then the whole world would be beating a path to Greece’s door.

Our entitlement system, meanwhile, is designed to redistribute wealth. But this redistribution doesn’t go from the idle rich to the working poor; it goes from young to old, working-age savings to retiree consumption, middle-class parents to empty-nest seniors. The Congressional Budget Office’s new report on income inequality points out that growing Medicare costs are part of the reason upper-income retirees receive a larger share of federal spending than they did 30 years ago, while working-age households with children receive “a much smaller and declining share of transfers.” Absent reforms, this mismatch will only grow more pronounced: by the 2030s, Medicare recipients will receive $3 in benefits for every dollar they paid in.

Then there’s the public education system, theoretically the nation’s most important socioeconomic equalizer. Yet even though government spending on K-to-12 education has more than doubled since the 1970s, test scores have flatlined and the United States has fallen behind its developed-world rivals. Meanwhile, federal spending on higher education has been undercut by steadily inflating tuitions, in what increasingly looks like an academic answer to the housing bubble. (If the Occupy Wall Street dream of student loan forgiveness were fulfilled, this cycle would probably just continue.)"

The summation goes like this:

"The story of the last three decades, in other words, is not the story of a benevolent government starved of funds by selfish rich people and fanatical Republicans. It’s a story of a public sector that has consistently done less with more, and a liberalism that has often defended the interests of narrow constituencies — public-employee unions, affluent seniors, the education bureaucracy — rather than the broader middle class."

My view is that the market works just fine to spread wealth around, including opportunities for a hard working upwardly mobile middle class. On the other hand, big brother government control, benevolence and wealth redistribution all stifle individual ingenuity and hard work, thus irreparably harming the middle class and the rest of society as well.

If we choose to take from the rich and give to the poor, that's one thing. In fact, that's often the decent thing to do.

But if we take from the young and give to the old, or take from the hard working private sector earners and give to government employees, that will only make us weaker and less of an equal opportunity society. That's not a happy thought.

Thanks. Bob.

American Toughness and the Hard Work Ahead before We Can Return to Peak Employment Levels

Long Road Ahead for Most American States lays out the unemployment forecast for U.S. states and when they are projected to return to their past employment peaks.

Here's the forecast:

"These analysts have projected when each state will likely return to its past peak employment, as shown in the map below:

Source: IHS Global Insight.

Across the country, there are 4.7 percent fewer jobs today than there were when the recession began in December 2007. And remember that the United States population has grown in the last five years, so if the economy were healthy there would be more jobs today than there were then. This analysis only models when we’ll be back to square one."

And then there's the developing European story. They are in even worse shape than we are, both currently and going forward as well.

So are all countries in the developed world prepared to do the hard work to get our debt and deficits under control so economic growth can resume strongly, thereby securing our future prosperity? In that regard, while I believe that we Americans will get the job done, I'm not that confident about Europe's prospects.

New Austerity Incites a Bitterness the Postwar Generation Did Without says this about the outlook and challenge for Europeans:

"As it confronts its massive debt problem, though, and a new austerity threatens to become its default setting, Europe seems to have lost sight of the fact that it has been there before; that the baby boom generation found its roots in postwar hardship; that, as Mr. Judt (historian) suggested, the huge affluence of more recent years could barely have been imagined as people struggled to shake off the gloom of war.

The difference now is that the taste for wealth, the aspiration to automatic betterment and the assumption of ever-expanding horizons have become universal, cemented by the growth of the European Union and the adoption of a single currency, the euro, that has spread a leavening of prosperity among the 17 countries in the union that use it.

In Mr. Judt’s early days, after the grinding deprivation of a world war, austerity trumped global conflict. Now, the point of departure is prosperity, a fool’s paradise in which Europeans came to see affluence as a state of being, a birthright.

As politicians slowly and reluctantly confront the reality that the bounty days are over, what makes the challenge so explosive is not simply a question of economics; it is one of expectations and cultural divides."

Of course, many of the same arguments about the mindset of the Europeans can be made about us, too. That said, Americans have always answered the call. We did it in World Wars I and II, and we did it during the Cold War period as well.

Now we're being called upon again to get another difficult job done in order to pass on to future generations what prior generations gave to us.

So it's gut check time around the world and a good time to be betting on Americans to rise to the challenge.

All that said, this fix will take a whole lot of hard work, time and cooperation among the citizenry.

Throughout history that's been our country's response whenever times were tough, and the chips were down. It will be that way this time, too.

Thanks. Bob.

Government Can't Get Anything Done Because It's Designed That Way

After the failure of the congressional supercommittee to decide how to reduce our nation's deficits and debts, or take meaningful steps to foster economic growth and create much needed jobs, the obvious question is "Why can't government get anything done?".

Americans all know that we need to change our ways with respect to how we manage our nation's fiscal affairs. We've lived beyond our means for far too long now, and we don't want to end up in the same boat with most European countries. More importantly, we don't want to fail future generations of Americans who are counting on us to do the right thing.

Nevertheless, government can't seem to get anything done that will put us on the real road to economic recovery, stability, growth and a prosperous future for our children and grandchildren. So why did Congress fail yet again, and why does this happen all too regularly?

Here's another way of putting the question. Why does Congress as a whole have a pitiful 9% approval rating and still perform, or fail to perform, as it does? Better yet, why do we keep re-electing the same people over and over and over again? Is there not a price for failure?

Partisanship Set Deficit Panel on Path to Failure answers the foregoing questions in lucid detail.

It argues that the 12-member congressional supercommittee's failure to act in the best interests of the American people was a logical, albeit sickening, response to the incentives and rewards which almost all congressmen share:

"Is there any political price to be paid for failure? . . . . There are many reasons for the partisanship that produces this dysfunction, but the most basic one is this: Voters have yet to show that they will punish lawmakers for failing to come together to get something done.

To the contrary, the rewards today tend to go to politicians who remain intransigent, while the pain is meted out to those who attempt to compromise with the other party. Members of Congress are only human, and they respond logically to the incentives and rewards they see before them.

