Easy Economics ... Government Schools

Basic economics is simple to understand.  Yet it's not generally well understood.

Or at least most people believe it's not so easy to follow. It need not be difficult, so let's apply the KISS method today. Easy economics is based on simple common sense. Let's use it.

Accordingly, my goal herein is to refute the "economics is tough" mindset and to demonstrate that common sense and intuition are sufficient to helping each of us get the most out of our financial activities. We'll replace the "economics is tough" view with the "easy economics" common sense based way of looking at things.

Besides that, most activities do have a financial aspect to them. So let's discuss a few simple concepts applicable to easy economics today.

Today's easy economics story is about the sorry state of education and its cost in America today. From kindergarten through college. Knowledge acquired for time spent and the costs associated therewith, to students, society and taxpayers as a whole.

Lots of noise these days about student loans, interest rates on them and even whether to discharge student loan debts in bankruptcy. Hardly any noise about why student loans are so necessary and what young people get in return.

Oh, I know that a college education purportedly creates substantially more earnings power over a lifetime. But that's not all I know.

I also know that today approximately 50% of recent college graduates are either unemployed or underemployed, meaning that many of these fortunate young people that are employed could have gotten their jobs without receiving a college degree and without first incurring a huge amount of student loan obligations.

And I also know that 43% of those people entering a four year college in 2002 hadn't received their degree 6 years later. Even worse, the percentage number for non-graduating community college attendees is a whopping 65%.

Accordingly, getting into college is simple; it's the graduating therefrom that's often elusive. But the student debt doesn't go away. And for lots of those who do eventually graduate, many of the majors don't pay enough to justify the extent of the student loans undertaken.

I also know that the vast majority of loans are government granted or subsidized and that a debate today centers around whether interest rates on those loans should be raised or kept at 3.4%. And that 1 out of 4 student loans are delinquent and that the taxpayer will be stuck with the bill if the debtor can't repay the loan.

What's not being discussed is why college costs are so high and why so few students graduate and why those that do graduate can't find suitable employment.

Competition is a word not often used when discussing the entire sorry student loan situation and, despite the spiraling costs, the failure to educate so many of our young people today. Neither is globablization. And neither is monopoly. Nor government schools. Nor competition. Nor choice. But they very much need to become part of the national conversation. The truth is the truth.

In my view, our government schools are bad, starting with elementary education and going right through college. And there's a simple reason.  A government monopoly prevents price and quality competition and a vibrant local marketplace. Teachers generally belong to union monopolies, politicians grant government funds to schools (funds which we don't have), pension obligations are unfunded and the list goes on.

But since it's our kids we're talking about, and our union represented "public servant" teachers as well, all we hear from the sickening politicians is that we need more taxpayer money to spend on educating our youngsters. But the problem is that they're not receiving a good education that will enable our future American workforce to compete against all comers through the world. Globally we're falling behind and paying more in the process.

And we're burdening the next generation with future debts as well as a poor education. Wake up to easy economics, America!

What the pols don't say is that the money that we don't have but are spending anyway will be ill spent by the government monopolists, as it has been for a long time now. And that as a nation we're falling further behind other nations.

So there we have it. Poor schools, expensive schools, monopolistic practices with respect to union represented teachers, unfunded teacher benefits that the taxpayers are obligated to pay and lots of student debt that will ultimately land on the taxpayers' plate as well.

Did you know that government took over student loans at the same time it passed ObamaCare in 2010? What a year!

We need to start paying attention and start insisting that the politicians at all levels-- local, state and federal-- know that We the People are paying close attention to this ongoing national disgrace.

Easy economics says that marketplace competition is good and that protected government monopolies are bad. Government schools are a serious threat to our national secutiry and ourt citizens' prosperity.

Summing Up

The really big problem isn't the interest rates paid on student loans, the amount of student debt or anything similar thereto.

The really big problem is the education our kids aren't getting and the shaft our taxpayers are getting.

Meanwhile, the politicians fiddle and talk nonsense.

That's not hard to understand.  It's easy economics.

Competition, globalization, markets, local control, price discipline, freedom of choice and personal responsibility.

Thanks. Bob.

Student Loans, Home Buying and Interest Rates ... Unconventional Advice

Student loans are now higher than $1 trillion and rising, and delinquencies on those loans are approximately one in four.

Student-Loan Debt Tops $1 Trillion provides an update on the broader ramifications of burdensome student loans, including the need to postpone home buying:

"The amount Americans owe on student loans is far higher than earlier estimates and could lead some consumers to postpone buying homes, potentially slowing the housing recovery . . . .
Total student debt outstanding appears to have surpassed $1 trillion late last year, said officials at the Consumer Financial Protection Bureau, a federal agency created in the wake of the financial crisis. That would be roughly 16% higher than an estimate earlier this year by the Federal Reserve Bank of New York. . . .

CFPB officials say student debt is rising for several reasons, including a surge in Americans going to college in recent years to escape the weak labor market. Also, tuition increases—which many colleges say are needed to offset big cuts in state funding—have many students taking out bigger loans.
In addition, the interest costs on older loans are climbing as borrowers fall behind on payments, reflecting mounting financial strains, bureau officials said. New York Fed data show that as many as one in four student borrowers who have begun repaying their education debts are behind on payments.
Economists say college is an increasingly good investment because of the widening pay gap between jobs that require a degree and those that don't. Ultimately, the educational degrees and added skills are meant to help workers earn higher incomes that, in time, will more than offset the student debt.
But as more people go to college and assume bigger loans for education, they may take longer than previous generations to hit key milestones such as buying a house or getting married, U.S. officials and economists say. It could take longer for heavily indebted graduates to save money for a down payment on a home, or it could be harder for them to qualify for mortgages.
Rohit Chopra, student-loan ombudsman for the Consumer Financial Protection Bureau, said student debt could ultimately slow the recovery of the housing market. "First-time home-buyers are a substantial part of the housing market," Mr. Chopra said in a speech at the banking conference in Austin. "Instead of saving for a down payment, these borrowers are sending big payments every month."
Student debt is a burden not just for recent college graduates in their 20s but also parents, who often co-sign their children's student loans, as well as midcareer professionals who opted to go back to school during the sluggish recovery."
But Low Interest Rates Are No Good Reason To Buy A House
Home affordability is often touted as a plus today due to low interest rates. But that's no reason to hurry out and buy a house. To the contrary, it's an excellent reason not to buy right now.
The best financial advice may well be to rent for now and pay off those student loans. And if you have no outstanding student loans, that's so much the better. You still should rent for now.
Then when the "affordability" factor declines enough in the next several years, that will be a much better time to buy a home. But what about the then higher interest rates and lessened affordability, you ask?
Well, that's the best part of the story, even if it's one not generally told. So we'll go ahead and tell it here.
The Best Time To Buy A House Is Not When Rates Are Low
The best time to buy a house may well be when interest rates are quite high and not very low. But how can that be?
Well, let's listen to the very sensible, if not generally offered, advice given in Beware of Housing Prices:

"The recent frenzy in the housing market is very interesting, although somewhat counterintuitive, and deserves consideration. In my neck of the woods, and I am sure in others, certain people are getting caught up in the sudden change in interest rates, but those same people are missing a very important relationship in the “home value” equation that I hope to reveal here. . . . Everyone knows when interest rates increase the monthly mortgage payment increases, so if prices are held the same and interest rates rise, then the affordability ratio declines. . . .

The best time to buy a house (assuming moderate inflation), is not when interest rates are at all-time lows, but instead when interest rates are high because prices and interest rates are inversely related. . . . “Get in when rates are low” they say, but we never hear them say beware when rates go up because home prices decline. They might have a slight vested interest in making a sale, and on the surface, people like the idea of locking in a low rate. But it is much better to buy a home when rates are high and prices are low, and then when rates decline refinance into that lower rate instead. That is investment 101."

Summing Up

Financially speaking, buying when interest rates are high and then refinancing when they're low is awfully good advice.

Student loans are too high.

Pay off the loans before jumping into house related debt.

Home sales are quite low.

Financially, it makes the most sense to wait until home prices come down after interest rates go up, even though that could be several more years.

Even if the realtors or home builders don't want us to know that.

Clean up your financial affairs and don't worry about missing a great buying opportunity in the housing market.

There will probably be an even greater one down the road.

Thanks. Bob.

College Affordability and the Government's Troubling Role

We all know college costs are high and rising at annual rates substantially greater than overall inflation. This is nothing new and has been going on for a long time.

Many of us also know that government subsidies, including student loans, are a major contributor to the ever escalating costs of college attendance.

