Monday, December 31, 2012

Raising Taxes ... How Much and on Whom? ... And What About Welfare-Entitlements?

There has been lots of noise and political chatter this year about the need to raise taxes on the 2% top earners, aka the "rich." Rather than argue the case, let's just admit that that's a done deal. Now what about the other 98%?

You see, the tax increase on the rich is nothing but a political ploy. It helped win Presdient Obama's re-election, of course, but now that's a done deal, too. Four more years.

So now let's look at the reality of why taxes on everybody need to go up, regardless of who says what or who's in office.

Here's the deal. Raising taxes by 100% on 100% of the taxpayers would in all likelihood not produce a balanced budget. That's right -- a 100% tax increase on 100% of the taxpayers wouldn't eliminate our deficits.

That's why we need solid and sustainable economic growth led by the private sector, but that's not where we're headed anytime soon. Unfortunately.

So why don't our elected self serving aristocrats get serious about this spending and taxing deficiency that's going to prevent our children from enjoying the same opportunities we're had? Good question.

Wishful Thinking and Middle-Class Taxes is an exercise in truth telling. And simple math as well:

"IN the continuing fiscal negotiations between President Obama and House Republicans, both sides have, from the very beginning, agreed on one point: Taxes on the middle class must not rise. But maybe it’s time to reconsider this premise. An unwavering commitment to keep middle-class taxes low could be one reason the political process has become so deeply dysfunctional.
Let’s start with the problem: the budget deficit. Under current policy, the federal government is spending vastly more than it is collecting in tax revenue. And that will be true for the next several decades, thanks largely to the growth in entitlement spending that will occur automatically as the population ages and health care costs increase. As a result, the ratio of government debt to the nation’s gross domestic product is projected to rise, substantially and without an end in sight.
That can happen for a while, or even a long while, but not forever. At some point, investors at home and abroad will start questioning our ability to service our debts without creating steep inflation. It’s hard to say precisely when this shift in investor sentiment will occur, and even whether it will strike in this president’s term or the next, but when it does, it won’t be pretty. The United States will find itself at the brink of an unprecedented financial crisis. . . . 
Democrats . . . want to preserve the social safety net pretty much as is. They balk at any attempt to reduce this spending, including even modest changes like altering the price index used to calculate Social Security benefits. They focus their attention on raising taxes on the most financially successful Americans, contending that the rich are not paying their “fair share.”
Fairness, like beauty, is in the eye of the beholder. Unfortunately, people’s judgment is often based on anecdotes that distort rather than illuminate. The story of the undertaxed Warren Buffett and his overtaxed secretary looms larger in the public’s mind than it should.
Here are some facts, so you can judge for yourself:
In 2009, the most recent year for which data are available, the richest 1 percent of Americans paid 28.9 percent of their income in federal taxes, according to the Congressional Budget Office. (That includes income taxes, both individual and corporate, and payroll taxes.) Members of the middle class, defined as the middle fifth of households, paid 11.1 percent of their income in taxes.
Some of this difference in tax rates is attributable to temporary tax changes passed in response to the recent recession. But not all. In 2006, before the financial crisis, the top 1 percent paid 30 percent of their income in taxes, compared with 13.9 percent for the middle class.
These data suggest that the rich are not, as a general matter, shirking their responsibilities to support the federal government. To me, the current tax system looks plenty progressive. Others may disagree.
One point, however, cannot be disputed: Even if President Obama wins all the tax increases on the rich that he is asking for, the long-term fiscal picture will still look grim. Perhaps we can stabilize the situation for a few years just by taxing the rich, but as greater numbers of baby boomers retire and start collecting Social Security and Medicare, more will need to be done.
Which brings us back to the middle class. When President Obama talks about taxing the rich, he means the top 2 percent of Americans. John A. Boehner, the House speaker, talks about an even thinner slice. But the current and future fiscal imbalances are too large to exempt 98 percent or more of the public from being part of the solution.
Ultimately, unless we scale back entitlement programs far more than anyone in Washington is now seriously considering, we will have no choice but to increase taxes on a vast majority of Americans.
This could involve higher tax rates or an elimination of popular deductions. Or it could mean an entirely new tax, such as a value-added tax or a carbon tax.
To be sure, the path ahead is not easy. No politician who wants to be re-elected is eager to entertain the possibility of higher taxes on the middle class. But fiscal negotiations might become a bit easier if everyone started by agreeing that the policies we choose must be constrained by the laws of arithmetic."
Summing Up
Are higher taxes across the board and reduced welfare-entitlements up ahead for We the People? Yes, both are going to happen sometime soon.
And they will hit all of us. The problem is simply too big to be solved by a small percentage of the population.
It's just math.
In rough numbers, We the People pay over $1 trillion in personal income taxes. We spend over $3.5 trillion annually. In total we collect about $2.5 trillion from all sources. That leaves a $1 trillion annual shortfall or deficit between spending and tax receipts.

And while more private sector led economic growth will certainly help, even that won't solve our excessive government spending related problems.

And although doubling individual income tax collections (100% increase on 100% of taxpayers) would theoretically eliminate our deficits, it won't. 

Even that wouldn't be enough, since the impact of such an extreme raise in taxes would undoubtedly impact economic growth negatively in a big way and thereby reduce income tax receipts, since income would decline due to the lower economic activity.

Thus, reduced welfare-entitlements are up ahead for We the People, regardless of what's done with taxes, and that's in addition to the higher taxes on all taxpayers.

Unless a drastic reduction in government spending takes place, which it won't.
So even while the aristocratic Remocrats and Depublicans all proclaim in apparent sincerity that higher taxes and reduced welfare-entitlements aren't going to be imposed on the 98% of "middle class" taxpayers at some near point down the road, don't believe a word they're saying.

They're lying. And we're letting them. What does that say about us?
To repeat, it's just math.
Thanks. Bob.

Sunday, December 30, 2012

Higher Education ... We the Minions Don't Have Enough Money to Pay for All the Governments' Bureaucratic and Wasteful Spending in the Slow Growth Economy of the Future


When economies grow, government spending grows. All boats are lifted, which is a great thing, but that strong economy also proves to be the unwitting genesis of future wasteful bureaucratic OPM spending.

And when government spending grows, it becomes less productive. The law of diminishing returns prevails, and the theory of bureaucratic displacement enters the picture.

Then despite the strong economy, the foundation for future outsized deficits is put in place, and borrowing to keep up spending in excess of tax receipts becomes the norm.

But nobody worries, including We the Minions, because it's just a matter of how much more is spent on the various areas. Divvying up the growing pie, in other words. And the government spending spree continues.

All is well in the land of the big spending aristocratic run country, at least until the period of strong economic growth stops.

Then as the economy becomes stagnant and debt levels continue to climb to until they reach record heights, the reverse becomes true.

The economy grinds to a halt, and that's when all economic hell breaks loose. Like today.

We've learned know how to spend wastefully when economic growth has been solid, and we now know how to borrow in excess to keep the good times rolling. But when the tide turns, we have no clue what to do. In other words, pain sharing and accepting that we have to work harder to generate more output or live on less spending isn't something we know how to do. We are addicted to growth and the wasteful and unproductive ways it has facilitated, if not fostered. The aristocratic politicians jave learned to love it, but so have We the Minions.

So we all join hands and fight tooth and nail the need to adust our spending habits. Since living on less doesn't come easy, we prefer to wait for the good times to return so we can keep spending and borrowing.

But the waiting doesn't end and the good times don't return. At least not automatically. In fact, government decisions and efforts designed to "save the middle class" tend to make the return of the good times vastly more difficult and distant.


We've discussed the theory of bureaucratic displacement recently. It's an important concept to understand.

The basic idea is that when a bureaucracy exists, making more money available to the wasteful bureaucrats will result in even more bureaucracy. In other words, the more spent by the bureaucracy, the less bang for each buck spent accrues to the benefit of the minions. Useless work displaces useful work and productivity weakens as a matter of course. It's systemic. 