Until that changes, dysfunction is likely to persist. Voters proclaim they hate the hyperpartisanship in Congress—congressional job approval hovers near 10%—yet the same voters regularly reward that hyper-partisanship by re-electing those responsible for it, while occasionally tossing out those who dare to cross party lines to seek compromise. What is the incentive for lawmakers to break the pattern?"

It's even worse than that. Our incumbent legislators actually pick the voters who will elect them by selectively drawing the specific voting districts in which voters will elect their congressional representatives. That's why we have a tendency to hate congress as a whole while loving our own individual congressman. That's the way the system works.

Read on.

"The explanation for this seemingly counterintuitive dynamic starts with how Congress is put together in the first place—that is, the process by which congressional districts are drawn up, a ritual now under way anew all around the country. Every 10 years, after the Census, state legislatures redraw their state's allotment of the 435 districts in the House of Representatives, thereby composing the political DNA of Congress.

Thanks to computerized tracking of voters block-by-block, this process of redistricting has become an ever more precise exercise in drawing up partisan districts in which voters are segregated into colonies that are safe for Republicans or safe for Democrats, creating a big incentive for lawmakers to stay on a partisan track. In a sense, political leaders now choose their voters rather than the other way around . . . ."

The 'safely partisan' system, albeit a screwed up one at that, works as intended. Here's an example from California:

"If you want to know how effectively this system works to create safely partisan districts, look at the state of California. In the last four election cycles, California, with its 53 House districts that are up for re-election every two years, has held 212 elections for House seats. In all those elections, there has been exactly one case in which a seat changed party hands.

That means the Democratic and Republican parties held onto their seats 99.5% of the time. Usually the same representative was simply re-elected, while other times faces changed but party affiliation remained the same. In one case, a California lawmaker was sent to jail for taking bribes, but his party held the seat anyway.

As that suggests, House members increasingly are elected not by appealing to a cross-section of voters, but rather by appealing to a carefully selected group of voters from their own party. Then, the way to stay in office is to cater to partisans at the base of your own party, rather than by angering those partisans by attempting to compromise with the other side.

So while control of the House has changed hands twice in the last six years, that's because a small subset of House seats—perhaps 15% of the 435—are truly competitive swing districts that move between the parties. In the majority of districts, members live on by staying safely in their partisan foxholes, voting the party line and never risking engagement with the other side."

That's the system, and that's why government can't get anything done.

We elect people who are incentivized and rewarded not to compromise. They also know not to try to make things better for America as a whole. They simply are there to represent the parochial and partisan voters who sent them there and will send them home if they don't do what's expected.

But that's the House. What about the Senate and the President? The same logic applies. Senators represent red or blue states because they know which base elected them. They know who not to cross and who doesn't count. Same with the President.

Unfortunately, every politician tries overly hard to please his base. By so doing, his reward is that he wins elections and re-elections as well.

The big picture? That isn't often seen. It simply doesn't matter to the politician.

Accordingly, he doesn't mind making enemies of those people who didn't or otherwise aren't likely to vote for him. They're pretty much a waste of time politically.

So our government can't get anything done because its partisan members have designed it that way. That's my take.

Thanks. Bob.

Happy Thanksgiving

Two WSJ editorials are repeated each year on the Wednesday preceding Thanksgiving Day.

They always remind me of just what it means to be an American. Our predecessors left us a wonderful country, and now it's our turn to pass this on to future generations.

The first editorial recounts the Pilgrims' voyage to America in 1620.

Titled The Desolate Wilderness, it poignantly lays out what awaited the Pilgrims upon landing at Plymouth:

"Being now passed the vast ocean, and a sea of troubles before them in expectations, they had now no friends to welcome them, no inns to entertain or refresh them, no houses, or much less towns, to repair unto to seek for succour; and for the season it was winter, and they that know the winters of the country know them to be sharp and violent, subject to cruel and fierce storms, dangerous to travel to known places, much more to search unknown coasts.

Besides, what could they see but a hideous and desolate wilderness, full of wilde beasts and wilde men? and what multitudes of them there were, they then knew not: for which way soever they turned their eyes (save upward to Heaven) they could have but little solace or content in respect of any outward object; for summer being ended, all things stand in appearance with a weatherbeaten face, and the whole country, full of woods and thickets, represented a wild and savage hew.

If they looked behind them, there was a mighty ocean which they had passed, and was now as a main bar or gulph to separate them from all the civil parts of the world."

Thus began what we've come to know as our American society. We truly are a nation founded on really big ideas including, but not limited to, individual risk taking, hard work and basic human rights and freedoms.

The second editorial, titled And the Fair Land, has been repeated for at least the past fifty years. Here's the bottom line, "And a traveler cannot but be struck on his journey {through America} by the thought that this country, one day, can be even greater. America, though many know it not, is one of the great underdeveloped countries of the world; what it reaches for exceeds by far what it has grasped."

In other words, our best days lie ahead, as always. Our many current travails are transitory, and American Exceptionalism is very much the real thing.

Taken together, the editorials advise that rather than having reason to be discouraged about today's situation, we instead have every reason to be optimistic about America's future.

What's the secret to our success? Well, it's we the people. The free, self governing people.

An excerpt from And the Fair Land reads as follows:

"How can they {Americans} turn from melancholy when at home they see young arrayed against old, black against white, neighbor against neighbor, so that they stand in peril of social discord. Or not despair when they see that the cities and countryside are in need of repair, yet find themselves threatened by scarcities of the resources that sustain their way of life. Or when, in the face of these challenges, they turn for leadership to men in high places—only to find those men as frail as any others.

So sometimes the {American} traveler is asked whence will come their succor. What is to preserve their abundance, or even their civility? How can they pass on to their children a nation as strong and free as the one they inherited from their forefathers? How is their country to endure these cruel storms that beset it from without and from within?

Of course the stranger cannot quiet their spirits. For it is true that everywhere men turn their eyes today much of the world has a truly wild and savage hue. No man, if he be truthful, can say that the specter of war is banished. Nor can he say that when men or communities are put upon their own resources they are sure of solace; nor be sure that men of diverse kinds and diverse views can live peaceably together in a time of troubles.

But we can all remind ourselves that the richness of this country was not born in the resources of the earth, though they be plentiful, but in the men that took its measure. For that reminder is everywhere—in the cities, towns, farms, roads, factories, homes, hospitals, schools that spread everywhere over that wilderness.