And it's another well known fact that student loans are a huge and growing problem for those attending college and their families.

All that said, commentator John Stossel in The College Cost Conundrum says that it's even worse than that.

In that regard, please consider the following:

"President Obama said in his State of the Union Address that he is putting colleges on notice to lower costs. A few days later, he spoke to students at the University of Michigan, with a promise of more federal aid. Politicians claim they can make college affordable. No They Can't!
In the last 30 years, inflation is up 160%, but tuition costs are up 750%.
It's because colleges have no incentive to cut prices when students can get money from government. Federal aid, adjusted for inflation, increased from 32 billion in 1987, to 169 billion in 2010. . . .
Government creates perverse incentives. Colleges compete on prestige and luxury amenities, not their price tag. Administrators don't worry about high tuition costs because their customers have government subsidies."
Discussion and Analysis
"Introducing Bennett Hypothesis 2.0" on page 22 offers a startling conclusion about the vicious cycle effects of government financial aid for college attendance (to access the entire article, just click on '169 billion' above):
"{T}here will never be enough financial aid because there is no limit to tuition.
A depressing realization among those who recognize the dangers of the Bennett Hypothesis is the prediction that many efforts to improve college affordability by increasing financial aid will be rendered ineffective. A terrifying realization is that there is no end to the process. For decades we have been caught in the vicious cycle of Bennett Hypothesis 2.0:
1. In an effort to improve college affordability, the government increases financial aid funding.
2. The financial aid allows colleges to raise tuition so as to gain more revenue to pursue excellence.
3. The higher tuition reduces affordability, leading to calls for more financial aid, sending us back to step 1 and starting the process all over again.
The predicted outcome of this cycle is higher aid spending, without an improvement in affordability."
Summing Up
Government officials may mean well with respect to making college attendance more affordable, but that's not what ends up happening.
Just the opposite occurs, in fact. Government financial aid makes the affordability problem worse over time.
The law of unintended consequences once again applies and makes the point convincingly that the road to perdition is often paved with good intentions.
To wit, in the case of attending college and its escalating costs, the government's "help" seems to be extremely harmful to the general welfare of students, their families and taxpayers, too.
More student loans outstanding backed by the government isn't the answer. It's a big part of the problem.
Good intentions alone don't produce good results.
In the case of government and college affordability, that's particularly true.
Buyer and borrower, beware!
Thanks. Bob.

Yet Another Reminder of Why We Should Own Dividend Stocks Instead of Bonds

From time to time we've discussed the outlook for fixed income investing during the next ten to twenty years. It's not promising.

In all probability, a better investment than bonds will be the shares of well capitalized solid performing blue chip companies with a record of growing earnings and increasing cash dividend payments.

Dividend Stocks Become the Heroes is a short but good article extolling the current virtues of investing in dividend stocks and how these stocks have outperformed the market in 2011.

Here's the short term argument in brief:

"In the first half of the 20th century, companies had to pay richer dividends on stocks than on their bonds in order to compensate investors for the higher risk of holding equity. Over time, high-dividend stocks have gotten less attention from investors than growth stocks, except for scurries during periods of economic stress.

High-dividend companies have typically seen their price-to-earnings ratios trade 20% or more lower than non-dividend-paying shares over the past three decades, according to AllianceBernstein. This year, though, valuations on dividend-hefty shares caught up with their no-dividend peers for the first time since the late 1970s.

McDonald's is a darling dividend stock of many investors. The fast-food chain's stock-price surge of 27% in the past year leads every other Dow Jones Industrial Average component.

McDonald's has a dividend yield of about 3%, outpacing the 2.625% coupon bond issued by the company in September, due in 2022. McDonald's has boosted its dividend by an average of 27% annually in the past five years, according to Haverford Trust Co.

"You have the best of both worlds: a company that has seen the stock price go up, and they've increased their dividend," says Hank Smith, chief investment officer at Haverford. The firm manages more than $6 billion in assets."

But that's only one stock. And one brief period of time. What about stocks generally and a longer term horizon for investing?

In other words, today's timeliness argument for investing in dividend stocks doesn't necessarily mean that it will be timely tomorrow. That's why the article's following comment is most revealing:

""We think our message about the importance of dividends is a timeless one," says Joe McLaughlin, Haverford's chairman and chief executive. "But obviously, it's also very timely right now."

I agree that stocks paying high cash dividends relative to the price of their shares has been a good approach recently.

I also agree that this approach is going to be a good one for the long term, too.

That's because stocks that pay dividends have the likelihood of paying even higher dividends in the future as earnings grow. And as their earnings grow, the shares of these companies also have the potential to appreciate in price. Thus, both the prospects for growing dividends and appreciating share prices give blue chip stocks the decided edge over investing in bonds or fixed income securities.

Especially when we're investing in a low inflation environment like today, or perhaps even an accelerating inflationary environment at some point down the road.

So why invest in fixed income securities or bonds for the longer term? I can think of no good reason, assuming deflation doesn't take hold. And I don't believe it will.

So other than on those rare occasions, such as the 1980s, when inflation and interest rates have peaked and a period of disinflation is about to occur, stocks will outperform bonds. At least that's my strongly held view.

In the above referenced article, McDonald's is offered as an example of the benefits accruing from owning dividend increasing blue chip stocks. Other examples that come to mind are such blue chip companies as Intel, Microsoft, Pfizer, Merck, Johnson & Johnson, GE, Pepsi, Coke, Nucor, U.S.Bancorp and Wal-Mart. There are many others as well.

In the case of McDonald's, the interest paid to bondholders is lower than the dividends paid on the stock. That hasn't happened routinely since the 1950s for companies generally. Thus, today looks good for investing in the shares of dividend increasing companies, whose dividends are most likely to be accompanied by solid earnings growth over the longer term.

At least it looks that way to me.

Let's take McDonald's. McDonald's is able to pay both its dividends and its interest on debt from its earnings. Thus, the source of the funds paid is the same.

Historically debt is deemed to be less risky than shares of stock, since dividends don't have to be declared by the company, but interest costs, barring bankruptcy, are certain.

To me that doesn't make McDonald's debt substantially less risky than its stock. If we're worried about the company's ability to either service its debt or continue to declare its dividends, we shouldn't own either the stock or the debt of the company. We should stay away from both.

Of course, there's risk involved with owning shares of stock. There is also risk with owning debt. There's always risk involved with investing. And with not investing as well.

In fact, there's risk associated with eating too much or little, exercising too much or little, driving the car and all other life experiences. That's life. Risk is nothing more than a four letter word. Risk is.

We simply have to learn how to live with and manage that omnipresent risk as best we can.

For investors, there's the clear inflation risk involved with not investing, too. Cash tends to become less valuable over time as inflation makes that 'old' money worth less each year it's owned.

Today we can buy good stocks that pay 3%-4% in dividend yields. For a comparison, ten year maturity government bonds pay less than 2%. Without even considering the income tax preference for dividends over interest income, dividends are the obvious winner.

That's because, unlike bonds, dividends and the stocks' prices are both likely to increase over time.

The only practicable way bonds will be priced higher is if interest rates continue to decline. But that's not in the cards as rates are already almost zero. Thus, the odds of further interest rate reductions are slim indeed.

Besides, for that to occur would mean that we will have an even sicker economy than today's.

So what to do? Buy a few 3.5% dividend yielders today, plan to hold them for the next twenty years and watch the yield on cost (what we paid for the stock initially) grow to 14% or higher. Then watch the share prices double or triple as well.

Otherwise, be content to stay out of the investing scenario entirely and plan to be satisfied with accepting 2% interest rates in a longer term 3% or higher inflationary environment. That's accepting a negative real return, and I don't recommend it.

Thanks. Bob.

More Government "Help"

Solyndra taught us a lesson about government "help." Now it's Fisker Automotive's turn.

Federally Backed Car Maker Hits Bump says this about the ongoing "taxpayer protection" program being waged by our always vigilant elected officials:

"Hybrid car maker Fisker Automotive Inc., one of several high-profile clean-energy ventures backed by the Obama administration, has skidded into trouble with its federal lenders, raising political risks for the White House.

Fisker was promised $529 million in loans from an Energy Department program to boost development of electric vehicles. The Anaheim, Calif., company said it would use the money to retool a former General Motors Co. factory in Delaware to build a new plug-in hybrid car, employing some 2,500 workers. The project had the strong support of Vice President Joe Biden, a former senator from the state.

But late Monday, Fisker disclosed that the Energy Department had frozen further payments from the loan, following the firm's failure to meet certain deadlines for developing the car, code-named Nina. The firm also said it had laid off 26 workers connected to the Nina project. Fisker has drawn down $193 million of the total it was granted.