Accordingly, government bureaucrats keep trying to help and government spending keeps growing, thereby making things worse as bureaucracies that grow simultaneously become less efficient and effective. Just more wasted time and money at a time that we can't afford to waste either time or money. OPM repaces MOM.


Government, health care and our system of public education are great examples of wasteful growth in bureaucratic spending of both time and money. And when weak economies cause the money to stop flowing into government coffers, these bureaucracies function like a deer in the headlights, not knowing what to do except spend more money.

As the bad times linger, taxpayers grow ever more weary and reluctant to provide more money to finance the governments' wasteful ways. And the lenders grow more weary and cautious as well.

Now let's zero in the University of Minnesota example to illustrate the overall point.

Deans List: Hiring Spree Fattens College Bureaucracy --- And Tuition puts the issue of bureaucratic displacement and OPMness in a straightforward way:

"When Eric Kaler became president of the University of Minnesota last year, he pledged to curb soaring tuition by cutting administrative overhead. But he hit a snag: No one could tell him exactly what it cost to manage the school.

Like many public colleges, the University of Minnesota went on a spending spree over the past decade, paid for by a steady stream of state money and rising tuition. Officials didn't keep close tabs on their payroll as it swelled beyond 19,000 employees, nearly one for every 3½ students. "The more questions I asked, the less happy I was," Dr. Kaler said.

Many of the newly hired, it turns out, were doing little teaching. . . . University of Minnesota salary and employment records from 2001 through last spring shows that the system added more than 1,000 administrators over that period. Their ranks grew 37%, more than twice as fast as the teaching corps and nearly twice as fast as the student body.

Across U.S. higher education, nonclassroom costs have ballooned, administrative payrolls being a prime example. The number of employees hired by colleges and universities to manage or administer people, programs and regulations increased 50% faster than the number of instructors between 2001 and 2011, the U.S. Department of Education says. It's part of the reason that tuition, according to the Bureau of Labor Statistics, has risen even faster than health-care costs. . . .
For students, the effect is striking. In 1975, a University of Minnesota undergraduate could cover tuition by working six hours a week year-round at a minimum-wage job . . . . Today, a student would have to work 32 hours at minimum wage to cover the cost. . . .

Administrative employees make up an increasing share of the university's higher-paid people. The school employs 353 people earning more than $200,000 a year. That is up 57% from the inflation-adjusted pay equivalent in 2001. Among this $200,000-plus group, 81 today have administrative titles, versus 39 in 2001.

Administrators making over $300,000 in inflation-adjusted terms rose to 17 from seven.

Many forces besides administrative overhead add to universities' cost pressures, among them health-care and retirement expenses. And among the administrative spending, some is unavoidable, such as that owing to federal rules requiring greater spending to oversee research grants or accommodations for students with disabilities.

Schools also compete—by necessity, they say—to offer fancier dorms, dining halls, gyms and other amenities, to raise their rankings and attract students. "It's a competitive business, and institutions compete for students the same way Lexus and Mercedes compete for car buyers," says Paul Lingenfelter, executive director of the State Higher Education Executive Officers Association.

To compete, schools have stepped up borrowing for construction. Total debt at public four-year colleges more than tripled between 2002 and 2011, to $88 billion, according to the Department of Education. At the University of Minnesota, the yearly cost of servicing debt more than doubled to $106 million in that time.

For decades, public universities were somewhat insulated from financial rigor by steadily increasing state funding. That has slowed or stopped in many states in tight budgetary times. Minnesota's government last year contributed $570 million to university operations, which was about the same as in the 2003-04 school year despite inflation and roughly 10% increased enrollment.

Higher education now faces pressures similar to those that reshaped other segments, Minnesota's Dr. Kaler says. "You look at American industry in general—the car industry got comfortable until the Japanese showed up, the airline industry was comfortable until it got deregulated," he says. "Now it's higher ed's turn.". . .

Dr. Kaler has a salary of $610,000 and his chief of staff of $195,000. Minnesota's governor makes $120,000. Mr. Kaler, 56, said his pay "is competitive in the marketplace."

Summing Up

When the good times roll, the money flows. Bad habits proliferate throughout the land.

When customers aren't in charge, MOM disappears and OPM takes control.

When bureaucracy is present and MOM is absent, "bureaucratic displacement" swings into action in a big way.

Government gets bigger, more wasteful, less customer centered, less productive and a vicious circle makes everything worse in the midst of trying to make things better.

But the artistocrats don't know or won't admit reality and keep spending and growing governments' piece of a shrinking pie.

Finally, the federal government has to cut back its funding to states for funding education due to the financial crisis, states then have to cut back back funding to cities and publicly supported K-12 schools, universities and such, and all the bad habits need to be reversed.

Ever try to lose weight, stop smoking or study more? If so, then you know what I mean by bad habits being hard to break.

But there's no more money available to waste and no more time to waste either.

Still, there's not yet a sense of urgency about spending and productivity in government bureaucracies, including the University of Minnesota.

But the sense of urgency will develop real soon, because when the aristocracy runs out of OPM to spend, the bureaucratic aristocrats, as well as all of us minions, find ourselves up a creek without a paddle.

And asking taxpayers or foreign lenders to row the boat harder is no real solution. The headwinds are simply too strong.

It's time to throw overboard our wasteful ways and eliminate our bad habits.

Here's the simple truth taught by the University of Minnesota example.

We the taxpayers are out of money to support unproductive government growth that results in wasting more time and money by aristocratic politicians playing the phony Robin Hood game of "saving the middle class."

Thanks. Bob.

Saturday, December 29, 2012

The Washington Aristocracy vs. We the People ... The Aristocracy is Winning

Our national politicians are inept, dysfunctional and unable or unwilling to govern effectively. Everybody knows that. But that's not the worst part.

They also constitute a self interested aristocracy which is interested only in power and staying in political office. They do not have the best interests of We the People in mind. Only their own political interests.

And repeatedly practicing and proving the "theory of bureaucratic displacement," of course. (See prior post.)

So let's cease and desist from separating the political 'leadership' into red and blue, Republicans and Democrats, conservatives and progressives, spending and tax hawks and all the rest of the nonsensical political talk that emanates from Washington. They're aristocrats, pure and simple, and we're their unwitting servants. Not the other way around.

Lots of us limited government advocates mistakenly refer to what really amounts to aristocracy as socialism.

But whatever it's called, to mere minions like us, what difference does it make whether we have socialist or aristocratic rulers? It amounts to the same thing, doesn't it? Well, no, as a matter of fact, it doesn't.

In a Constitutional system of limited government like we have in the U.S., there is no place for a self appointed aristocracy. We the People are supposed to be in charge. There's not supposed to be an aristocracy. We're not Europe.

Our system of government simply was not intended for We the People to be ruled by self appointed aristocrats. We're supposed to rule ourselves and be represented by our duly elected officials --- not ruled by them.

But if I'm correct and it is the political aristocracy that rules our government, who belongs to the aristocracy and where does it reside? Well, read on.

America's Boomtown is subtitled 'While the economy sputters, Washington flourishes:'

"Angst may pervade the land at year's end, but there's one place where residents can rest easy. According to the Washington Post, "While much of the nation is still struggling to emerge from a historic housing-market meltdown, the District is reliving its boom days."

No matter how the economy sputters in flyover country next year, President Obama has made clear that the spending party will continue in Washington. And that's the main reason Beltway homeowners can party like it's 2005. The Post says that amid a "red-hot real estate market," one D.C. townhouse recently listed for $337,000 sold for more than $760,000, after attracting an astounding 168 offers.

Who wouldn't bid aggressively? The chance that the capital city will face the kind of austerity visited upon Midwest manufacturing towns is essentially zero. The feds have run up annual deficits of more than $1 trillion in every year of the Obama first term.

Even if the scheduled avalanche of taxes buries workers and savers next week, the Congressional Budget Office says the federal government will still be spending $641 billion more in fiscal 2013 than it collects in revenue. This is probably a low-ball deficit estimate because CBO staffers largely ignore the impact of tax policies on human behavior.