We can remind ourselves that for all our social discord we yet remain the longest enduring society of free men governing themselves without benefit of kings or dictators. Being so, we are the marvel and the mystery of the world, for that enduring liberty is no less a blessing than the abundance of the earth.

And we might remind ourselves also, that if those men setting out from Delftshaven had been daunted by the troubles they saw around them, then we could not this autumn be thankful for a fair land."

Enough said. Enjoy the turkey and the fellowship.

Happy Thanksgiving. Bob.

Congressional Supercommittee Fails ... What's the Outlook?

To nobody's surprise, our politicians have failed again to address the burdensome financial issues related to deficits, debt and slow economic growth facing our nation.

Of course, without substantial future economic growth, the current high unemployment conditions will remain a big problem well into the future, too.

Apparently the Republicans want to protect the "Bush tax cuts" and the Democrats want to protect entitlements more than either side wants to address our nation's financial mess in a meaningful and adult manner. As this charade continues, we're looking more like many European countries--dysfunctional and ungovernable.

Simply put, any solution will necessitate (1) increased private sector growth along with (2) a combination of increased tax revenues and reduced entitlement spending, accompanied by a focus on less government spending, waste and regulation.

The so-called Bush tax cuts were first introduced in 2001 during a much different time when budget surpluses, not deficits, were projected far into the future. In accordance with the budget gimmickry of our federal government, they were 'slated' to expire at the end of 2010. These cuts included both taxes on the affluent as well as middle class earners, too. In round numbers, 80% of the reduced tax benefit went to middle class earners and 20% went to the rich folks.

Of course, when expiration time came, extension time began. So did the political games.

As with popular entitlement benefit programs, politicians have an easier time reducing taxes than increasing them. It's more 'voter friendly' for certain.

So now the president and his Democrat allies 'only' want to increase taxes on the bad guys or 1% of the voters--er--earners, and not on those voters-er-earners who received 80% of the benefit from the Bush tax cuts.

The president and his cronies apparently like most of what Bush did--at least 80% thereof. Unmistakably, this debate isn't about economics. It's about votes.

With respect to entitlements for the elderly, current programs for medicare and medicaid nursing home benefits clearly aren't sustainable as currently constituted. Neither is social security.

In fact, U.S. health care costs escalate each year at a rate much faster than general costs of living increase. Our fee for services third party payer approach is way too costly and therefore unsustainable as well. Besides, the demographics are working against us at the same time. We're getting older as a society.

In this regard, the enactment or even outright repeal of Obamacare won't change any of those simple facts. The costs of health care in America aren't being matched by payments into the system. We're running on lots of borrowed money, and it's the same with medicare, medicaid and social security, if viewed honestly and objectively.

In sum, we couldn't afford our growing health care burden before Obamacare was enacted, and that legislation, whether upheld or overruled by the Supreme Court next year, will do nothing to bring down costs.

So there we have it. If we want to maintain all the benefits we've promised ourselves, taxes will have to be raised materially and applied to a far greater percentage of the American population than the so-called millionaires and billionaires. Unless we want to redefine millionaires as people who earn greater than $50,000 annually.

And if we want to maintain tax rates for those $50,000 and above earners, we'll have to dramatically curtail benefits for social security, medicare, medicaid and even Obamacare.

A combination of more tax dollars and fewer entitlements will happen, in other words. The only question is when and by how much.

We'll need to address many other spending and revenue issues as well, and we should. But that won't change the simple fact that taxes for the many and entitlements for the elderly are have-to-do items.

Four Nations, Four Lessons was written by distinguished economist Greg Mankiw and compares our American situation with France (big government/slow growth), Greece (game over), Japan (deflation) and Zimbabwe (hyperinflation).

Importantly, Mankiw says this about our available choices and outlook:

"The more we rely on deficit spending to keep the economy afloat, the more we risk the kind of sovereign debt crisis we have witnessed in Greece over the past year. The Standard & Poor’s downgrade of United States debt over the summer is a portent of what could lie ahead. In the long run, we have to pay our debts — or face dire consequences.

To be sure, the bond market doesn’t seem particularly worried about the solvency of the federal government. It is still willing to lend to the United States at low rates of interest. But the same thing was true of Greece four years ago. Once the bond market starts changing its mind, the verdict can be swift, and can lead to a vicious circle of rising interest rates, increasing debt service and budget deficits, and falling confidence.

Bond markets are now giving the United States the benefit of the doubt, partly because other nations look even riskier, and partly in the belief that we will, in time, get our fiscal house in order. The big political question is how.

The nation faces a fundamental decision about priorities. To maintain current levels of taxation, we will need to substantially reduce spending on the social safety net, including Social Security, Medicare, Medicaid and the new health care program sometimes called Obamacare. Alternatively, we can preserve the current social safety net and raise taxes substantially to pay for it. Or we may choose a combination of spending cuts and tax increases. This brings us to the last of our cautionary tales: France.

Here are two facts about the French economy. First, gross domestic product per capita in France is 29 percent less than it is in the United States, in large part because the French work many fewer hours over their lifetimes than Americans do. Second, the French are taxed more than Americans. In 2009, taxes were 24 percent of G.D.P. in the United States but 42 percent in France."

France already resides in the land of big government--no growth--high taxation--lower living standards. Without a change in direction sometime soon, that's where the U.S. is headed as well.

So what exactly does the future hold if we choose to work and earn less, maintain entitlement programs and increase the social safety net continuously?

To me that kind of future looks like a permanently much lower standard of living for one and all. Including future generations.

We'll get to be like France, in other words. Let's hope not.

Thanks. Bob.

That Day 48 years ago

November 22, 1963 was the occasion of President Kennedy's assassination by Lee Harvey Oswald. Texas Governor John Connally, riding in the same parade car (a convertible) with the president, was seriously wounded.

Two days later nightclub owner Jack Ruby killed Oswald as Oswald was being transferred to Dallas County jail from police headquarters. It happened on live TV.

When I think back to those tumultuous few days, including the swearing in of President Johnson on Air Force One and the subsequent Kennedy funeral and burial, lots of memories return.