An Energy Department spokesman said in a statement Wednesday that the department was reviewing a revised business plan with Fisker. "Our loan guarantees have strict conditions in place to protect taxpayers," he said. . . .

The Obama administration's efforts to use federally backed loans to bankroll start-up clean-energy companies have come under fire from Republicans in Congress since the collapse last September of solar-panel maker Solyndra LLC. Solyndra sought bankruptcy protection, owing the government about $527 million.

Mr. Ormisher (CEO of Fisker) said his company wasn't in peril. "We are still continuing to raise equity. We raised $260 million in the last three or four months," he said. The company said in a statement that it had raised $850 million in equity from private sources. But the future of the Nina and the 2,500 jobs in Delaware will depend on whether Fisker can revive the federal loans, or replace them, Mr. Ormisher said.

"There comes a point where you say, 'We can't keep putting money into that project,' " he said."

So it appears that we the people, thanks to our vigilant and interfering politicians, may "only" lose $193 million on Fisker. That's an improvement over the $527 million wasted-er lost-on Solyndra.

How lucky we taxpayers are to have our government place such "strict conditions in place to protect taxpayers," as the Energy Department spokesman said.

Oh well, it's only money.

Thanks. Bob.

Income Inequality and What It Means

Is income inequality really a bad thing?

Or is it a good thing?

How prevalent is it in America today? And how is it calculated?

And after answering those questions, should we dedicate our efforts to providing more income for the lower earners or to reducing the income of the higher paid among us?

And what determines whether we're likely to become low or high earners--education, hard work, luck-- or a combination of all three factors? {We'll save the answer to that question for the end of today's story.}

Jenkins: The Inequality Obsession describes the situation:

"If it were learned that the car driven by the average American is 10 times more likely to burst into flames than the car driven by the richest 1%, what should the policy response be? Should it be to mandate that cars driven by the rich burst into flames more often?
Income inequality is a strange obsession, at least to the extent the obsessives focus their policy responses on trying to adjust the condition of the top 1% rather than improving the opportunities of everyone else.
Income inequality could be a sign of real pathology in authoritarian societies where entrenched groups use government-granted privileges to protect themselves from competition. By and large, that's not the case in the U.S., where most see the market actually increasing the competitive advantages of the educated, skilled, hardworking and talented.
Though it's always good to be on guard against political favoritism, the U.S. exhibits mostly a giddy process of wealth creation by people from middle-class backgrounds who start companies or become Wall Street traders or CEOs or celebrity performers in entertainment and sports.
Generalizing about the distribution of incomes is an academic specialty seemingly incapable of freeing itself from tendentiousness. Take a popular study by Thomas Piketty and Emmanuel Saez, two French-born researchers, claiming U.S. income inequality is higher than anytime since the 1920s.
Their result comes from choosing to look at income that leaves out transfers. Unlike the 1920s, Americans today have the opportunity partly to live off Social Security and Medicare. They can decide to do without reportable income. Also left out of the calculation is the large share of compensation accounted for by untaxed health insurance.
Too, the tax code has changed. Income is realized under today's code that wouldn't have been realized under previous tax codes. Owners of capital buy and sell much more easily, and the tax system creates much less incentive for them to sit on their holdings and report less income.
For the record, so sensitive are the inequality generalizations to how you define income, and whether household size is taken into account, that the claimed shift toward greater inequality can be made easily to disappear, especially when consumption rather than income is measured.

And, as always, the solution to income inequality amounts to persuading the rich to report less income. As CNBC's John Carney has shown, Facebook founder Mark Zuckerberg could avoid ever reporting any income simply by borrowing against his assets to meet his living expenses. "Perhaps most bizarrely, Zuckerberg might be eligible for an Earned Income Tax Credit if he keeps his personal income under $13,000," writes Mr. Carney.
This would make America a better place how? Yet, at bottom, such cosmetic fixes are the main outcome from using higher tax rates to "correct" income inequality. . . .
One can only wonder how much faster progress on tax reform or school choice would have been if the political capital devoted to income inequality had been devoted to fighting entrenched institutional resistance to useful reforms. . . .
That goes doubly for the inequality obsessives. How society stimulates the creation and distribution of income is an important topic—so important that one could wish it were less infected with the pathology Freud diagnosed as "group spirit" and which he said was ultimately founded on envy.
As Freud put it, "Everyone must be the same and have the same. Social justice means we deny ourselves many things so that others may have to do without them as well.""
Now let's address why wage inequality exists and what, if anything, can be done about it.
Key Reason for Wage Inequality Is Education delivers solid evidence of how to increase earned income:
"The widening gap between America’s haves and have-nots (highlighted in a Journal article today) is fueling debate across the political spectrum. But here’s one less-appreciated take-way: It suggests getting a college education — and indeed, an advanced degree — might just be worth the hefty price tag.

Let’s back up. As most people know, the cost of a four-year college education is rising, forcing students to take on a pile of debt that some economists fear will spark America’s next debt mess. There’s talk of a student-loan “bubble.” And some feel America should be funneling more kids into vocational training instead of encouraging everyone to get seemingly useless liberal arts degrees — something Germany already does.

The Labor Department’s latest figures on wages, however, suggest that the gap between America’s highest- and lowest-paid workers continues to grow — and a key reason for this is education.
David Autor at the Massachusetts Institute of Technology calls this the “rising return to education.”
Put simply, the growth of highly-educated people in the U.S. hasn’t kept up with demand, Autor says, which means college graduates and Ph.D’s in the job market, especially those in areas like the sciences, are a hot property.
As James Surowiecki of the New Yorker magazine put it in November, no matter how hard it is for recent college grads, it’s much worse for people lacking a college degree. “The college wage premium — how much more a college graduate makes than someone without a degree — is at an all time-high,” he wrote. “As college has, in relative terms, become more valuable economically, people have become more willing to pay more for it.”"
Summing Up
Wage inequality is healthy in a free market based society.
The focus needs to be on raising people's education and thereby reducing wage inequality.
Lift all boats through individual and collective knowledge growth, in other words.
In turn, America will become an even more prosperous society.
As our society becomes more prosperous, it will be positioned properly to better provide educational and employment opportunities for all of our citizens.
Let's not kill the goose that laid the golden egg in the name of false placed equality.
Education, hard work and a little luck are still the keys to success.
And they're all right here for the taking.
Thanks. Bob.

More Brilliance From California and Some From Wyoming, too

California ... Academics, Athletics and MOM

Cal's Football-Stadium Gamble is a telling story, even as it's a distressing one to read. Here's what it says:

"As state legislators shrink its appropriations, it's hard enough for the University of California-Berkeley to maintain the nation's highest academic ranking among public colleges.

But there now looms a financial threat from another, somewhat unlikely quarter: the university's football program.

Until now, the years-old effort to renovate the school's football stadium, which sits on an earthquake fault line, never raised many alarms. Although its $321 million price tag would make it one of the most expensive renovations in college sports history, the university said the project would be funded privately, largely through long-term seat sales and naming rights.

But three years into the fund-raising effort, a projected $270 million from the sale of seats has failed to materialize. At the end of December, the school had collected only $31 million in the first three years of the sale. Now it has become clear that the university will have to borrow the vast majority of the money.

In recent interviews, university officials acknowledge that if revenue projections fall short and won't cover the bond payments, the shortfall "would have to come from campus."

The idea that money for the football stadium could come from campus funds, which include student fees, is an admission likely to stir outrage at a school that's already facing possible double-digit tuition increases. . . .

Unlike some athletic powerhouses, Cal's athletic department isn't self sufficient. From 2003 to 2011 it stayed solvent only by receiving a total of $88.4 million in campus funds . . . .

The stadium situation comes at a time of financial anxiety on campus. After the state legislature last year slashed $650 million from the University of California system's previously $3-billion budget, tuition at UC schools rose 17% for in-state students and 5% for nonresident ones, prompting student protests and sit-ins on the Berkeley campus. With California already leading the nation in tuition increases, the UC system has said that annual tuition spikes could range from 8% to 16% over the next four years.

Also controversial is a plan to open the gates to more nonresident students—who pay higher tuition. At Berkeley, the proportion of undergraduate students who pay nonresident tuition is 16%. The school said its goal is to increase that figure to 20%.

The nearly half-billion-dollar Cal athletic project encompasses a $321 million renovation of Memorial Stadium that opens Sept. 1 and $153 million for a new multisport training facility....