But any way you calculate it, the feds will spend more than $3.5 trillion this year, and a lot of that money will be spilled in the District of Columbia and its ever-expanding suburbs. The Obama regulatory binge, including the implementation of ObamaCare, will force businesses to send money to D.C. influence-peddlers.

For the Beltway boom, there's no end in sight. In an uncertain world, betting on the expansion of Washington seems to be the most prudent of investments."


Artistocratic politicians like the Roosevelts, Kennedys, Bushes and Clintons have longed reigned supreme in U.S. government. They're not smarter individuals than the rest of We the People -- just more powerful and perhaps a bit more clever politically with the games they play.

Over the decades, most of the Democratic leaders have successfully vilified entreprenuerial businessmen as fat cat greedy enemies of the victimized 'middle class,' and the 'middle class' has been won over by effectively being bribed with entitlements for which somebody else is paying --- fat cats or government borrowings to be repaid by succeeding generations of minions.

Our government spends a trillion dollars more each year than we collect in taxes. And not even one half of that spend to tax gap can continue indefinitely, no matter what the political aristocrats may say or do.

The money they spend and redistribute to minion #1 is first taken from minion #2. The money they "invest"  in Solyndra and education must first be taken from the minions. Period. End of story.

Both political "sides" keep using the word "fairness." Well, what's fair about a no growth, high unemployment, heavily indebted nation ruled by self interested bureaucrats who can't make the necessary bipartisan and timely decisions to bring our country's finances under control?

And who also won't agree on the specifics with respect to how we will learn to live within our means as a nation? And who treat We the People with utter disdain by the very way in which they "rule?"

The facts are straightforward. We've spent and borrowed our way to a false prosperity over the past several decades, and now the bill is coming due.

What do we need to do? Things like the following: raise taxes, reduce spending, raise the age for Medicare and Social Security eligibility, reduce mortgage interest deductibility, reduce charitable contributions deductibility, eliminate the non-taxable nature of employer health care contributions for employees, tighten student loans, stop building bridges to nowhere, stop "investing" in the Solyndras, wind and ethanol programs, introduce vouchers into our educational system, tighten control over taxpayer funded support for public universities, put the post office out of business as a ward of the state, and countless other similar activities.

We simply need to develop an actionable plan to raise enough revenue and reduce enough spending to accomplish some kind of national fiscal sanity over time. And unleash the private sector so the economy can grow and jobs can be found for those willing and able to work.

But now that the year 2013 is upon us and the obvious but clearly painful choices await the aristocrats' decisons as the duly elected representatives and public servants of We the People, the aristocratic government rulers don't know what to do. Or at least don't have the guts to do it.

In fact, acknowledging that as a nation we must learn to live within our means hasn't even been part of the aristocrats' lexicon the past several decades.

Summing Up

The entire aristocratic U.S. political rulership is predicated on OPM redistributionist spending, and on getting and staying elected. And to do that by taxing as few people as possible as much as possible and by giving freebies to as many people as possible and borrowing the shortfall or gap between the amount taxed and the amount spent.

The political aristocrats realize fully that implementing a truly 'balanced' spending to taxing approach would be painful and upset the 'middle class' minions, aka the lion's share of the voters. And that if they were to do what's right, in the next election they may lose their powerful positions as the chief spenders of the land.

So they play chief can kickers and hope the problem will either go away or at least not become an immediate crisis which has to be dealt with on their watch.

The politicians are in this together, joined at the hip and unwilling to admit the cold hard truth about their very real contribution and huge role in our nation's unhealthy economy and poor financial condition and outlook.

Here's my reality. It's not about the rich versus the poor or the capitalists versus the socialists.

Instead it's all about the aristocrats versus We the People.

Thus far the aristocrats are winning in a big way, as they have been for a very long time.

And it's our fault, We the Minions, that we're allowing the aristocrats to defeat us without even working up a sweat while doing so.

Politics sucks.

Now I feel better.

Thanks. Bob.

Friday, December 28, 2012

Do or Die for Four Old Line Retailers ... Creative Destruction and The "Theory of Bureaucratic Displacement"

In the private sector, creative destruction rules. Private sector companies either grow sales by competing effectively for profitable consumers or lose in their attempts to sell those customers, and then lose investors and go out of business.

No such existential thing is in play in a public sector bureaucratic enterprise supported by taxpayer dollars. Then it's the "bureaucratic displacement theory" at work. As bureaucracy grows, additional and unproductive bueaucratic work displaces useful work. As a result, the added expense results in less useful output.

But in the public sector, the customer doesn't rule when government bureaucrats are calling the shots, so the increasingly unproductive government agency neither changes its ways nor ceases to exist. Think of government run and heavily taxpayer supported health care, K-12 public schools, universities, Social Security offices, the postal service, drivers licensing bureaus and such.

At least the vast majority of unprofitable bureaucratic private sector companies eventually change their ways or cease to exist, and they don't absorb taxpayer monies while in the process of doing so. Think of GM as a good example but for the government bailout, which I believe was just a temporary "fix" at best. In the end, the customer will rule when it comes to GM's future as a private sector employer.

But let's discuss retailing today.

Montgomery Ward used to be the second largest retailer in America behind #1 Sears. J.C. Penney was the third largest.

Kmart passed Montgomery Ward in the 80s to become #2.

At that time Wal-Mart was a little known regional discounter of low priced goods whose business was centered on customers in small towns in approximately 10 southwestern states. The idea was to bring big city prices to small towns through improved logistics, information and physical distribution facilties. The low cost Wal-Mart business model of everyday low pricing and minimal advertising worked as customers flocked to its stores. Companies like Target soon followed.

The word Amazon was known only as a rainforest or jungle in the Amazon Basin of South America.

Fast forward to today and the effects of capitalistic "creative destruction" where free to choose customers rule and retailers like Wal-Mart and Amazon prosper the most.

Through the process of creative destruction in retailing, Amazon and online selling have made huge strides throughout the U.S. retail marketplace, showrooming is a truly big deal, and direct to home delivery is becoming no big deal. In fact, it's commonplace. Logistics is the name of the game in customer service and low cost business models are the winners. Price, quality and delivery capability are still the name of the game, but the game continues to be played differently and consumers are the beneficiaries and the bosses as well.

Thus, what hasn't changed in retail is the power of consumers  to determine who wins the retailing game. That said, just about everything else has changed, thanks to the creative destruction of the marketplace where MOM still runs the show.

For Four Retailers, Do or Die is subtitled 'The New Year Has New Urgency for Best Buy, RadioShack, J.C. Penney and Sears:'

"While 2013 will be a tough year for retailers due to the tepid economic recovery, a few in particular face a critical 12 months. Their experiences highlight the challenges facing store chains, from increasingly cautious consumers to fierce online competition.

These unlucky retailers are going into the New Year with extra woes: slipping sales, questionable strategies and tight finances—which is why they are the ones to watch, and not in a good way.

Best Buy has been plagued by the retail phenomenon called "showrooming," where shoppers examine products in its stores but buy online through rivals. A quarter of shoppers who said they had showroomed had done so at Best Buy, according to a recent Harris Poll, so analysts will be watching to see if it can capture more of those sales on its own website.

J.C. Penney  has been trying to ditch its image as an old-fashioned department store where Middle America went seeking bargains. But its rapid and radical makeover has left it burning through cash and struggling to attract shoppers, leading to questions about how long the company can afford to stick to its new strategy.

RadioShack Corp.'s bet on mobile phones and tablets has backfired. It has sold more of these low-margin devices but is making less money than it did retailing old standards like cameras and computers. Though it staved off a cash crunch earlier this year by suspending its dividend, mounting losses cloud its future.

Sears Holdings sales and profits continue to slide. The 124-year-old department store chain has been shoring up its liquidity by selling itself off in pieces—but some of its remaining assets might be tough to unload when retailing is under pressure."


Summing Up

Private sector businesses stay viable through constantly reinventing themselves in the face of new competition and by continuously finding improved ways to serve customers. Otherwise they cease to exist.

On the other hand, public sector taxpayer supported government agencies like the postal service, public schools, drivers licensing bureaus and countless other OPMers are under so such competitive pressure.