The following are a few of the more momentous ones that occurred during the next ten years.

After Kennedy's death, Great Society legislative programs were implemented, and the War on Poverty was begun. Civil rights marches were many. Later in the decade came Martin Luther King's assassination in 1968 followed by Bobby Kennedy's in 1969.

During the 1960 presidential race, Republican Vice President Richard Nixon had been defeated by Democrat John F. Kennedy, the first Catholic to run for president. Nixon next lost the gubernatorial race in California in 1962, apparently ending his political career. However, he then made a stunning political comeback and was elected president in 1968.

Upon election in 1968, Nixon succeeded Johnson, who had decided not to run for re-election. The country was in turmoil internationally as a result of the Vietnam War and domestically due to the various civil rights movements. Demonstrations, protests and even riots were ongoing.

When I take note of Occupy Wall Street and similar protests today, I think back to that totally different era of the 60s and 70s.

For one thing, I'm reminded of the Kent State killings of four college students by Ohio National Guard members on May 4, 1970. {Many believe that those killings led directly to the Watergate scandal a few years later, leading to Nixon's eventual resignation from the presidency on August 9, 1974.}

On August 15, 1971, the U.S. unilaterally went off the gold standard. President Nixon also imposed a wage and price freeze throughout the country in an unsuccessful effort to deal with our inflation issues.

After our table tennis team was invited by Chairman Mao to play exhibition matches in China in 1971, next came Nixon's remarkable China trip in 1972 and the opening of relations between our two countries.

Largely as a result of dollar weakening due to going off the gold standard (and the 1973 Arab-Israeli war, too), OPEC quadrupled oil prices from $3 to $12 in 1973-74, thereby exacerbating our inflation problems.

Nixon's Vice President Spiro Agnew, faced with bribery charges stemming from his days in Maryland government, resigned in late 1973. Gerald Ford was appointed Vice President.

When Nixon resigned the presidency in 1974, Gerald Ford became president and Nelson Rockefeller became Vice President. Neither had been elected to their offices.

Lots of other things come to mind as well. But you get the picture. Many big things happened during those ten years following November 22, 1963. Lots of small things, too.

Yet we endured and kept on keeping on. That's what Americans have always done.

Perhaps the most important takeaway is that all this makes me proud of our great country and how we are able to endure whatever comes our way and then become an even better society as a result.

Today is such a time for getting better. It's not a time for being discouraged.

Disappointed perhaps, but not discouraged. Americans don't get discouraged.

We always have too much work to do to set the table for future generations.

Thanks. Bob.

U.S. -- Europe -- China -- Who Has The Best Future?

We now hear all the time about the best days being behind America.

Poll after poll shows that Americans are pessimistic about the bleak future we'll leave to coming generations.

That China will overtake us soon, if it hasn't already. And so on.

In the 1980s, the experts declared game over for the U.S. -- Japan was the proclaimed winner. After Japan faltered, next came a new winner -- Mexico. Now it's China.

But is it really?

Whose Economy Has It Worst?, co-written by Ian Bremmer and Nouriel Roubini, provides reason for optimism about America's economic future.

The current uncertain situation and future outlook for each of the European, Chinese and U.S. economies are described as follows:

"It's no wonder that global markets are so jittery. The world's three largest economies can't continue along their current paths, and everybody knows it. Investors watch nervously for signs that China is headed toward a hard landing, that America will sink back into recession, and that the euro zone will simply implode.

In all three cases, kicking the can down the road has staved off disaster so far, but the cans are getting bigger and heavier. Which economy will be the first to stumble on its problems?"

Unsurprisingly, of the world's three largest economies, Europe is likely to be the first to fall by the competitive wayside. Its countries have too much culturally embedded socialism, several have too few prospects for sustained economic growth relative to sovereign debt levels, and throughout the continent there exists too little cohesive or coherent structural governance capability to deal effectively with the sovereigns' many problems.

Next to drop out of the race will be China. This may be surprising to some, but the reasons for China's second place finish are logical and threefold. Its dangerously heavy dependence on exports for growth, its emphasis on state and private fixed investment spending instead of focusing on individual domestic consumption, along with the communist party's state-directed model of capitalism, all bode ill for China's longer term economic future.

The article says this:

"China's growth remains dangerously dependent on exports to Europe, America and Japan.

To ensure long-term economic expansion (and political stability), Beijing must figure out a way to encourage Chinese consumers to buy more of the products that local manufacturers make. This will demand a massive transfer of wealth from the state and China's state-owned companies to Chinese households.

But Beijing is moving in the opposite direction. The leadership responded to Western market turmoil not by boosting consumption but by increasing state and private spending on fixed investment, which now accounts for nearly half of China's growth. The result has been an explosion in residential and commercial real estate, more state spending on infrastructure and more cheap loans from state-owned banks to state-owned enterprises.

Indeed, a key obstacle to reform is that China remains so heavily invested in its state-managed model of capitalism. Of the 42 Chinese companies listed in the 2010 edition of the Fortune 500, 39 were state-owned enterprises, and three quarters of China's 100 largest publicly traded companies are government controlled. Party officials with a stake in the success of state-owned enterprises have amassed considerable power within the leadership, and they ferociously resist efforts to transfer away their wealth to private enterprises and ordinary citizens.

China has the cash and foreign reserves to postpone a crisis. But growth is slowing, financial stresses are rising, and there is good reason to fear that China's days of can-kicking are numbered as well."

That leaves the U.S. as the winner. Numero uno. But why us?

Briefly here's what the authors say about the U.S., including the demographic advantage associated with a relatively young workforce:

"Which leaves the U.S. No one can restore confidence in America's long-term fiscal health without a credible plan to cut spending on entitlements and defense while raising revenues, which are now at a 60-year low as a share of GDP. But don't expect any immediate solutions from Washington. The campaign season will only exacerbate petty partisanship and political gridlock, which means that the structural problems of the U.S. economy are likely to persist.

But the longer-term future appears much brighter for the U.S. than for either Europe or China. America is still the leader in the kind of cutting-edge technology that expands a nation's long-term economic potential, from renewable energy and medical devices to nanotechnology and cloud computing. Over time, these advantages will yield more robust economic growth.