The total bonded debt for the project, including the training center, will be $447 million. That's apparently an unprecedented amount of borrowing for a college-sports project, far above the $220 million that Minnesota borrowed to build a new stadium in 2009, the $200 million that Washington has borrowed for its stadium renovation and the $148 million that Michigan took out to add luxury seats that opened in 2010. . . ."

Wyoming .... Coal, Basketball and MOM

And there's a similar but perhaps even more disturbing example of government spending from the University of Wyoming's basketball facility's renovation.

States Mine Federal Funds Long After Need Is Gone tells the story of the state of Wyoming spending federally allocated money, and which money doesn't even exist, on projects for which it was not intended to be spent:

"LARAMIE, Wyo.—When the University of Wyoming needed an extra $10 million for renovations to its basketball arena last month, state legislators turned to an unlikely source: a federal fund for cleaning up abandoned coal mines.

The fund was set up to pay for things like sealing up old mine shafts and dealing with collapsed tunnels and abandoned surface mines. But, as allowed under law, the university plans to use the money to fix up its Arena-Auditorium, where its Cowboys play, providing an exterior face lift and rotating the court 90 degrees.

The U.S. Interior Department is likely to fork over the money for the arena despite years of bipartisan efforts in Washington to close the spigot of federal dollars to states that no longer need so much money for abandoned mines.

In the fight to curb government spending, the Obama administration, the Simpson-Bowles deficit-reduction commission and a host of Republican and Democratic lawmakers have advocated cutting the $180 million in mine cleanup money that goes to four states and three Native American tribes that have largely fixed their abandoned coal mines.

The money keeps flowing, however, because efforts to stop it have been blocked by a bipartisan group of lawmakers from the states that get the money. They say the money is theirs because the federal government collected it from coal-mining operations in their states.

The stalemate illustrates how difficult it can be for Washington to stop spending money even when members of both parties agree that cuts are needed to reduce the federal deficit, projected at roughly $1.2 trillion this year. Other bipartisan proposals, such as a push by the White House and House Budget Committee Chairman Paul Ryan (R., Wis.) to end certain farm subsidies, projected to save at least $20 billion over 10 years, have hit a legislative wall amid stiff resistance from farm-state lawmakers.

Advocates of scaling back the abandoned-mine spending argue that if the federal government can't trim a program that small—it makes up just 0.0047% of federal spending—odds are slim it will be able to effectively tackle bigger challenges like Medicare and Social Security. . . .

Republican Gov. Matt Mead said in an interview he had concerns about the basketball-arena project, but agreed to support the funding because the school needed it. "The Arena-Auditorium is probably outside of the core area, but I don't think it is inappropriate or that we are violating anything like the spirit" of the law, he said. . . .

Wyoming officials figured they would get large payouts every year because their state was producing so much coal. But the money had to be "appropriated" by Congress, meaning lawmakers had to vote each year on who would receive it. That often didn't happen, so a lot of the money sat unused, including hundreds of millions of dollars that Wyoming officials believed belonged in their state.

In 2006, as parts of the law were set to expire, Sen. Mike Enzi (R., Wyo.) won passage of a measure that allowed the money to flow as "mandatory" spending, meaning it didn't have to be voted on by Congress each year. In addition, it allowed Wyoming, three other states and three Native American tribes to use their money, including funds not distributed in prior years, with virtually no strings attached. Those four states and three tribes were certified as having taken care of their most severe abandoned coal mine problems. Other states had to use the money more narrowly for mine problems.

The next year, the Wyoming legislature voted to spend $50 million in coal-mine funds to build a new science, technology, engineering and math building at the university. Groundbreaking for the building, to be named after Mr. Enzi, is slated to begin this year. . . .

"Wyoming ought to get to do with the money what they want to do," Mr. Enzi said.

Democrats from states that benefit from the current law also have vowed to stop the White House effort.

"We will keep fighting to make sure money from Montana coal companies goes to cleanup efforts in Montana, where it rightfully belongs," Senate Finance Committee Chairman Max Baucus (D., Mont.) said in 2010. . . .

The 2006 law was a victory for Mr. Enzi, who estimated it would bring in $1.6 billion for Wyoming over 15 years.

Last month, Wyoming legislators from both parties agreed to spend $30 million of the roughly $150 million they will receive this year on road projects and $40 million on the University of Wyoming. Another $30 million is being set aside to deal with problems that could crop up with abandoned mines previously thought to be stable.

Meantime, other states that aren't producing as much coal today lack funds to address problems with their old mines. . . ."

Summing Up

At the state level, we continue to spend money we don't have for things we don't need. Then at the federal level we vote to spend additional funds we don't have to provide federal aid to education and such to help students attend public universities. Meanwhile, tuition goes up as states are out of funds.

In any case, we sure do have nice sports venues in California and Wyoming, as well as many other states, albeit expensive ones. So did the Romans.

What both state and federal officials aren't concerned about is the simple fact that we don't have the money to spend on luxuries like these. The federal government has no money, and neither do the states involved. Yet we spend it anyway.

At least drunken sailors spent their own money. Our apparently sober politicians don't even do that.

Where do we get the OPM to spend? Well, we often get it either (1) from foreign countries like China and Japan in the explicit form of loans or (2) from future taxpayers in the implicit form of future taxes.

Government officials will spend whatever money is available to them, even if it doesn't exist.

We the People need to understand this when approving tax increases. There will never be "enough" money to satisfy the insatiable spending appetite of our politicians. They're hooked on debt.

Hopefully, We the People aren't so hooked. That's our only way out of this mess.

Thanks. Bob.

Public Sector Pension and Retiree Health Mismanagement ... Effects on Future Taxpayers

Widespread public sector financial mismanagement, if not fraud, will prove to be extremely harmful to all current and future American taxpayers and citizens.

It is concentrated on retiree pension and health care benefits promised by government leaders at all levels.

Whether that mismanagement is more attributable to the incompetence, simple neglect or just plain fraud by government officials isn't the issue.

Whatever the cause, it's a total breach of the fiduciary trust owed to taxpayers by public sector leaders and one which will negatively impact citizen taxpayers for years to come in countless ways.

We'll focus on the example of the city of Stockton, California in today's discussion. How Stockton, California Went Broke in Plain Sight says this:

"What does it look like when a city of almost 300,000 flirts with becoming America's largest ever city to go bankrupt? Welcome to Stockton, Calif. . . . Stockton exemplifies the fiscal hole that many municipalities have dug for their taxpayers. . . .

The city's fiscal history "has eerie similarities to a Ponzi scheme," says Bob Deis, the city manager Stockton hired in 2010. Over the years, the city promised employees huge—and unfunded—salaries and benefits, so when trouble struck officials began cutting back on services such as police and fire protection, plus libraries and parks.

Stockton's current leadership, which has already suspended some payments to bondholders and is negotiating with creditors and unions, is frank about its past shortcomings. In last year's budget, Stockton admitted that its biggest problem has been a lack of transparency resulting in a host of "hidden costs" in labor agreements for "obligations that are often difficult for citizens to identify or understand." . . .

Stockton safety employees with 30 years of service receive 90% of their highest working salary as a pension, with cost-of-living adjustments up to 2% annually for the rest of their lives. And while the state requires workers to contribute between 7% and 9% of their salary toward pensions, Stockton agreed in a series of agreements with various municipal unions going back to the 1990s to pay the worker portion of the contribution along with its 20% employer share.

Stockton couldn't afford this rich program even in boom times, so officials played risky investment games. In 2007, the city borrowed $125 million and put the money into Calpers, the giant California pension fund, betting that investment managers could earn more than the interest Stockton owed on the debt. When the market tanked, Calpers lost 24%-30% of the loan's principal, according to city budget documents.

Now Stockton is stuck with interest costs on top of pension obligations that pile an additional 48% onto basic employee pay. Thus a public safety worker earning $70,000 annually costs the city another $33,000 in interest and pension-borrowing costs.

Perched precariously atop this mountain of obligations are retiree health benefits. Stockton officials awarded these to city employees in a series of votes in the 1990s but made no effort to fund them, intending simply to pay costs out of their budget as workers retired. As hundreds did just that over the years, the costs grew. Next year, the city's fiscal documents project, retiree health costs will surpass those of the city's regular work force. At last count the city's unfunded liabilities for retiree health care are above $400 million.

Stockton Mayor Ann Johnston voted for these expensive measures when she served on the city council. "We didn't have projections into the future what the costs might be," she told the Record, a Stockton newspaper, earlier this month. She added, "I learned that you don't make decisions without looking into the future."

Council votes to approve ever-greater benefits were often unanimous, according to Record columnist Michael Fitzgerald. "Nobody gave thought to how it was eventually going to be paid for," says Mr. Deis, the city manager.