The all important customer serving and productivity enhancing feature of creative destruction is largely missing from the public sector, and it shows.

This brings us to a general rule known as the "theory of bureaucratic displacement." The theory posits that in a bureacracy an increase in expenditure is accompanied by a fall in production. In other words, the greater the spending, the less productive the bureaucracy will become.

The system functions as a 'black hole' where the input of more resources yields less useful output. Sounds like the typical government entity to me.

Thus, as government bureaucracy grows, societies tend to become less prosperous, and individual citizens suffer lower living standards and also enjoy less individual freedoms as the OPM way replaces the MOM way.

And with respect to the phenomenon of "bureaucratic displacement," the more bureaucratic an organization becomes, the greater the extent to which useless work displaces useful work.

To repeat, bureaucratic displacement suggests that as government grows and the role of MOM based decision making shrinks, freedom of choice decreases and useless work acts to replace useful work. It's systemic, pure and simple.

Of course, bureaucratic displacement frequently is in action in private sector companies as well. The case of GM is a good example of bureaucracy gone bad. And it very much looks like Best Buy, J.C. Penney, RadioShack and Sears fit the bill, too. As did Montgomery Ward and Kmart before their demise.

But there is one huge distinction and fundamental difference in the effect of bureaucratic displacement in the public and private sector workplaces. Eventually private sector companies who practice bureaucratic displacement through rigid internal rules and lose focus on better serving customers cease to exist. That's creative destruction at work.

Count me on the side of creative destruction where free to choose customers spending MOM are in charge. And definitely count me as totally opposed to the tendency of all organizations, public and private alike, to become more bureaucratic and displace useful work with more expensive and unproductive useless work.

That said, there's an effective remedy for bureaucratic displacement in the private sphere where MOM reigns. It's an existential thing.

No such remedy exists where the political aristocracy reigns in the public sector.

What a shame that is for customers, taxpayers and citizens where the only winners are the aristocratic politicians --- of both political parties.

OPM or MOM. It's that simple.

Thanks. Bob.

Thursday, December 27, 2012

Attempting to Quantify the Unquantifiable in Pension Funding Requirements


Retirement underfunding is a huge issue facing Americans and American taxpayers as well. Whether it's the lack of money for private sector or public sector pensions, private or public sector 401(k)s, Social Security, Medicare or now ObamaCare, we have a "public education" problem and it's a biggie.

When we combine this lack of necessary knowledge with the added difficulty of funding adequately for an aging society and also for a citizenry not accustomed to self reliance as a method of providing for our own old age security, the big problem gets even bigger.

And finally, if we throw in a general lack of understanding of the financial issues involved with saving and investment versus the effects of current consumption and borrowing, it's perhaps the biggest factor, other than government ineptitude and private sector led future economic growth, facing the nation.

So let's tackle the specific issue of pension plan underfunding today.


We hear lots of chatter, but no serious remedial action, about the tens, hundreds of billions and even trillions of dollars in pension plan underfunding.

And we also frequently hear about the roughly one hundred trillion dollars in Social Security and Medicare unfunded promised benefits as well.

But what's the real number? Is there one? Well, that's where things get interesting. There is no one accurate number. It all depends on what happens down the road.

The problem is huge but largely unquantifiable without making assumptions about future developments and which almost certainly will prove to be significantly inaccurate. The only question is how inaccurate they will turn out to be.

In 2013, An Antidote for Poison Pensions? says this about the unquantifiable nature of the problem. Or as Donald Rumsfeld might say, the known unknown of pension fund liabilities:

"When you have just come through a hurricane, some rain doesn't seem such a big deal.

For corporate pension plans, that may sum up 2013. Although many are still dealing with the aftereffects of the financial crisis, they seem to have weathered the worst of the storm.

That may not be readily apparent. Pension deficits are still near record levels. Companies in the Standard & Poor's 1500-stock index with pension plans showed a combined deficit of $607 billion at the end of November, according to Mercer. Although this is down from a peak of $689 billion at the end of July, it is still up sharply from $484 billion at the end of 2011.

And one of the big factors weighing on pension plans—superlow interest rates—isn't likely to lift anytime soon. . . .

Low rates are tough on pension plans because they swell calculations of liabilities, and deficits. High-quality corporate bond yields, as measured by one index and an example of the rate companies would use to calculate those liabilities, stood at 3.57% at the end of November, versus 6.4% at the end of 2007, according to Mercer.

Meanwhile, although stock markets have recovered from crisis lows, the large-cap S&P 500 has basically gone nowhere over the past five years. So longer term, pension funds have had trouble meeting return expectations, which have generally averaged about 8%.

Going into next year, though, funds can hope interest rates don't fall much further. Barring unforeseen shocks, economic growth should be enough to keep rates around current levels, even if the Fed will try to prevent them from rising sharply. Should the Fed's latest measures help buck up the economic recovery, any improvement in stock markets will provide additional relief by helping funds to boost assets.

What is more, some companies will see some pension expenses fall, which could benefit cash flow. In mid-2012, Congress passed changes to interest-rate assumptions that corporate plans can use for calculating liabilities. Rather than base these on recent rates, companies will be able to use a 25-year average of rates. That will generally produce a higher rate, which will lead to a lower overall liability.

This won't affect the size of pension deficits or pension expense for accounting purposes. But it will shrink deficits for funding purposes under federal law. And the effects could be dramatic.

David Zion, accounting and tax analyst at Credit Suisse, estimated earlier this year that the change could reduce pension obligations, for funding purposes under federal rules, by more than 20% for S&P 500 companies. That in turn could cause a 90% drop in the required contributions these companies must make in 2013.

The catch is that this is a game of smoke and mirrors. The actual pension obligation hasn't changed. And by putting less into their plans today, companies may end up facing a bigger bill in the future. "Pension funding relief is just kicking the can down the road," Mr. Zion noted.

That is why some companies may choose to contribute more than is required. Others may look to turn low interest rates in their favor by borrowing cheaply to make up funding gaps in their plans."

Summing Up

If interest rates are 3% and the pension plan assumes they'll be 6%, the reality is still 3%.

And if the plan assumes an overall return of 8% and 50% of the plan's assets are invested in bonds at 3%, that would require a rate of return on stocks of 13% to hit the overall 8% rate of return as assumed in the plan. Not 10% as would be the case if interest rates were 6%.

All of which is to say simply that future ACTUAL investment returns will have an enormous, albeit unknown, impact on how well or poorly the plan is able to meet its future benefit obligations, regardless of what RATE OF RETURN assumptions are made by plan sponsors.

Hitting 8% overall almost certainly would necessitate something approximating an investment portfolio of 100% in stocks, but pension plans won't dare to invest that way, even though they should.

That said, they aren't going to have the guts to reduce their overall rate of return assumption to 5.5% from its current level of 8% either.

Going from an assumed rate of 8% to 5.5% would cause necessary contributions to skyrocket, which they should anyway, regardless of the assumptions used. There's a lot of catching-up to do.

Unless, of course, future benefits are going to be reduced, which will be very hard for pension sponsors to pull off, too.

It's indeed a tough spot to be in for pension plans, their sponsors, union leaders and employees.

No easy road lies ahead.

Thanks. Bob.

Wednesday, December 26, 2012

Many Similarities Between Our States' Underfunded Public Sector Retirement Plans and Our Nation's Deficits and Debts

Some mixture of pension plans, 401(k)s and cash benefit plans will constitute the future retirement vehicles for public sector employees. Heretofore almost all public employees have been covered by pension plans.

Of course, while pension plan benefits are guaranteed to employees, they represent open ended and often unknown financial obligations to their employers.

Meanwhile, 401(k) plans represent limited financial obligations to employers, while the actual end benefit is a risk borne by employees.

Cash balance plans are minimum guarantees provided by employers and function as a hybrid of sorts. They sound good initially but generally are inferior to both pension and 401(k) plans.

Many states have humongous unfunded pension obligations, of course, and our nation's problems with our never ending annual deficits and enormous debt levels are similarly huge.

We'll skip over the national deficits and debt dilemma facing America. Instead let's focus on the states' retirement funding issues for now.