The U.S. also has a demographic advantage. In Europe, declining birthrates and rising sentiment against immigration point toward a population that will shrink by as much as 100 million people by 2050. In China, thanks in part to its one-child policy, the working population has already begun to contract. By 2030, nearly 250 million Chinese will have passed the age of 65, and providing them with pensions and health care will be very costly.

Despite debate over illegal immigration, the U.S. population will likely rise from 310 million to about 420 million by midcentury. . . .

Finally, despite the rising exasperation of the American public, the U.S. is significantly more likely than Europe or China to quit kicking the can down the road. Nothing much will change during the election year, but 2013 offers a chance for real fiscal reform."

This all makes sense to me. In the end, we will do the right thing, and that means that the free market entrepreneurial approach will win the global race again. I can't wait for 2013 to get here.

In the meantime, let's hold our noses and hope for the best while planning for the worst in 2012.

Thanks. Bob.

Proposed Balanced Budget Amendments Don't Mean Much ... Accounting Methods Do

We hear lots of noise, especially from House Speaker Boehner and the Republicans, about the importance of a balanced budget.

All other things being equal, that's surely a good idea. However, all other things aren't equal.

In the first place, a typical budget lasts only one year. What about all those years beyond the initial twelve month budgeting period? And what would be the enforcement mechanism? The Congress?

In other words, what about instead accounting properly for all those future promises and underfunded liabilities that won't come due next year but will come due in the years thereafter? And then addressing each year by budgeting annual outlays in a straightforward manner, including the need to fully fund those future liabilities?

In other words, America has made financial commitments that will last longer than the next twelve months or even twelve years, for that matter. Why don't we admit that simple fact in our government budgeting and accounting records and projections? That would be the honest thing to do.

But setting aside the future liabilities and their honest funding for now, the role of tax increases, if any, to achieve a balanced budget is also a fundamental item of importance in our quest to restore fiscal sanity.

Accordingly, achieving a balanced budget by tax increases will impact future economic growth in a negative and different way than spending decreases will.

Again, it's the short versus long term political issue coming to the fore again.

Let's take the high road and look at the long term issue.

In tongue and cheek fashion, an actuary is often described as an accountant without a personality. What actuaries actually do, however, is an essential part of sound financial management. They assess the financial impact of future risk and uncertainty and its impact on future taxpayers.

We'll use a simple case of social security as an example, although medicare, medicaid, FHA loan guarantees, postal service operations, GM loans, Amtrak and other similar examples would apply as well.

If the government promises person 'A' of age 25 a $200 weekly retirement benefit upon completing his working career, reaching age 66 and lasting until his death, someone will have to come up with the necessary money to pay that retirement benefit commencing in 2052.

Common sense says that sufficient money should be put aside during A's working life in order to make sure that the full retirement benefit can be paid.

Now expand A to include the entire U.S. work force of considerably more than one hundred million people. And include the money required in order to meet the needs of medicare promises and probable nursing home care costs and benefits, too.

Next factor in that some of those one hundred million plus persons will stop working or die before reaching age 66, some will live until 70-80-90, some until 100, some will get very sick early, some will remain healthy until the end, some will live out their lives in nursing homes, some will earn more than others during their working careers, some will have their spousal benefits kick in because their spouse outlives them, some won't--and so on.

Actuaries take all these possibilities into account, including future inflation estimates and assumed investment rates of return, and use these estimates to predict the eventual cost associated with these future promised benefits.

Of course, actuaries don't pay the benefits. Nor do they invest the money contributed in order for the benefits to be paid. Workers, taxpayers and investment managers do that.

In private sector pension plans, money received as contributions from the company or worker is invested during A's remaining forty one working years in order to pay in full the promised benefits upon A's retirement.

In contrast, the government's accounting doesn't legitimately acknowledge, let alone fund, these future liabilities using its misleading cash accounting methodology.

Thus, no tax dollars are raised for social security investment purposes. None of A's individual contributions are invested either. Those payments obligations for A are left to future taxpayers, and that's unfair to all concerned.

Accordingly, my recommendation would be for Speaker Boehner to introduce an accounting and funding methodology which is truthful and complete.

Then if the Republicans and Democrats want to balance the budget while funding the promised future benefits at the same time, that would be nice, too.

But let's do first things first. Tell us how much we owe and must pay each year in order to achieve both a balanced annual budget and well funded benefit plans for the future.

Then we can decide about the proper level of taxes, benefits, contributions and such. But not until then.

The same longer term actuarial process should be followed in determining how to pay for future medical costs, nursing home costs, Amtrak losses, postal service deficits and defaults on home loan guarantees from FHA, Fannie and Freddie, as examples.

The common thread is that the cost of the future promised payment needs to recognized when the promise is made, even though the payment won't occur until later.

To repeat, unlike cash accounting, accrual accounting sets up the liability when it's known and doesn't wait until the cash payment is made.

The Balanced-Budget Backfire discusses the phoniness surrounding the Republicans' latest attempt to pass a balanced budget amendment in the House.

It references giving politicians an excuse to raise taxes in order to balance the budget:

"As self-defeating sideshows go, few compare to the Republican obsession with a balanced-budget amendment. And here we go again.

As early as today, the House GOP plans to begin debate on a balanced-budget amendment to the Constitution, a vote Democrats agreed to as part of the August debt-ceiling deal. But, lo, they will not debate an amendment that would require a two-thirds supermajority to raise taxes and cap spending eventually at 18% of GDP. . . .

Instead, House Speaker John Boehner plans to offer a vanilla amendment that merely calls for a balanced budget, with no spending limitation or supermajority tax requirements. . . .

And even if it did become the law of the land, the amendment could easily become an engine for tax increases, as it so often has in the 50 states. Under Mr. Boehner's amendment, spending could rise to 25% or 30% or more of GDP, so long as the budget is balanced. This is a recipe for politicians to tell voters that taxes must go up because the Constitution made them do it."

If the politicians want to do something truly meaningful on behalf of taxpayers, they can simply adopt the accrual method of accounting in place of the current cash method.

In other words, we should tell the full and complete truth. Promising a benefit to be paid some years from now has a real present cost associated with it. It's not free, and it must not remain invisible.