The future is bleak, as the city has only $165 million in its general budget to provide police, fire and other basic services to 292,000 citizens. The police force has shrunk by about 100 officers, or about 25%, in the last two years. Residents report long wait-times after making 911 calls, and police only respond to emergencies. . . .

The big question is whether Stockton is only the tip of an iceberg. The 50 states alone have promised their employees retirement health-care benefits amounting to a $627 billion future liability—and funded only 4% of that cost, according to a recent accounting by Bloomberg Data. Unfunded state and municipal pension liabilities range up to $4 trillion, depending on what future investment assumptions you make.

Most local governments may never reach insolvency, but the rising costs of these benefits already crowd out other spending, including on police and fire protection. Thanks to unaffordable promises made by politicians who never bothered to total up the costs, we're in a new era of local government in America: Taxpayers can expect to pay more but get less."

Discussion and Analysis

Teachers, police, fire fighters and others all believe they have earned the benefits promised to them by city and other government officials in labor negotiations.

Here's my question: Who told the future taxpayers what they have been obligated to pay by their elected and duly appointed representatives in public office? And here's my answer to that question: Evidently nobody.

In other words, current workers were frequently promised lavish future benefits by city officials but the money to pay those benefits wasn't collected and then properly set aside. Accordingly, it's government mismanagement for certain and quite likely incompetence as well. In any event, either the benefits won't be paid as promised or the future taxpayers will have to pay exorbitant amounts in taxes to fund the promised benefits and necessary city services as well.

Summing Up

This disgraceful financial debacle is playing out across America and will be for many years to come.

As a city council member, the current mayor of Stockton, as well as her public sector colleagues, voted for the benefits without considering any "projections into the future what the costs might be." Think about that comment. It's disgusting.

She admits that she voted for something without having any idea what the eventual costs would be. At least she's honest, even if incompetent.

We can only wonder how many other city, state and federal officials have taken similar actions.

Thus, they acted as if the benefits would somehow be free-- and they in fact were free to the city worker, the city official and the union leadership. Only the future taxpayer would get the bill. That's where the free lunch ended.

But it was even worse than that. The city made the public sector employees' pension contributions, often by borrowing the funds to do so, and then lost that money by investing poorly, thus making an awful situation even more awful.

And retiree health costs across the nation are woefully underfunded as well.

My bet is that we have no idea how bad this will all turn out. Yet while we don't know what the final bill will be, we do know that it was all avoidable. That's why it's such a disgraceful situation.

In simple terms, the retiree benefits were promised to certain employees to be paid in certain amounts at certain times in the future. The mayor and her cohorts could have collected and set aside taxpayer dollars and employee contributions each year. They then could have invested that money in order to pay the benefits by assuming a certain average annual investment rate of return.

Then they could have monitored the actual investment performance of the funds as well as the salaries of the workers over time and made adjustments to the contribution levels from time to time. That way they wouldn't be sticking future taxpayers with the painful alternative choices of reducing benefits, city services or materially increasing taxes paid.

Why didn't they take the straightforward path? Probably because they didn't want the taxpayers to know about the financial obligations they were assuming. So they made the promises without disclosing them properly and obligated future taxpayers to make good on them.

If that's not fraud, it's close. But that's exactly what they did. And what many other governments have done across the U.S. as well.

And that's also what has happened at various levels of government throughout our country--Social Security and Medicare included.

Whether we are now faced with an unfunded amount of $100 trillion or some higher astronomical number isn't the point.

It's huge and it's unknown, but it's always been knowable. That's why it's financial mismanagement at best and fraud at worst.

The poor taxpayer has been fleeced again, but the "poor" public sector employees will be the ones getting the sympathy of the public. And the government officials will do everything possible to escape responsibility for their actions, as always.

That's a crock, my fellow citizens.

Thanks. Bob.

More on U.S. Energy Independence and the Effects of Delay

One of my favorite expressions goes as follows: If we know where we're going to end up, let's immediately start heading in that direction. We'll never finish that which we don't begin.

That common sense rule absolutely applies to achieving North American energy independence. Let's get going. Besides, there's no time like the present.

For a look at what "could have been" in this regard, a recent editorial by Alaska Senator Lisa Murkowski in America's Lost Energy Decade is instructive. Here's what she says:

"Ten years ago this week, the U.S. Senate debated whether to open a small section of the Arctic National Wildlife Refuge to oil and natural gas production. Under the terms of the ANWR amendment, a maximum of 2,000 acres in the nonwilderness portion of the refuge (less than 0.01% of the whole) would have been opened to surface development. But the amendment was defeated, and we are paying the price today.

In an energy-strategy speech Tuesday, President Obama once again listed the importance of producing "more oil and gas here at home." Whether that happens depends on what the president and other policy makers have learned since the ANWR debate a decade ago.

Despite Alaska's stellar record of balancing energy production with environmental protection, opponents threw out a litany of excuses to oppose development in ANWR, none tethered to reason or reality. One senator urged her colleagues to think of the local wildlife, although wildlife has thrived on nearby state lands with oil and gas production. Another declared that there aren't enough pristine areas left in the world, ignoring the fact that the federal government alone has designated nearly 110 million acres in the U.S. as wilderness.

Some chose to claim that America was running out of oil, as if that would be a compelling reason to ignore our largest untapped field. Others alleged that the proposed drilling area only holds a six-month supply of oil—both understating the size of the resource and strangely believing it would somehow be the sole source of oil for our entire country over that period.

But the most blatant excuse is one that officially expires this week. Because oil might take up to 10 years to reach market, we were told that the nonwilderness portion of ANWR could not be part of the solution to our energy challenges. Nearly every senator who spoke against the amendment in 2002 listed this as a factor in his or her decision.

Now, 10 years later, it is plain to see that the argument was not just wrong, but backward. Instead of being a reason to oppose development in ANWR, the time it takes to develop the resource should be treated as a reason to approve it as quickly as possible.

Consider what would be different today had the Senate agreed to open those 2,000 acres a decade ago. If production were coming online right now as expected, it would be providing our nation with a number of much-needed benefits—including a lot more oil.

Oil prices would be restrained, if not reduced, as Alaskan crude made up for both actual and threatened losses around the world. Billions of dollars in new revenues would be generated for the U.S. Treasury, reducing the deficit and providing us with a means to invest in new energy technologies.

Oil imports would be reduced, keeping dollars within our economy to promote growth here at home. Thousands of ANWR-related, well-paying new jobs would be created at zero cost to taxpayers. And a looming national catastrophe—the shutdown for economic reasons of the increasingly empty trans-Alaska pipeline—would be averted.

It's a shame that we are forced to forgo these benefits at a time when all are desperately needed. But this is not just a missed opportunity; it's a cautionary tale. The shortsighted decision made 10 years ago is relevant to the current debate on energy policy.

Today, we again find ourselves at a moment when federal policy makers could dramatically increase domestic oil and gas production. But instead of embracing that possibility, many of the same members of Congress are making the same antisupply arguments. What we should realize is that these are empty excuses that hurt our nation's future prosperity.

It's time to revisit whether ANWR itself should be opened to development. Opening ANWR is not a silver bullet that will unilaterally or immediately solve our energy challenges. To demand that sets an impossibly high bar that no resource or regulation can ever reach. Instead we should see ANWR for what it can provide in terms of energy, jobs, revenue and security.

I'm particularly hopeful that President Obama will lead the way by living up to his recent promise to allow oil production "everywhere we can." If that's not just election-year rhetoric, this tiny patch of tundra in northeast Alaska would be a perfect place to start."

Summing Up

Talk's cheap. Delay's costly.

We coulda, shoulda and woulda started long ago to produce more oil in Alaska and elsewhere had the politicians not "saved us." We can't afford to let them save us again. It's time to act.

This costly silliness and absurdity has been going on since the 1970s. We need the oil, we have the oil and we can get it safely and inexpensively.

Our national security requires us to act. Our economic security requires us to act as well. So do our employment needs.

What more is there to say? Let's get on with it.

Thanks. Bob.

Malthusian Theory, Free Markets, Capacity and Government Knows Best

The Malthusian Theory, named long ago for Thomas Malthus, posited that population growth would eventually return society to a subsistence level as the output of agriculture was fixed.

In other words, as population grew, we'd run out of food, which was considered to be in a state of fixed supply.

That wrongheaded Malthusian principle has often been applied to oil capacity and oil depletion as well.

The problem is that it's wrong, because it doesn't factor in new knowledge, better technology and the increased productivity and output arising therefrom.

People have capacity to grow their knowledge base exponentially, and as our individual and collective knowledge increases, our productive capacity increases as well.