That said, with all the current talk about the nation's longstanding severe affordability problems with deficits and debts, and the states' pension underfunding issues, the nation's and states' financial situations are very much alike. The issue now is what we must do to solve them.

As the state with the biggest unfunded public sector problem, we'll briefly look at the example of Illinois. To put it bluntly, Illinois government officials, taxpayers, public sector workers and unions face a genuine crisis. The state owes ~$96 billion in catch-up funding that it doesn't have and its officials never really planned to collect from taxpayers. They made bad bets on plan investments, in other words, and now are looking for where to send the bill, renege or otherwise get off the hook. But they're no longer able to avoid the ugly $96 billion unfunded reality, and they simply don't know what to do about it.

Despite the politicians' deer in the headlights approach thus far, the problem is actually a simple if not an easy one to solve. The choices are obvious: either (1) get the money from the taxpayers, (2) reduce the pay and benefits which have been promised to public sector employees, or (3) formulate some combination of #1 and #2, respectively.

Of course, taxpayers don't have anywhere near the $96 billion to spare and public sector workers won't happily accept less than what they've been promised. Sounds like an issue for Superman or at least the government knows best gang to solve.

Now let's briefly consider some background.

Unlike the public sector, private sector employers and employees have largely transitioned away from guaranteed pension benefits and into 401(k) plans whose final benefits are always at risk -- to the individual retiree.

And although a topic of discussion recently, cash benefit plans are no panacea either. In fact, cash benefit plans are a form of pension plan with a lower benefit guaranteed than a traditional pension plan. Kind of a floor or minimum but with potential upside for retiring employees.

This whole topic of public sector retiree benefits for the future is a whole a lot like the federal government's need to balance taxing and spending.

It sounds good and conceptually is a very simple thing, but it's not easily done. Too much pain involved for all concerned. Similar to the government's need to balance taxes and spending, we all enjoy freebies and not having to pay for them. And if somebody does have to pay, we want the other guy to pay the bill.

In the end, of course, we all have to pay the tab. But until that end game, whenever it occurs, we look the other way, put off the inevitable and keep fighting tax increases and necessary entitlement reforms.

So government budget balancing and public-employee retirement funding issues are the same problem.

Who will pay for them is the only relevant question. And we all will is the only honest answer.

And to the extent that it's the taxpayer, how much will he have to pay? Well, that's the real issue. Nobody knows until the final bill comes due. Because if the benefit is guaranteed, the taxpayer's liability is open ended. He'll get the full bill, if one is due, no matter how much or little it is down the road. And no matter how well or poorly plan funding and its investments perform over time.

But if it's a 401(k) benefit, the one "at risk" is the public-employee retiree, as is already the case with most private sector employees.

But if the taxpayer is to stay on the "guarantee" hook, how much is that "unknown" and largely "unknowable" liability worth? Will taxpayers be required to pay for the individual retiree's pension "guarantee" risk as well as continue to pay the full tab for all the other existing government services such as police and fire protection?

If so, things are going to get a lot more expensive for taxpayers and a lot more difficult for the economy's future growth prospects. Then it will get even tougher as the vicous circle of slow growth to higher taxes to slower growth to higher taxes continues unabated.

Summing Up

In other words, where and when will the taxpayer draw the line? At what point will self serving and inept bureaucrats and public sector union officials stop running the show? At what point will We the People make the inevitable and irrevocable choice to live within our means and pay our own way?

While we still have a choice or only after some crisis forces us to face the ugly reality?

So there are definite similarities between our national deficts and debts fiasco and our state and local public sector retirement funding fiasco. It's a "mindset" thing which needs to be converted into action, led by We the People.

The government knows best bureaucrats, at both the state and national levels, over the years have dug a deep hole and have no clue how to get out of it without telling the ugly truth. And they sure don't want to do that -- tell the truth, that is.

So whether the truth finally comes out because the taxpayers wake up first or the politicians and union leaders decide to speak out and admit the truth, the truth will come out. It always does.

And only then will we begin to solve our eminently solvable financial issues, regardless of whether they're balancing the nation's books or setting aside enough funds to pay the retirement benefits of our public-employees.

Facing reality and telling the truth will precede taking the necessary action for problem resolution. As always.

Stay tuned.

Thanks. Bob.

Monday, December 24, 2012

MERRY CHRISTMAS ... God, Government and We the People

Merry Christmas!

Each Christmas season since 1949 the Wall Street Journal has published the same wonderful thought provoking editorial.

Because I enjoy reading the annual message so much, I deemed it appropriate to share the 'story' with you.

Just reading In Hoc Anno Domini each year at this time provides a time for peaceful reflection:

"When Saul of Tarsus set out on his journey to Damascus, the whole of the known world lay in bondage. There was one state, and it was Rome. There was one master for it all, and he was Tiberius Caesar.

Everywhere there was civil order, for the arm of the Roman law was long. Everywhere there was stability, in government and in society, for the centurions saw that it was so.

But everywhere there was something else, too. There was oppression—for those who were not the friends of Tiberius Caesar. There was the tax gatherer to take the grain from the fields and the flax from the spindle to feed the legions or to fill the hungry treasury from which divine Caesar gave largess to the people. There was the impressor to find recruits for the circuses. There were executioners to quiet those whom the Emperor proscribed. What was a man for but to serve Caesar?

There was the persecution of men who dared think differently, who heard strange voices or read strange manuscripts. There was enslavement of men whose tribes came not from Rome, disdain for those who did not have the familiar visage. And most of all, there was everywhere a contempt for human life. What, to the strong, was one man more or less in a crowded world?

Then, of a sudden, there was a light in the world, and a man from Galilee saying, Render unto Caesar the things which are Caesar's and unto God the things that are God's.

And the voice from Galilee, which would defy Caesar, offered a new Kingdom in which each man could walk upright and bow to none but his God. Inasmuch as ye have done it unto one of the least of these my brethren, ye have done it unto me. And he sent this gospel of the Kingdom of Man into the uttermost ends of the earth.

So the light came into the world and the men who lived in darkness were afraid, and they tried to lower a curtain so that man would still believe salvation lay with the leaders.

But it came to pass for a while in diverse places that the truth did set man free, although the men of darkness were offended and they tried to put out the light. The voice said, Haste ye. Walk while you have the light, lest darkness come upon you, for he that walketh in darkness knoweth not whither he goeth.

Along the road to Damascus the light shone brightly. But afterward Paul of Tarsus, too, was sore afraid. He feared that other Caesars, other prophets, might one day persuade men that man was nothing save a servant unto them, that men might yield up their birthright from God for pottage and walk no more in freedom.

Then might it come to pass that darkness would settle again over the lands and there would be a burning of books and men would think only of what they should eat and what they should wear, and would give heed only to new Caesars and to false prophets. Then might it come to pass that men would not look upward to see even a winter's star in the East, and once more, there would be no light at all in the darkness.

And so Paul, the apostle of the Son of Man, spoke to his brethren, the Galatians, the words he would have us remember afterward in each of the years of his Lord:

Stand fast therefore in the liberty wherewith Christ has made us free and be not entangled again with the yoke of bondage."

Summing Up

The real truth is all about personal freedoms and not about government's power.

Responsible self government is the only effective and appropriate government for genuinely free people.

And We the People of the United States are the world's role model for what it means to be a free and self governing nation of equals.

Let's always try to remember that simple fact of life. And always do our best to live up to our many obligations, too!

Merry Christmas. Bob.

Balancing Government Spending and Taxes

Democrats like to spend money, or OPM.

Republicans like to reduce taxes, both to increase MOM and minimize the amount available to the government to spend.

Voters like both the goodies from government spending, especially on entitlements, and to pay lower taxes, at least for themselves.

The obvious problem occurs when insufficient private sector led economic growth and tax receipts don't offset government spending. This ongoing fiscal imbalance leads to higher and higher government deficits and debts for our society as a whole.

And someday those debts and deficits have to brought under control as lenders grow weary of making additional loans to a financially fragile government. In other words, if something can't go on forever, it won't.