But don't count on it happening anytime soon. The politicians wouldn't feel anything but pain if the accrual method were adopted. How sad.

Thanks. Bob.

Our Government's Political Leadership ... In Absentia

Despite last summer's lousy performance by Congress and the president, the newly appointed so-called congressional super committee now appears ready to fail again to put our financial house in order.

Having a committee of twelve instead of the Congress as a whole address the debt and deficit issues facing our nation is quite similar to the Greek and Italian governments selecting 'technocrats' to deal with their budgetary and fiscal issues. The politicians continue to punt when they can.

Politicians of all sizes and shapes and in all places are seemingly unable or unwilling to act on their own or in the open concerning solutions to the fundamental worldwide issues of national deficits and debt levels.

They just don't want to take the 'political risk' of upsetting their constituents by taking action themselves. As a result, they designate groups to meet secretly or select non-political technocrats to somehow remedy the problems created by the elected officials.

Doesn't sound much like self government in a free and open society, does it?

As with our 12-member super committee, the new technocratic government leaders of Greece and Italy are set up to take the blame if they're not successful. On the other hand, the rest of the politicians will be center stage to accept the credit if the committee achieves success.

This government charade could be written off as nothing more than silly political gamesmanship if it weren't so serious. What's at stake?

In CEOs Get Warnings About 2012, the societal threat was put directly:

"Just how likely is U.S. business to get whipsawed by troubles in the year ahead?

"If you haven't thrown up yet, you're getting ready to," Erskine Bowles, former co-chair of the national fiscal responsibility commission, told a group of CEOs in Washington this week. Efforts to cut the deficit are falling short, he said. Congress is in seizure. Calamity beckons.

We've got to spend our money more wisely, just like you guys do. We have this treaty with Taiwan that we'll protect Taiwan if they're invaded by the Chinese. There's only one problem with that: We've got to borrow the money from China to do it!

His shtick brought the house down, but there was no mistaking the nervous edge to the laughter."

Later the article points out how much Asian consumer spending will increase by 2030 compared to that in North America and other areas:

"{Click hereinabove on the article itself and then click again on the chart for easier reading.}

As the chart reveals, North American consumer spending is projected to remain flat from 2009 to 2030 at $5.5 trillion and $5.6 trillion, respectively.

In Europe spending is expected to increase from $8.1 trillion to $11.1 trillion.

The biggie, however, is that Asian consumer spending should grow from $4.9 trillion in 2009 (slightly less than North America) to more than six times that level, or $32.9 trillion, by 2030.

Said another way, North America and Asia spent comparably in 2009. By 2030, Asian consumer spending will be six times greater than North American levels. Of course, growth in consumer spending depends in large part on economic growth. That's a mouthful for what it portends about our future relative to China's.

Yes, the world is clearly undergoing tremendous change, and we need to prepare for the future. Maybe even try to tilt it in our favor by making the right decisions now.

This all means that financially we must not allow ourselves to become weak to the point that China achieves military superiority as a result of U.S. profligate spending on big government and elderly entitlements at the expense of our national security.

When we look at things clearly, we see that the real debate isn't about a choice between Democrats protecting elderly entitlements and the Republicans defending low taxes for the wealthy. These are both phony issues when viewed honestly and openly.

Our choices today about tomorrow revolve around four basic factors:

(1) the total and per capita size of our future economic pie relative to China and other countries;

(2) the portion thereof to be set aside for national security and defense purposes;

(3) the portion thereof to be taken by government spending, elderly entitlements and national debt servicing payments (including interest and principal); and

(4) the remainder available for private sector investment and economic "pie" growth.

Number 4, of course, will lead us directly back to number 1. And so on.

According to the above referenced chart, in 2009 we accounted for ~25% of the world's consumer spending. The forecast for 2030 is that the North American consumer will represent ~10% of the total.

Let's hope that we don't lose our ability to remain free, open and an independent self governing society along the way.

The really sad part is the current absence of leadership within either political party. As should be evident to all, the U.S. has fundamental issues to address that will require informed choices by our fellow citizens about the future.

If the future U.S. economic pie is smaller or larger than otherwise, that will have very real consequences. Same with national security, size of government, elderly entitlements, deficits and debt, as well as the extent of entrepreneurial freedom, opportunity and the commitment to free market capitalism.

What a time for the pols to be AWOL! Oh well, the people will just have to carry on without them.

Maybe we'll even decide to get some new pols along the way that aren't afraid to deal with the real issues facing we the people. That would be nice, especially if we made clear that's what we wanted them to do.

Lead, follow or get out of the way, in other words.

Thanks. Bob.

FHA Loans Have Grown Immensely ... So Have Writeoffs ... Taxpayers Will Pay

The Federal Housing Authority (FHA) is running short on cash. That's due to its stepping up the past few years and underwriting four times as many home-related loans (from 6% in 2007 to 24% now) than it had historically.

As a result of these ballooning market share gains during an extremely deflationary period for home prices accompanied by high unemployment, many of these new loans are now delinquent or defaulting. Accordingly, the losses thereon have been much higher than assumed based on historical experience. Thus, it looks like FHA bailout time by the taxpayer is right around the corner.

The recent losses have been magnified by rapidly rising home-loan defaults and falling home prices. Together these two factors are generating big losses as foreclosed homes are sold. Not a happy situation, for sure.

And the worst part is that it's only one example of the enormous but largely hidden government costs incurred while unsuccessfully trying to rescue housing these past few years. But for now let's stick with the FHA story. We'll get to Fannie Mae and Freddie Mac later.

The FHA provided both cheap and readily available credit for willing home buyers. With as little as 3.5% required for a down payment for a government insured loan, home buyers flocked to FHA and loaded up during the 2007-2009 period of tremendous housing stress.

This combination of readily available and cheap money with minimal down payments enabled very bad practices by willing home owners and lenders. Now the taxpayer will be getting the bill.

Since defaults on an unusual number of the home loans made during 2007-2009 have been abnormally high, FHA losses are occurring in big numbers. That's because the agency, backed by taxpayers, is now obligated to step up and take the foreclosure losses. Unfortunately, there are likely to be many more losses ahead.