If you doubt this, think of what we are able to do using the internet today compared to how we communicated just a few short decades ago, and then reflect on why that's possible.

It's all due to increased human knowledge based on improved technology and the appropriate application thereof.

Similarly, how much oil exists depends largely on the state of knowledge and related technology. In turn we achieve progress built on added output and higher productivity.

In short, free markets and the contributions of free people are the keys to material progress and our ever growing standards of living.

Consider Notable & Quotable , global oil capacity and the supposed 'limits to growth.' Here's what it says:

"Forty years ago, The Limits to Growth, a report to the Club of Rome, was released with great fanfare at a conference at the Smithsonian Institution. The study was based on a computer model developed by researchers at the Massachusetts Institute of Technology (MIT) and designed "to investigate five major trends of global concern—accelerating industrial development, rapid population growth, widespread malnutrition, depletion of nonrenewable resources, and a deteriorating environment." . . . In 1972, the Limits researchers estimated known global oil reserves at 455 billion barrels. Since then the world has produced very nearly 1 trillion barrels of oil and current known reserves hover around 1.2 trillion barrels, a 40-year supply at current consumption rates. With regard to natural gas supplies, the International Energy Agency last year issued a report asserting, "Conventional recoverable resources are equivalent to more than 120 years of current global consumption, while total recoverable resources could sustain today's production for over 250 years.""

Summing Up

And that's why free people operating in free markets can do wonderful things. As knowledge expands, benefits increase exponentially.

No few members of the intelligentsia will ever match the collective knowledge or good judgment of We the People. Accordingly, that total knowledge held and dispersed by We the People will always far exceed the limited knowledge possessed by our nation's so-called political leaders.

Of course, we'll need to make sure the politicians always know that we know that, or they'll act otherwise. In any event, we won't run out of or need to suffer a shortage of fuel.

Knowledge and personal freedoms are the keys to the future, and the future will always be bright for Americans. You'd think we'd all know that by now.

That said, reminders are required from time to time as to who's really in charge and why knowledge matters.

The oil's there to be discovered and drilled. So let's get busy doing the right thing instead of arguing about the wrong thing.

And while we're at it, let's be quick to remind the politicians of that simple fact, too.

Thanks. Bob.

Let's Deal with Facts about Taxes Paid

The Real Tax Rates of the Rich has the facts.

And to nobody's surprise, they don't resemble at all what we're hearing these days from the politicians advocating higher taxes on the rich, but only on the rich, at least for now, in the name of fairness. After all, it's an election year.

Here goes:

"That fact that America’s tax code is progressive–i.e., the wealthy pay more–has been largely a given since the first income-tax was levied in 1862.
Yet the Buffett Rule and the ensuing debate over Mitt Romney’s taxes has painted a picture of America’s tax structure as regressive. Polls show that many Americans think the wealthy now pay a lower share than the rest of America.
While this may be true for a small number of rich people, it is broadly inaccurate. According to the most recent data from the IRS, America’s tax code remains progressive all the way up the income ladder–until you get to a tiny sliver of Americans who earn more than $10 million a year (there are about 8,000 of those out of 104 million filers).
What’s more, the wealthiest earners are paying a higher tax rate than they did in 2008.
Consider the following chart, which shows adjusted gross incomes and average tax rates, i.e., total income tax as a percentage of adjusted gross income less deficit:
We all know that the one percent (those making around $340,000 a year) as a group pay a higher rate than any other income group. Yet the new IRS data show that even the $1 million-plus earners (the top fraction of the one percent) pays the highest rate.
It’s only when you get to somewhere between the $10 million-plus earners and the “Fortunate 400″–the 400 highest earners–that the tax rates paid start to dip. And when they dip, they still dip to levels far above the average rates paid by 90% of Americans. The Fortunate 400 paid a rate of more than 18% in the latest period.
This isn’t to argue against higher taxes on the wealthy. Nor does it deny that some rich people reduce their taxes to well below the official rates through tax avoidance schemes and capital gains.
Yet the charts do support the previous findings that a growing number of today’s wealthy make their money from salaries rather than capital gains. And those top earners as a group still pay the highest rates in the country.

Discussion and Analysis
How much should each category of earner pay to the government is a common question. I guess the answer depends on what we view as fairness.
If fairness depends at least in substantial part on the individual taxpayer's ability to pay, then we should first ask how much money in total we'll pay to the government. Only thereafter can we assign each category of earner the responsibility to pay his "fair share" as a percentage of that total.
At least that seems fair to me.
Of course, our politicians don't act that way. That would require being specific, something they resist in favor of emotional sound bites. But we'll pretend otherwise in the following thought experiment.
In nice round numbers, the federal government spent about $3.8 trillion last year. Yet tax receipts were about $2.4 trillion. That leaves a shortfall of $1.4 trillion, commonly called the deficit.
On the campaign trail, President Obama has proposed the "Buffett" rule which would impose an additional tax on millionaires of approximately $5 billion annually. That leaves a shortfall of still approximately $1.4 trillion. In other words, the needle doesn't move.
Would it be too much to ask the politicians how they would intend, if they so intend, to close the $1.4 trillion shortfall, or at least a major portion thereof? Of course, their answer will be to wait until the economy recovers for economic growth to allow tax receipts to grow sufficiently to solve the deficit problem.
To which I reply, ok, then let's fantasize that we'll only need to close ~50% of the shortfall with higher taxes or less spending. That's $700 billion.
Now would it be to much to ask the politicians how they would intend to do that? Of course, their answer will be a combination of both higher taxes and lower spending. To which I reply, ok, then which spending will be reduced by ~$350 billion and which category of taxpayers will pay the additional $350 billion in taxes?
See how simple this could be, at least for starters?
A Few Caveats
Of course, more money to the government will mean more spending by the government. It always does.
And taking more money from some taxpayers to enable the government to redistribute a portion of that money to others will mean less economic growth and fewer tax receipts. It always does.
And committing to reduce government spending won't mean reduced government spending. It never does.
But let's try to get the politicians to play some version of the aforementioned accountability and transparency game anyway. If nothing else, it would be fun to watch them squirm.
Thanks. Bob.

OPM and Taxpayer Vigilance

City Official Said to Misuse $30 Million is a cautionary tale about government and OPM. First, the story:

"Federal authorities arrested the comptroller of a small city in Illinois on Tuesday, saying she used more than $30 million in municipal funds to live a lifestyle that included a horse farm, a convertible and a $2.1 million motor home.

Rita Crundwell was charged with one count of wire fraud. The 58-year-old has been the comptroller of Dixon, Ill., since the early 1980s. In the role, she oversaw all finances for the city, which is best known as the boyhood home of Ronald Reagan. . . .

Ms. Crundwell, over a nearly six-year period, paid out more than $30 million from a city account for her personal and business expenses, according to the U.S. Attorney for the Northern District of Illinois.

A federal court filing describes Ms. Crundwell as living a "luxurious lifestyle" that included a horse farm with stables for 150 horses. Federal officials said she used city funds to purchase the 2009 Liberty Coach motor home, several trucks and trailers, and a Ford Thunderbird convertible. Ms. Crundwell has an annual salary as comptroller of $80,000. . . .

Federal authorities said they were contacted by Dixon Mayor James Burke last fall after a city employee who was filling in for Ms. Crundwell during an unpaid vacation found an account that city money was being deposited into and withdrawn from.

Investigators said they traced the account and withdrawals back to Ms. Crundwell. A further review of city bank records found the misappropriation of city funds dated back to 2006, according to the U.S. attorney."

Discussion and Analysis

Good people do bad things. We'll begin there.

People entrusted with OPM will often waste much of it if not monitored carefully and in a transparent manner.

Accordingly, it's always best not to tempt people, good or bad. As President Reagan put it, "Trust but verify."

MOM like rules should always apply to OPM, especially when the public trust is involved. And that trust is always involved when taxpayer monies are expended by government officials.

Accountants follow a basic principle known as segregation of duties. Simply stated, it means that an employee that approves the writing of checks isn't to be the same person as the one writing the checks. Or that a different employee reconciles the checkbook than the one who wrote the checks and so forth.

In other words, while we can't always prevent a bad thing from happening, we can at least make it hard for the wrongdoer. And frequently we can nip bad behavior in the bud when it does occur.

As a result, we can at least make it hard for an employee to steal. And we do this by making the presence of a two or more person conspiracy a fundamental prerequisite to steal. Thus, one person acting alone should never be able to engage in financial theft for any extended period of time without being detected.