Of course, spending more than we make is easy to do, both in government and at the household level as well. As a result, the need for balancing spending and income works the same way for debt accumulation by both government and its individual citizens. Think housing, student loans and credit card debts.

So what to do? Well, actually the solution is pretty simple, assuming we don't want to stiff succeeding generations with the bills we're running up and therefore guarantee them a lower standard of living than we've enjoyed.

We need to make the connection explicit between government spending and taxation.

In the Fiscal Debate, a Little Symbolism Can Go a Long Way recommends an interesting way to get We the People focused on the need to "balance" spending and taxes:

“GRANT me chastity and continence, but not yet.” That line from St. Augustine could describe the undercurrent of the fiscal negotiations in Washington. We must decide whether to pursue a relatively loose and stimulative policy, and to trust in our later discipline, or to slam on the brakes now. . . .
The sorry truth is that we Americans seem like the addict who keeps saying “I can quit any time,” yet doesn’t cut back. So what else might we say to frame this problem in a more useful way? . . .       
To see how this could work, consider this script: Let’s say the Republicans decide to largely give in to what the President Obama is proposing. There is, however, a catch: the president has to agree to raise marginal tax rates on all income classes, not just on the rich. The tax increase would be one-quarter of a percentage point, or some other arbitrary small amount, with larger increases possible for higher incomes, as has been discussed. The deal also stipulates that both the president and Congress must publicly acknowledge that current plans for government spending can’t be financed unless taxes on most or all income groups climb further yet, and by some hefty amount. . . . 
The positioning suggested here would highlight the major weakness and, indeed, an evasion in the Obama administration’s fiscal stance — namely, the president’s campaign pledge to protect the middle class from income tax increases. It is commonly agreed that raising taxes on the wealthy alone will close only a small part of our fiscal gap over the next 10 years; an estimate of 15 percent is optimistic.
It could also be agreed that taxes could come back down in the future, but only if politicians found matching spending cuts.
Think of this stance as a first step toward the explicit pairing of spending and taxes, toward a goal of more responsible fiscal decisions. Although taxes would go up for now, this could lead to a smaller, more effective government than our current mismatch of taxes and spending would produce.
Economic conservatives often stress the connection between low taxes and smaller government. But that observation, as an argument for lower current taxes, looks weaker as the years pass. Keeping taxes low doesn’t stop the growth of government spending and, indeed, makes spending taste like a free lunch, because the bill is paid much later. The conservative strategy has long been to hold the line on taxes now, but it would be better to encourage the public to more readily grasp and internalize the costs of government spending.
There is something to be said for “pricing” big government by making an explicit connection to taxes, much the way utilities explicitly price water and electricity. And higher tax revenue now will decrease the extent to which interest on the debt consumes future budgets — and that probably means lower taxes in the future. Counterintuitively, raising tax rates sooner rather than later may be the true “low-tax policy” because it may increase the chance of limiting future taxes. . . . 
In our country, the typical approach to fiscal deadlines is to kick the can down the road. But that assumes we are kicking a can, not a grenade. It’s time for at least one party — and why not the electoral loser? — to do something just a little shocking. It can give in on much of the negotiations, but insist that both sides start stressing the fiscal truth."
Summing Up       

Common sense suggests that we need to face up to our overspending and undertaxing issues as a nation.

Simple math suggests that raising taxes on a very few high earners and leaving taxes alone on the great majority or earners won't address our financial issues in a serious way.

If government spends $X, it must collect $X from taxpayers or borrow the money.

If we choose to borrow more instead of taxing, that borrowed money will have to be repaid with interest in the future.

To the extent that future earnings are used to repay debt, future economic growth will be negatively impacted.

And future generations will be the ones repaying the debt and enduring a lower standard of living --- needlessly and all because we didn't deal with our own problems.

What's so hard to understand about that?

Thanks. Bob.

Sunday, December 23, 2012

Mexican Education System Sucks ... But There's a Bigger Story about the Power of Public Sector Unions and the Government versus the Power of Individuals

We all know about the inadequacies of our U.S. educational system and our dysfunctional limited government as well. 

Sometimes, however, it's good to look at other countries and systems and simply reflect on why things are as they are in our own back yard.

Not to congratulate ourselves for not having as bad a system as others but to try to discern how to improve our own situation and system of self government.

Such an example comes from Mexico as described in Mexico Takes On Teachers Over School Control:

"MEXICO CITY—Mexico's Congress on Friday passed a sweeping overhaul to the country's dysfunctional educational system, marking a major victory for new President Enrique Peña Nieto but setting up a protracted conflict with the powerful teachers' union.

The bill, which passed 360-51, changes Mexico's Constitution to give the government, rather than the union, control over the hiring and firing of teachers, tackling a system where only union members can become teachers and where teachers hold guaranteed lifelong posts without ever being tested or measured for their performance.

Among other things, the bill creates a new independent body to periodically evaluate teachers, who could potentially be fired if they don't meet required standards. It also seeks to lengthen the school day to six to eight hours from a current average of just four—about half that of South Korea and Finland. . . .


The leader of the 1.4 million member teachers' union lashed out at the reform and pledged to lead a campaign of nonviolent protests as soon as public schools returned from the holiday break. The union "cannot support a measure that threatens our job security," said Elba Esther Gordillo, a powerful figure in Mexican politics who has run the union for the past 23 years, told reporters Thursday. . . .

During the past two decades, even as other big emerging markets like China, India and Brazil have taken off, Mexico's economy has mustered just 2.2% average annual growth, held back by a poor educational system, an inefficient economy riddled with monopolies, rising crime, a weak government tax take that leaves little money for things like highways, and a Byzantine legal system where only 2% of crimes are solved. . . .

Just one in three Mexicans graduates from high school, according to the Organization for Economic Cooperation and Development. Of Mexico's 99,400 primary schools, just 4,750 offer a full day of classes, with the rest offering students just four hours apiece, according to government statistics. Mexico ranks last in the 34-member OECD—a club of mostly developed nations—in test scores.

Many countries around the world grapple with powerful teacher unions, but Mexico's is legendary by almost any standard. The union, with its 1.4 million members, is the largest in Latin America, and makes up half of Mexico's government workers. Until a few years ago, teachers who retired would routinely give their lifelong post to a relative or sell it to a newcomer.

Even today, some states still let teachers sell their posts, which fetch between $4,700 to $11,800, according to the government.

Ms. Gordillo, the union boss, is famous for wearing luxury brands, flies in a private jet, and has amassed some 10 properties, including a $1.7 million home in San Diego that the union boss says belongs to her mother and other relatives.

"I live very well, and I'm no angel," the union leader told The Wall Street Journal in a 2003 interview. "But I've neither stolen nor killed." She wasn't available to comment for this article.

Having long used the collective voting power of teachers to extract concessions from different governments and political parties, Ms. Gordillo in 2005 founded a political party of her own called the New Alliance Party. The party has 10 congressmen in the lower house, a delegation led by Ms. Gordillo's grandson. Her daughter Mónica Arriola won a senate seat.

Some $150 million a year in taxpayer money goes to pay for 22,000 union posts, according to Mexicanos Primero. None of those union posts are occupied by active teachers. The union controls school curriculums, and all teacher appointments. Ms. Gordillo's son-in-law Fernando González was deputy education minister under former President Felipe Calderón.

Héctor Aguilar Camín, one of Mexico's leading intellectuals, described the reform as an effort to stop the "colonization" of the country's educational system by the union. "The strength and presence of the union makes any improvements in education impossible," he said. "This first step—cutting back on the power of the union, and establishing evaluation with consequences for teachers—is the right thing to do.". . .

Mr. Grayson said that by choosing Ms. Gordillo and her union, "the toughest dinosaur in the country" to attack, Mr. Peña Nieto would set the tone for his six year administration. Mr. Grayson said he believed Mr. Peña Nieto would be successful in his offensive against Ms. Gordillo because the union leader is isolated from other political parties and widely discredited with the Mexican public."

Summing Up

Who's in charge --- individuals or the system?