What's all this mean to taxpayers? More taxpayer sponsored bailouts, for one thing. For another, perhaps considerably more than $250 billion in total unbudgeted losses for relevant FHA, Fannie Mae and Freddie Mac taxpayer backed guarantees as well.

It's not a pretty situation. Nor is it readily transparent to taxpayers. But it's real.

Loan Backer's Cash Runs Low puts the current odds at one in two that the FHA will need a taxpayer bailout next year. Here's part of what an independent audit of the FHA's finances revealed:

"The Federal Housing Administration's cash reserves have fallen so low that there is a "close to 50%" chance the agency could run out of money and require a taxpayer bailout in the next year, according to the annual independent audit of the FHA's finances."

Of course, all the cash in the reserve fund hasn't yet been depleted, but it's in a most precarious position. If home prices continue their decline, which there's good reason to believe they will, then the fund shortly will run out of money and turn to the U.S. Treasury for more funding. How much will depend on what the future holds for home prices, loan defaults, unemployment conditions and the like.

And all things considered, the FHA is small potatoes. Its perhaps greater than $50 billion shortfall pales in comparison to the probable more than $200 billion in other "hidden costs" that the taxpayer is funding with respect to continuing real estate related losses at the two other government agencies, Fannie Mae and Freddie Mac.

How expensive all of this will get is an unknown at this time, but it's not getting much play either in the press or from government officials. The message; taxpayers, beware.

The Housing Lobby Strikes Again issues the following explanation and taxpayer warning:

"This FHA payoff to the housing lobby comes as the agency has had to publicly reveal the extent of its financial travails. In its annual report to Congress Tuesday, the Department of Housing and Urban Development and an independent auditor reported the FHA has a 0.24% capital reserve, well below its statutory 2% minimum for the third year running. Take $1.1 trillion of outstanding loan guarantees divided by $2.6 billion in capital reserves and you get a 422-to-1 leverage ratio, up from 33-to-1 in 2009. By this standard, Lehman Brothers was risk-averse.

So how much would a bailout cost, even before the proposed loan-limit increase? University of Pennsylvania real-estate finance professor Joseph Gyourko noted in a paper last week that FHA "systematically" underestimates future default risk, not least because it lends to borrowers with very little equity in their homes and uses rosy economic assumptions. Mr. Gyourko estimates that FHA is "materially underreserved by at least $50 billion, with the true figure likely higher."

These numbers are no surprise, given FHA's inherently risky business model. It provides 100%, explicitly taxpayer-backed mortgage loans to first-time, moderate- to low-income borrowers. Down payments can be as low as 3.5%, at a time when most private lenders are prudently insisting on 20% after the housing bust. In fiscal 2011, 85% of FHA loans had a down payment of less than 5%.

Like Fannie and Freddie, the housing collapse hit FHA hard. The difference is that the FHA has since become the political class's main substitute for the private subprime lending it once encouraged. As subprime lending vanished after the crash, FHA became the major lender for marginal borrowers. The share of new mortgages it insures has risen to 24% in July, the latest data available, from 6% in 2007."

Other somewhat off-the-taxpayer-radar examples that come to mind are Amtrak and the Postal Service, as well as the underfunded future liabilities associated with Medicare, Medicaid and Social Security promises. These and many other "hidden"(or at least not prominently mentioned) costs make our acknowledged fiscal deficits and the national debt much worse than typically disclosed.

Why must taxpayers continue to endure this ongoing mystery about costs and liabilities in the midst of a growing national financial catastrophe?

Thanks. Bob.

How Taxation Really Works

A Short Econ Quiz for the Super Committee nicely summarizes what additional taxes often do to discourage future economic growth.

Unlike earned income by individuals, the government doesn't earn money. It instead taxes those who earned it.

So when government elects to tax or not, the relevant decision is whether the best use of that money is for it to be redistributed by government officials or left to private individuals to do with as they please.

Through taxation government takes money or wealth from those individuals who have previously earned it and makes that money available to politicians to redistribute or spend as they choose. It is no longer available to those who earned it for spending or investment. In other words, different people can't spend the same money.

So the politicians' decision to tax or not tax specific earned income by individuals means government will spend or invest that money or it will be left to the individual person's choice as to how to spend or invest that money. It's another example of the OPM vs. MOM way of life in our society.

But let's let the editorial speak for itself. It does so in a straightforward manner:

"Suppose that year after year, you spend more than you earn. You are worried that you've become fiscally irresponsible. Which of the following could be paths back to fiscal sanity for your household?

A) Spend less.

B) Earn more.

C) Stop at the ATM more often so you'll have more cash in your pocket.

Do we all understand why C is a really bad answer? Good. Now let's try another one.

Suppose that year after year, your government spends more than it collects in taxes. You are worried that it's become fiscally irresponsible. Which of the following could be a path back to fiscal sanity for your government?

A) Spend less.

B) Collect more tax revenue.

Spending less—at least spending less on things you don't need—can be a first step toward sanity for a government just as it can for a household. So A is a pretty good answer. What about B?

As the deadline looms for the congressional super committee, there's seems to be a growing sense that tax revenue for the government is like income for the household. That's wrong. Raising taxes is nothing at all like earning income. Instead, it's a lot more like visiting the ATM.

The government's debt is the American people's debt. If we pay down that debt through higher taxes, we will, for the most part, pay those taxes by drawing down our savings. That's no more "responsible'' than drawing down those savings to finance overconsumption within the household.

If you buy a kayak you don't need and can't afford, you're unlikely to placate your spouse by saying "Don't worry, dear, I withdrew the money from our retirement account.'' If your government insists on maintaining social programs we don't need and can't afford, nobody should be placated by a congressional agreement to finance that program with money withdrawn from those same accounts.

Here's another way to say essentially the same thing: The government's chief asset—in fact, pretty much its only asset—is its ability to tax people, now and in the future. The taxpayers are the government's ATM. Make a withdrawal today, and there's less available tomorrow.

Now the ability to tax is a pretty huge asset and the government has not (yet!) come close to depleting it. In that sense, there's a lot of money in the bank. But no matter how much you've got in the bank, a policy of ever-increasing withdrawals is nothing at all like a decision to earn more income. It's important to get the analogy right. And it's clear from the blogs and the op-ed pages that not everybody gets this.