This more than one person to steal safeguard obviously wasn't in place in Dixon, Illinois during the past several years. The principle of segregation of duties may have been written in the city's accounting manual, and it certainly would have been in the city's outside auditor's manual. In any event, it wasn't adhered to by anyone, even if documented.

To me this behavior by all concerned is symptomatic of a much bigger issue when it comes to the public trust and taxpayer money. The presence of OPM mandates that special care be taken in safeguarding the expenditure of public funds.

Ms. Crundwell was undoubtedly a thoroughly trusted employee. That's probably why she was able to steal so many millions of dollars and go undetected for so long. And the taxpayers' money wasn't treated as MOM by the Dixon leaders either.

To say the least, Dixon officials did not serve their thieving and trusted employee well when they made it so easy for her to steal. Of course, Ms. Crundwell didn't serve Dixon city officials well either when she stole all that money.

Summing Up

Here's the real point. Although the employee clearly deserves whatever punishment is ultimately meted out, the Dixon city officials didn't even try to act as stewards of taxpayer funds.

In assessing blame, my view is that the most culpable people were the Dixon city officials and their auditors.

While Ms. Crundwell will undoubtedly go to jail, the rest of the bad guys will get off with not even a serious reprimand by the taxpayers.

They may even be praised for discovering the crime. That's wrong.

Sadly, We the People have grown far too accustomed to being cheated out of our money by government officials at all levels, whether the direct cause be simple waste or straightforward theft. That's also wrong.

The underlying cause is almost always the OPM factor. MOM behavior is absent. That's wrong, too.

Transparency, scrutiny and accountability are essential to the protection of MOM. That's what's right.

Thanks. Bob.

Energy Independence

North America is on the road to energy independence. We're going to be the new Middle East of energy production.

It sounds impossible and too good to be true, I know. But it's true. And how sweet it will be!

Move Over, OPEC--Here We Come argues quite convincingly that the only thing standing between America and energy independence is our domestic politics:

"The United States has become the fastest-growing oil and gas producer in the world, and it is likely to remain so for the rest of this decade and into the 2020s. Add to this output the steadily growing Canadian production and a likely reversal of Mexico's recent production decline, and theoretically total oil production from the three countries could rise by 11.2 million barrels per day by 2020, or to 26.6 million barrels per day from around 15.4 million per day at the end of 2011.

Whether the increase results in the U.S. reducing its imports or whether our net exports grow doesn't matter much to world balances. Either way, North America is becoming the new Middle East. The only thing that can stop this is politics—environmentalists getting the upper hand over supply in the U.S., for instance; or First Nations impeding pipeline expansion in Canada; or Mexican production continuing to trip over the Mexican Constitution, impeding foreign investment or technology transfers—in North America itself.

On top of this, the U.S. and Canada could see natural gas output rise by 22 billion cubic feet per day by 2020, with 14 billion of it coming from the Lower 48 states, four billion from Alaska and four billion from Canada. That's an increase of one-third, catapulting this continent into the ranks of significant exporters of liquefied natural gas.

These numbers provide a useful benchmark for measuring ways that policies could obstruct the pace of supply growth. We already have the experience of the BP/Macondo disaster in the Gulf of Mexico in April 2010, which led to a moratorium on drilling in U.S. federal waters, and a revamping of the U.S. regulatory regime governing leasing, revenue collection and safety. As a consequence, U.S. deepwater production has fallen by more than 300,000 barrels per day since then.

North America already has become the most important marginal source of oil and gas globally. U.S. imports of crude oil and petroleum-product imports have been plunging. The U.S. reached its peak as a net petroleum importing country in 2005-06. Since then, crude oil imports have fallen by almost two million barrels per day. Because the U.S. has the largest refining sector in the world, as domestic demand has fallen it has become a net petroleum-product exporting country—exporting more than 1.2 million barrels per day by the end of 2011—the first time it reached this status since 1949. The U.S.'s growing crude output is affecting the price difference between the traditionally more expensive light sweet crudes (which yield higher-value products like gasoline) and heavy sour grades.

Excess Canadian crude oil produced from oil sands is expanding at a rate of one million barrels a day every five years. The more that's produced, the less of a market there will be for oil from Venezuela and some other OPEC member countries with similar-quality oil, requiring them to either curtail production or lower prices. Even if oil prices rise in the medium term, we expect 2020 prices to be no more than $85 per barrel, compared with today's prevailing global price of $125.

The economic consequences of this supply-and-demand revolution are potentially extraordinary. We estimate that the cumulative impact of new production and reduced consumption could increase real U.S. gross domestic product (GDP) by 2%-3.3%, or by $370 billion-$624 billion, by 2020.

Of this estimate, $74 billion comes directly from the output of new hydrocarbon production alone. The rest is generated by multiplier effects as the surge in economic activity drives higher wealth, spending, consumption and investment effects that ripple through the economy. This potential re-industrialization of the U.S. economy is both profound and timely, occurring as the U.S struggles to shake off the lingering effects of the 2008 financial crisis.

Equally remarkable is the potential impact on the U.S. labor market. We estimate that as many as 3.6 million new jobs may be created on net by 2020. Some 600,000 jobs would be in the oil and gas extraction sector, another 1.1 million jobs in related industrial and manufacturing activity, and the remainder in ancillary job sectors. Overall, the national unemployment rate could decline by as much as 1.1 percentage points from what it otherwise would be in 2020.

Another potentially dramatic consequence of the North American hydrocarbon revolution is the impact on the U.S. current account deficit. The deficit, currently running at negative 3% of GDP, may be reduced by anywhere from 1.2% of GDP to 2.4% of GDP. This would also have implications for the U.S. dollar, potentially helping it appreciate by 2% to 5% in real exchange-rate terms, reversing its long-term decline and maintaining its status as the global reserve currency of choice.

It is now possible to meet the goal of energy independence for the U.S. One consequence is a significantly lower vulnerability of North America—and the world market—to oil price spikes. But also significant are the geopolitical consequences of a weakened OPEC and of the potentially reduced importance to the U.S. of changes in oil- and natural gas-producing countries world-wide."

How sweet it will be. It seemed impossible a few short years ago.

Now all we have to do is believe, act and move the politics to the side.

We can do that.

Thanks. Bob.

Failing U.S. Schools and National Security

Weak Schools Said to Imperil Security argues that the performance of our U.S. schools is not only essential to our nation's economic prosperity but critical to our national security as well.

Here's an excerpt from the sobering fact based study:

"Flaws in U.S. schools are increasingly causing a national-security risk, producing adults without the math, science and language skills necessary to ensure American leadership in the 21st century, warns a report issued Tuesday by the Council on Foreign Relations.

Warning that "the education crisis is a national security crisis," the report says that too many schools are failing to adequately equip students for the work force, and that many have stopped teaching the sort of basic civics that prepare students for citizenship. Resources and expertise aren't distributed equitably, often hurting the most at-risk students. The situation, it says, puts the country's "future economic prosperity, global position, and physical safety at risk."

The report notes that U.S. students have performed poorly on international assessment tests against those from other nations that are making rapid strides. It points to reported shortages of qualified workers in the U.S. life-science and aerospace industries, and notes that the State Department and intelligence agencies are "facing critical language shortfalls in areas of strategic interest."

It cites a recent study saying that more than half of Americans aged 17 to 24 aren't qualified to join the military because they drop out of high school or graduate but lack the math, science, and English skills to perform well on standardized military-qualification tests.

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The authors recommend expanding core standards for states—now focused on math and literacy—to science, technology and foreign-language skills. The report urges wider use of charter schools and other alternatives to neighborhood public schools that are underperforming, and it suggests an annual "national security readiness audit" to help policy makers and citizens assess the "level of educational readiness."

The report acknowledges the persistence of the problems it highlights, noting that many of the same risks were identified in "Nation at Risk," a 1983 report commissioned by the Reagan administration that warned of "a rising tide of mediocrity that threatens our very future as a nation and a people." But it cites reasons for fresh hope, including growing public awareness of the issues and bipartisan support for measures to address them.

"This country has a real but time-limited opportunity to make changes that would maintain the United States' position in the world and its security at home," it concludes."

Summing Up

In 1983 essentially the same conclusions were reached in "Nation at Risk." Since then the outlook has gotten considerably worse.

Government schools and government control of education have failed far too many of our kids, pure and simple. There is an overwhelming amount of evidence supporting this conclusion.

But the vested interests in perpetuating this failing situation are obviously very strong. As a result, our children's educational achievement levels relative to the rest of the world's children continue to decline.

Unless and until We the People insist on accountability and choice for U.S. schools and parents, respectively, we will only have ourselves to blame when the next failing report comes out.

We have lots of problems but none more fundamental than the failure to educate and develop informed and knowledgeable future citizens.