And if it's the system that's in charge, who's in charge of the system --- duly elected (or duly appointed) representatives of We the People or the unions?

With respect to education, is it (1) the parents, (2) the teachers' unions, (3) the elected officials or (4) the duly appointed school administrators?

And whatever the case, why is that the way it's done? Because it's best for the people or because it's best for the teachers' union leadership?

Does giving each child the opportunity for a great education matter to the overall society? Should it?

Does giving the taxpayers good value for the money they spend on educating our youth matter to the overall society? Should it?

Does quality education delivered in a cost effective manner matter to the individual and overall prosperity of a society? Of course it does.

Why should unions have such a hold on any society and occupy a position of power in a nation's educational system?

Or for that matter, to the extent that its sole purpose isn't to better serve the interests of the larger society, why does the public sector exist?

We The People have the power to change what needs changing if we'll simply take charge.

Otherwise we'll get what we accept and never what we expect.

Expect versus accept. Higher aspirations versus lowest common denominator.

Yes, expect versus accept says it all. The choice is ours.

Thanks. Bob.

Saturday, December 22, 2012

Politicians Play Scrooge

Initially it seemed like with the economy recovering and interest rates at record lows, consumers would respond by further loosening their purse strings this holiday shopping season.

In turn this would stimulate retail sales and provide a further boost in confidence for eonomic growth.

Well, that was before our sound bite indecisive blame it on the other guy politicians in Washington (and many cities and states, too) chose to play Scrooge, whether intentionally or not.

These poor excuses for public servants sure seem to like their self declared self importance and never ending ways of "serving" the American people.

My take is they manage to screw everything up almost all the time and thereby snatch defeat from the jaws of victory each time they "help" us.

We could use a whole lot less of their help as well as a whole lot less media coverage of their seemingly hourly antics before the TV cameras, too.

Politics sucks.

'Fiscal Cliff' Spooks U. S. Shoppers in Last Lap of Holiday Race describes the mood thusly:

"Fears about imminent tax hikes and cuts to government spending are taking a toll on U.S. shoppers and could deprive retailers of a strong finish to the 2012 holiday shopping season.

The acrimonious debate in Washington over how to avoid the so-called fiscal cliff has cast a pall over shopper sentiment, retail experts say, as consumers head to the malls on the last Saturday before Christmas - typically one of the busiest shopping days of the year.
Talks to avoid the fiscal cliff stalled on Thursday when Republican lawmakers rejected House Speaker John Boehner's proposal aimed at winning concessions from President Barack Obama.
"The longer Congress delays making a decision on the fiscal cliff and the more uncertainty people feel, as we go toward Christmas, they would start pulling back on their spending," said Ron Friedman, retail practice leader at consulting firm Marcum LLP. "I don't think we're going to get a great pickup in the last few days here."
About 17 percent of the 1,514 Americans who participated in a Reuters/Ipsos poll conducted December 17-20 said the impending "fiscal cliff" was making them spend less this season.
U.S. consumer sentiment also plummeted in December as Americans were unnerved by ongoing negotiations, data showed.
The Thomson Reuters/University of Michigan's final reading on the overall index on consumer sentiment tumbled to 72.9 from 82.7 in November, worse than forecasts for 74.7. It was the lowest level since July.
"What could have been a merry Christmas is going to turn to a ho-hum Christmas, and we can thank our, you know, politicians for getting in the middle of it all," NPD analyst Marshal Cohen said. "It is like this great unknown puts a big damper on the consumer feeling confident to go out and spend more."
More than 60 percent of U.S. consumers have already finished more than three-quarters of their holiday shopping, according to a Reuters/Ipsos poll released on Thursday. This means retailers will have to offer deeper discounts to force Americans to open their wallets in the last lap of the holiday season.
The holiday quarter can account for about 30 percent of annual sales and half of profit for many chains, and experts including Cohen and Friedman see retailers pulling out all the stops this weekend and the week ahead to woo last-minute shoppers.
"The only way retailers now are going to be able to get a boost is by creating their own stimulus package, and that stimulus package is going to be markdowns," Cohen said.
Earlier this week, research firm ShopperTrak lowered its sales forecast for November and December and now expects sales to be up 2.5 percent, rather than up 3.3 percent.
Many retailers reported record traffic at the beginning of the season, but several, including Macy's Inc and Saks Inc, lost a lot of business because of Hurricane Sandy.
Earlier this week, Redbook Research said chain-store same-store sales rose 2.2 percent so far in December, suggesting shoppers are indeed cooling their heels. Sales for the November-December holiday season look set to rise 4.1 percent to $586.1 billion this year after a 5.6 percent increase in 2011, according to a National Retail Federation forecast.
"Retailers are going to be pretty challenged this year in trying to get beyond all this," Cohen said, referring to a string of events this holiday season that have weighed on U.S. shoppers including the hurricane, gridlock in Washington and a recent shooting at an elementary school in Connecticut.
NRF sees 2013 retail sales rising about 2 to 2.5 percent if the fiscal cliff is averted. If not, sales would be essentially flat for the year, the trade group estimated in a study with Macroeconomic Advisers."
Summing Up 

Sandy and Newtown were tragedies that have had an impact on each of us, regardless of where we live. They were disasters.

The politicians are making their own disaster by the way they conduct "the people's business."

Even when they somehow and in some manner manage to kick the can down the proverbial road again, We the People will still know we're running out of road.

Unfortunately, we can look forward to more of the same political nonsense in 2013 as the fiscal cliff, the debt ceiling, tax increases, entitlement programs, budget deficits and government spending all will remind us on a daily basis just how dysfunctional our U.S. political system remains.

We sure do live in interesting times.

Thanks. Bob.

America is Changing ... We're Getting Older and More Diverse ... And We'll Become a Better Nation as We Go

Americans are getting older, and we're looking different, too.

But the combination of older and more diverse can either work to our advantage or against us as a society. It's our choice as a self governing nation.

As diversity's biggest component, Hispanics will continue growing to be a very large part of our population.

But the bigger issue is demographic --- we're not replacing our population at a pace which will enable our country to satisfy its obligations to current workers and their children.

So it's one thing that we're getting more diverse. That's not a bad thing and can in fact be a very good thing.

But getting to the point where fewer and fewer active workers per retiree is the norm is actually quite troublesome. It will negatively impact the future well being of all Americans.

Hispanic Future in the Cards is subtitled 'Whites to represent 43% of U.S. by 2060, Down from 63% Today:'

"By 2060, Hispanics will account for nearly one in three people in the U.S., nearly double their share of the population today, the Census Bureau said Wednesday in a report that carries significant political and cultural implications.

The bureau estimates that by 2043, whites no longer will be in the majority among racial groups, with no one race representing more than half of the population. The white population is projected to peak in 2024 at nearly 200 million and then begin to fall, as older whites die at a faster pace than new white babies are born.

By 2060, non-Hispanic whites will represent 43% of the U.S., down from 63% today. In 1960, whites made up 85% of the U.S., a share that began to fall after immigration limits were relaxed in 1965.

The projections reinforce a trend the Census Bureau has reported before, most recently in 2008. But the new report, which extends the bureau's projections to 2060, show a more striking shift toward nonwhites.

Additionally, the report projects that the overall population will grow more slowly than previously thought, based on lower projections for both fertility and migration. The population now is expected to reach 400 million by 2051, 12 years later than in prior projections. The country has about 315 million people today.

The report paints a picture of a nation becoming considerably more racially diverse, with the portion of blacks, Asians and people of multiple races all rising, alongside Hispanics.

At the same time, the nation will grow older, the Census Bureau said, with whites making up a disproportionate share of the aging population.

By 2056, people age 65 and older are projected to outnumber those under 18 for the first time. Over time, fewer working-age adults will be in the labor force to support retirement and medical benefits for the aging. The working-age share of the population is projected to decline from 62.7% in 2012 to 56.9% in 2060.

The shifts set up a contrast between a set of younger, racially diverse Americans and older, whiter ones, whose interests may be at odds. Underscoring the shifts is the Census Bureau's finding that by 2018, whites will no longer represent a majority of children in the U.S. Last year for the first time, less than half of all babies in the U.S. were white.