Instead, the notion persists that an extra trillion in federal spending can be converted from "irresponsible'' to "responsible'' as long as it's accompanied by an extra trillion in tax hikes. That's like saying a $500 haircut can be converted from "irresponsible'' to "responsible'' as long as you withdraw the $500 from your bank account. If the super committee loses sight of this fundamental truth, it is doomed to fail."

There's nothing left to add. The editorial said it all and said it all so well, too.

Thanks. Bob.

NBA Labor Dispute, Casual Fan's TV Viewing Choices and Pro Basketball's Future

N.B.A. Season in Peril as Players Reject Offer details the latest breakdown in negotiations between the owners and basketball players. Suffice it to say that lots of posturing continues on each side, and whether most of the regular season is played or not is in question. See also NBA Talks Collapse, Head to Court.

Meanwhile, the parties are making the most serious financial mistake of taking their all important TV advertising package and casual fan base for granted. As entertainers whose careers last but a few years, the players especially should know better than to engage in such a dangerous game at the season's outset.

With respect to the TV networks, the current NBA labor dispute provides an opportunity to save "early season" money while taking time to reconsider the cost-benefit aspects of possible alternative programming compared to the current NBA arrangement.

The really valuable network time for airing NBA games occurs during the summer playoffs when TV networks are able to introduce their upcoming fall programming to a strong and heavily male audience of NBA playoff watchers. To me that indicates the casual fan, at the margin, is worth much more to TV sponsors than is the diehard fan.

So who really cares about what's happening in the NBA right now, other than the players, owners, stadiums and diehard fans? Hardly anybody, and certainly not the casual fan.

As with any labor dispute involving a work stoppage, the pressure now will build steadily on the parties to that dispute. It's their money at risk, since the fight is occurring during what would have been the season's beginning weeks or months, as the case may be.

In other words, having a work stoppage at the beginning of the season is a costly time indeed to have a labor fight. In the meantime, the advertising dollars and salaries are burning and won't be forthcoming unless and until play commences, whenever that may be.

The Casual NBA Fan Is Half Out the Door deals with the financially all important casual, as opposed to diehard, fan. The article says this about the ongoing lockout's likely impact on the NBA's casual fan:

"And the more the lockout drags on, the more the casual fan slip, slip, slips away.

Last year's NBA season was seductive to casual fans. It began with the summer-long LeBron James free-agency drama, which was goofy and maddening but transformed into an engrossing spectacle as the Heat rolled into the NBA Finals. You had big seasons in fat markets like Chicago, Los Angeles and Boston, and stirring improvement in self-obsessed New York. The year rounded out with rollicking six-game final and a poetic upset of the attention-seeking Heat by the low-key Mavericks.

If you weren't entertained, you weren't watching.

But the lockout is foiling the chance to build upon last season's drama. Despite the high drama in the conference rooms, urgency isn't simmering on the outside—lockout news right now feels like an afterthought behind the Penn State crisis and about 15 NFL sagas (the Packers, the Patriots, Tebow, Philly's implosion, etc.).

There's still optimism that the league has wiggle room to get a deal done that would provide for at least a 50-game season. Fifty games doesn't sound like the worst thing in the world.

It's not over, but there's a frosty feeling. On ESPN, NBA Commissioner David Stern warned of a "nuclear winter." Players association executive director Billy Hunter said the players viewed the ownership ultimatums as "extremely unfair." Ready to dissolve, the union moved to file a "disclaimer of interest" alerting the league of its plan to dissolve.

A disclaimer of interest? Outside the NBA, that's already happening."

To the sport's casual fan, the standoff between the owners and players is absolutely unimportant. It's simply not our problem. We have other things we can and will do with our time and money.

That's also the case for advertisers and TV networks. The market works. Choices abound, alternatives exist and life goes on.

Are you listening, players and owners? You're just one among many possibilities for viewers and TV advertisers.

With respect to televised sports viewing, here are just a few of the choices available to the casual fan and advertiser.

Heavily watched televised college football and NFL games will last until early February. Exciting season ending college basketball conference tournaments and the "March Madness" NCAA playoffs will commence in February and last until early April. Then Major League Baseball will take over and last through October, at which time college football and the NFL will again will be in full swing. The circle is complete.

That pretty much covers all twelve months for TV viewing. There's no compelling need for any televised NBA games, let alone a full season of them beginning in November and lasting until June.

And lest we forget, the Olympics will air in 2012, too. Lots and lots of available 2012 TV sports viewing for the casual fan.

The NBA players and owners should make no mistake about who's really in charge. It's the TV fan and the casual one at that.

Without a strong TV audience, the NBA owners wouldn't be able to pay anywhere close to the current average salary of $5.5 million for players. As for the owners, the value of an NBA franchise would deteriorate quite rapidly.

Without TV in the forefront, the end game for the players and owners may be near.The all important casual fan may already be out the door. And if and when the casual fan loses interest, the available TV ad dollar won't amount to much.

If that happens, the level of player salaries and value of owner franchises will reflect that customers have become dissatisfied, and the financial values attached to entertaining professional basketball fans on TV will decline very quickly. In turn advertising funds will evaporate and reappear at more popular venues. That's the free market at work.

In sum, it's a dangerous "rookie" game now being played by NBA players and owners alike. By thumbing their noses at the casual fan base, they may be negotiating themselves out of good jobs and valuable NBA franchises.

But it's their money and their livelihoods, so who cares? Certainly not the taxpayer nor the casual fan.

My guess? Unless absolute idiocy prevails, which it all too often does in emotional labor disputes, look for the NBA season to begin prior to year end or very shortly thereafter. If not by then, the NBA's future looks bleak indeed.

In any case, pro basketball isn't likely to resemble its current self a few short years from now. With respect to players and owners alike, it's pretty much game over for getting lots of money while living on easy street. That will be the simple result of innovation, creative destruction and the free market at work in the private sector.

We're all free to choose in the private sector. Players, owners, unions, advertisers, networks and casual fans, too.

And that's the way taxpayers like it. It's not our dime.

Thanks. Bob.