The apparently unconcerned public sector unions and allied government officials must be confronted and overcome by We the People. Otherwise we'll have failed our kids and grandkids.

Monopolies don't create good results. Government schools are monopolies. We need to rid ourselves of these monopolies and create markets where parents receive vouchers and are allowed to spend those vouchers on the school of their choice.

Who among us finds vouchers and parental choice an unacceptable alternative compared to the disgraceful situation in American public education today?

Thanks. Bob.

American Airlines and its Bankruptcy Proposal ... Unions Kill Another Company and Thousands of Jobs

American Airlines (AMR) recently filed for bankruptcy. Now management has disclosed its proposed plan to "fix" the company.

As part of its "get well" plan, AMR intends to reduce employment by 15%, or 13,000 employees. It also plans to terminate its pension plans and convert them to 401k plans. It further expects to modernize its fleet, outsource work and improve internal productivity in an attempt to restore the company to a competitive and profitable condition.

Why bankruptcy? Why didn't the company, with the agreement of its unions, take these very necessary steps years ago? Why didn't the unions play a constructive role and prevent the situation from getting out of hand? Why was it necessary to involve the courts? Why does the government continue to side with the unions? And what about the taxpayers?

Basically, the answers to all of the above questions involve the power, intransigence and brinksmanship employed by the unions for many, many years, both at AMR and elsewhere in the airline industry as well.

AMR incorrectly believed it could work effectively with the unions to regain competitiveness and profitability. It tried much harder and longer to work things out with the unions than its competitors did. And now it's going to continue to pay the price for having done so.

Simply stated, the unions wouldn't agree to make the changes required to save the company and the employees' jobs. They preferred to see the company go downhill until it entered bankruptcy. Now the unions will sit and harshly criticize the company and bankruptcy court as they are forced to do the necessary and unpleasant work all by themselves.

That union posturing will allow the unions to oppose company proposals and the court's approval thereof, and thereby the unions will maintain their pro-employee facade. At the end of the bankruptcy proceeding, they will be able to say to their membership and the public, and after the company's go forward plan has been approved, "Don't blame us. We fought them all the way."

And in fact, they will have done just that.

One more thing. Lest we forget, all this game playing by the unions will also cost U.S. taxpayers lots of money. Later we'll get to the taxpayer and the role of the PBGC (pension benefit guaranty corporation), a federal pension insurer.

But now let's look more closely at this AMR story.

AMR Seeks to Cut 15% of Jobs has several relevant pieces from which we'll quote:

GENERAL OVERVIEW

1 ... "American Airlines parent AMR Corp. Wednesday said it will seek to cut 13,000 jobs and terminate pensions in pursuit of $2 billion in annual cost savings, tipping its hand for the first time in what could be a long and painful bankruptcy proceeding.

The company said it wants to reduce labor costs by $1.25 billion a year, or 20%. That includes cutting its work force of 88,000 by nearly 15%, imposing new productivity measures and outsourcing some work. The company also aims to terminate its four underfunded pension plans, a move that would represent the largest pension default in U.S. history.

"The world has changed around us and this is our moment to adapt or lose the opportunity forever," AMR Chief Executive Tom Horton said in a letter to employees.

Mr. Horton, who with senior executives Wednesday laid out the plans to leaders of American Airlines' three big labor unions, also said "we will end this journey with many fewer people. But we will also preserve tens of thousands of jobs that would have been lost if we had not embarked on this path.""

ROLE OF BANKRUPTCY COURT, THE UNIONS AND GOVERNMENT (PBGC)

2 ... "AMR's plan faces a number of hurdles, including convincing U.S. Bankruptcy Court Judge Sean Lane that the carrier won't be able to successfully reorganize without these savings. The desired labor cuts will first be subject to negotiations between the company and its unions. If the unions balk, AMR could petition the judge to let it modify the contracts and impose the changes it seeks.

"The piece I'm personally shocked by is the depth of the concessions they're asking for," said Transport Workers Union International President James C. Little. "We're going to fight this."

To win approval for the desired pension terminations, AMR will need to make a similar case to the judge over what is expected to be fervent opposition from the Pension Benefit Guaranty Corp. The PBGC, a federal pension insurer, would have to take over the plans, adding to its already record deficit.

AMR, the nation's No. 3 airline by traffic, has struggled financially since 2001, losing $12.5 billion from that year through the first nine months of 2011. The Fort Worth, Texas, company filed for bankruptcy-court protection Nov. 29. As part of its turnaround plan, Mr. Horton said AMR seeks $750 million a year in other savings from restructuring debt and aircraft leases, grounding older planes and redoing supplier contracts."

COMPETITION USED BANKRUPTCY PROCESS TO STRENGTHEN THEMSELVES AND WEAKEN AMR

3 ... "More than eight years ago, AMR staved off a Chapter 11 filing when employees voluntarily agreed to $1.8 billion in annual concessions. But many of its rivals used the bankruptcy-court process to extract much larger cuts, and some of them also shed their pension obligations. Then they consolidated, creating larger airlines with better route networks and strong relationships with foreign partners. American, mired in its own problems, sat out that dance.

The four largest carriers that restructured under court protection in recent years chopped labor costs by an average of 42% and cut their full-time-equivalent employees by 45%, according to Bill Swelbar, an airline researcher at the Massachusetts Institute of Technology. To match those savings, American needs to cut another $1.5 billion in labor costs and nearly 14,000 jobs on top of the changes made in 2003, he said.

Mr. Horton's overall labor-savings goal of $1.25 billion a year is not far off that mark, especially because rivals' labor costs are rising as unions negotiate new contracts. The reduction of 13,000 or more of AMR's workers also would comport with steps rivals took."

TAXPAYERS WILL END UP ON THE PENSION HOOK

4 ... "The PBGC already has warned that it will fight AMR on the pension terminations. "Before American takes such a drastic action," agency Director Josh Gotbaum said Wednesday, "it needs to show there is no better alternative."The PBGC, already laboring under a record $26 billion deficit, estimates that the plans have assets of $8.3 billion to cover $18.5 billion in benefits. The agency is limited on what it can pay to retirees, thus the highest-paid AMR workers, particularly the pilots, would receive much less than they would have if the plans weren't jettisoned.

The plans would be replaced by 401(k) plans with a company match for employees who contribute. Workers would have to contribute toward their medical plans and the company would discontinue retiree medical coverage, Mr. Brundage said. . . .

AMR has no set timeline in which it hopes to reach consensual agreements with its unions on the new terms it seeks. But Mr. Horton said it is in the best interests of the company and employees "to get on with this" and achieve agreement as soon as possible."

WITHOUT A REASON, THE UNION HAS RUINED EVERYTHING FOR AMR AND ITS EMPLOYEES

5 ... "Mr. Hoban, the spokesman for the Allied Pilots Association union, said the company wants authority to require its pilots to fly 100 hours a month, or 15 hours more than their current labor contract allows.

The company also is seeking to outsource flying of any planes with fewer than 89 seats, instead of the current limit of 50 seats. Only about 400 pilot positions will be eliminated out of 10,000.

The company's proposal "is even more extreme and despicable than we had anticipated," Laura Glading, president of the Association of Professional Flight Attendants union said Wednesday.

AMR's six-year contract offer to flight attendants would increase salaries by 1.5% a year but also require flight attendants to work up to 100 hours per month—up from a maximum of 83—and reduce vacation and sick-day accrual rates."

PUTTING IT ALL TOGETHER

Laura Glading, the flight attendant union's president, is absolutely correct about the presence of "extreme and despicable" behavior. However, she's completely wrong about who engaged in it.

The unions have managed to bankrupt the unionized portion of the airline industry, as they did the steel industry, auto industry and rubber industries previously.

Thus, the bankruptcy court is the only avenue left to AMR management as it tries to survive in business and save tens of thousands of jobs in the process.

The unions, as is their habit, have continued to play a short sighted, very stupid and reckless power game throughout the years. In the process, AMR has lost billions of dollars for its shareholders. Now they're bankrupt.

Other unionized airlines have long been unprofitable as well. Except for a few non-union carriers, the airline industry has consistently been and remains a loser for shareholders. Taxpayers, too.

Now the taxpayers will get to pay another huge sum by subsidizing the government pension agency, the PBGC. That's because the PBGC doesn't have enough money to pay the AMR pensions owed. Enter the taxpayers, perennial bag holders for the unions and government officials.

Yes, the union lady president is right. It's despicable behavior for sure.

The unions have won again. In the end, they'll lose again. And lots of regular people as well.

And for no good reason.

Thanks. Bob.