"I think the fundamental axis on which American politics now turns is this demographic shift," said Deepak Bhargava, executive director of the Center for Community Change, a Hispanic advocacy group in Washington. "We have an older white population that is shrinking and a younger, browner population which is growing.". . .

The population shifts also pose fresh policy challenges for Washington, said William Frey, a demographer at the Brookings Institution. Older, white Americans may not be naturally inclined to support the sort of government aid that younger minorities see as helping them to move into the middle class, he said, such as funding for education, student loans or housing.

He said policy makers who support that funding will need to persuade older Americans that an educated workforce is necessary to generate the taxes needed to support aging boomers in retirement, among other imperatives.

The implications extend well beyond politics. High school dropout rates among Hispanics are higher than they are for whites or blacks, posing new challenges for schools, given the growing presence of young Hispanics in the population. . . .

The Hispanic population's rise is being driven by higher fertility rates than whites, and by the large presence of Hispanics among immigrants arriving to the U.S."

Summing Up 

America is much more of a simple idea than it is a place. And that idea is centered on human freedom and a self governing democracy. That won't change.

When we became a nation, there were approximately 3 million citizens. There were also 13 states. Now the numbers are more than 300 million citizens and 50 states.

The citizenship of African-Americans and Hispanics, as well as Native Americans, came long after our founding. And women weren't even allowed to vote until long after we became a nation.

So America has changed a great deal over the centuries. But one thing hasn't changed. Our ideals as expressed in the Declaration of Independence and later in the Constitution

As the oldest self governing republic on the face of the earth, we're the best one, too.

We'll continue down the road to personal freedom, self reliance and interdependency and remain the place where people want to be.

And we'll need more immigrants and a better educated population which will provide a globally competitive workforce able to facilitate substantial economic growth.

That growing immigrant population is in large measure what's going to be required to help support our oldsters as they retire.

At least that's my take.

Thanks. Bob.

Friday, December 21, 2012

GM Still Isn't "Saved" ... Neither Are the Taxpayers

GM has been put in the "saved" camp by President Obama and like minded politicians.

Of course, that "saved" status is just silly political talk unless taxpayers are deemed to be the ultimate source of salvation and permanent financing for private sector companies like GM.

In other words, unless GM becomes just another government like taxpayer supported U.S. Postal Service "type investment," the company has in no way been saved permanently. The taxpayers' money has just kept GM on life support for now. Customers will decide about GM's future by buying or not buying what GM is selling at a price which generates sufficient profitability for its investors to stick around.

Without a permanent taxpayer backstop, GM's long term future staying power as a worthwhile investment proposition is by no means assured. And free markets don't provide taxpayer backstops and guarantees supported by taxpayers.

Taxpayers through the government bailed out GM in 2010 by "investing" billions of dollars in the company. Now the taxpayers through the government are "selling" our ownership position to independent investors, including individuals, at a loss of billions of dollars to those taxpayers who financed the bailout. How many billions of losses will be determined after all the shares have been sold.

So I guess technically the government, aka taxpayers, did save GM from bankruptcy -- for now at least. But the "saving" gesture will end up costing taxpayers billions of dollars in the end. We just don't have a final tally of the ultimate taxpayer "subsidy" yet.

But the signs aren't good. In fact they're indicating that GM's stock price will have to triple from its current level of ~$27 to ~$70 for taxpayers to break even on our "investment." That tripling to $70 is, in my opinion, a fairy tale price.

While we don't yet know how much taxpayers will end up paying, the bill will be substantial. Treasury to Sell G.M. Stake Within 15 Months says this:

"For months, General Motors executives have been pressing Washington to sell its stake in the company, desperate to rid itself of the yoke of being called Government Motors.

Nearly four years after what became a $49.5 billion bailout, the Treasury Department announced on Wednesday that it would sell 200 million shares back to the company for $5.5 billion, then sell an additional 300 million shares by early 2014.

Currently, the exit would produce a loss of more than $12 billion for taxpayers — one of the few major bailouts that did not produce a return. . . .


The Treasury’s presence in G.M. disturbed investors and prompted some consumers to avoid its products in an increasingly competitive United States auto market. Independence, however, will leave the company with no excuse as it battles domestic and foreign rivals, many of whom did not turn to the government for a lifeline.

When G.M. was given its first loans by the Bush administration, the company was still the industry leader, with a 22 percent share of the market in the United States. After bankruptcy and its re-emergence as a public company, that dominance has eroded.

As of the end of November, G.M.’s market share had slipped below 18 percent this year, and it was struggling with hefty inventories of some major models like the Silverado pickup and the Malibu midsize sedan.

And while General Motors has benefited from shedding debt and four brands in bankruptcy, it has considerable work ahead to rebuild a product lineup that withered during its financial crisis. For one, its hometown rival, Ford Motor, earns more money in North America despite selling fewer vehicles....

Executives were eager to shed the government’s 32 percent ownership stake, but the election in November delayed any talk of a share buyback. But soon after President Obama’s victory, G.M.’s chief financial officer, Daniel Ammann, called Timothy G. Massad, the Treasury Department’s assistant secretary for financial stability, to begin negotiations, according to people with direct knowledge of the matter.

An offer to buy back a substantial number of G.M. shares at the market price — no premium for the Treasury — was rejected. Several weeks of start-and-stop negotiation followed, during which the company demanded a firm timetable for the government’s exit.
By about 5 p.m. Tuesday, G.M.’s board had voted to offer $27.50 for the Treasury stake, an approximately 8 percent premium to the stock price at that day’s close. By about 7:30 p.m., the sides signed off on the deal.

Despite the relief of reaching an accord, G.M. executives planned no celebration or new marketing campaign, feeling that might look unseemly or even arrogant.

Wednesday’s deal all but guarantees a loss for taxpayers. The remaining shares need to be sold at close to $70 each to break even. But a Treasury official argued that the company’s stock hadn’t surpassed $27.50 since the government was legally cleared to sell additional shares after G.M.’s initial public offering.

The Obama administration has long argued that the rescue was always about saving the American auto industry, not making money. On Wednesday, Treasury claimed to have saved more than one million jobs through the bailout. . . .

“The government should not be in the business of owning stakes in private companies for an indefinite period of time,” Mr. Massad, of the Treasury Department, said in a statement. “Moving to exit our investment in G.M. within the next 12 to 15 months is consistent with our dual goals of winding down TARP as soon as practicable and protecting taxpayer interests.”. . .

G.M. has improved in several respects. Its annual profit has risen over the last two years, and as of the end of the year will have about $38 billion in cash and credit lines to draw upon.

But much hard work remains. Ford has had a head start on G.M. in globalizing its products and spreading out development costs. And during its bankruptcy, G.M. had to delay some new models, costing it valuable time in reacting to market trends. . . .

They have to keep their head down and keep plugging away and executing their strategy,” Mr. Wall of IHS Automotive said. “It is the beginning of the end of government ownership, but way too soon to celebrate anything.”"

Summing Up

GM will pay the government $27.50 to buy back these two million shares. That's not a good omen for taxpayers being made whole in the end.

In fact, in order for the taxpayers not to lose money on our "investment," the remaining government's ownership shares will have to be sold for $70. There's almost no chance of that happening.

So GM isn't "saved." Nor will it be for many years to come, assuming the intention was that taxpayers would not suffer billions in losses.

But President Obama says that making taxpayers whole never was government's objective.

So what was the government's objective -- maintaining UAW jobs at the expense of taxpayers? And for how long?

Assuming taxpayers won't provide funds to keep the company afloat forever, customers will ultimately decide GM's longevity and viability by which company's cars they decide to purchase, how many they purchase, at what prices they purchase them and how much it costs the company to provide those desired vehicles. It's all about market based competition.

And GM's future shareholders will also play a big part in the final outcome as they buy or sell their ownership positions in the company from time to time.

In free markets it always comes down to what customers choose to do with MOM.

And no matter what the politicians may say, governments and unions can't control what MOM does.

Thanks. Bob.