How Much Longer Will Taxpayers be Suckers for Public Pension Plans?

Public employees customarily are enrolled in defined benefit pension plans. These plans often provide generous retirement benefits at little cost to the employee.

These public plans are usually poorly funded as well . As a consequence, taxpayers are the ultimate funding backstop. That means that we the people are firmly on the hook for the full amount of the promised pension benefits to public sector employees.

In contrast and unlike the public sector, employees of private companies usually are covered by 401k type defined contribution plans. Private sector employers are increasingly choosing this approach and by so doing, they limit the financial uncertainty of funding a fixed pension benefit far into the future.

If these private sector companies had continued to provide traditional pension plans in lieu of the now customary defined contribution benefits, their ability to adequately fund those guaranteed pension benefits would have depended upon the future investment performance of monies contributed by employees and employers. The adoption of 401k plans has eliminated this "blank check" funding uncertainty and associated liability. But the uncertainty of final funding costs is still in effect for public sector funds.

Let's further nail down the opposing public-private offerings in retirement benefits, as well as their funding. It will help us understand why "taxpayers are suckers."

Let's begin with two simple truths. (1) All other things being equal, both public and private sector employees would prefer free or inexpensive, but generous and guaranteed retirement benefits, to more costly and uncertain benefits based on the future investment performance of monies contributed and invested. (2) Taxpayers and private sector employers, however, would prefer lower taxpayer and employer costs, as well as certainty to uncertainty with respect to funding the future benefits of retirees.

Unlike in the private sector, taxpayer backstopped government pension plans continue to grant guaranteed and fixed pension benefits to retirees. Sponsors of private sector plans have concluded that they can't continue to bear the uncertain and open ended expense of a pension plan, as they seek to remain competitive in today's global economy.

The public sector offering is simply due to public employees not assuming the ultimate retirement funding risk. In other words, the final cost is not their problem. Instead that problem belongs to the taxpayers. Just as it does with respect to social security promises and the tens of trillions of dollars in unfunded liabilities associated therewith.

As employees within the private sector, taxpayers are usually covered by 401k type plans due to the cost and uncertainty associated with funding pension plans. But these exact same people, when acting as taxpayers alone, agree to assume the blank check funding obligation of providing fixed pensions to public sector employees, despite the difficulties and uncertainties involved. And that's why taxpayers are suckers.

Public employee projected pension benefits are $3 trillion greater than the projected funds that will be available to pay those benefits. How Not to Fix Social Security makes the point that two Republican presidential candidates both missed in their recent debate:

"Mr. Perry recommended that workers be able to opt out of Social Security just like "the state employees and the state retirees, they being able to go off of the current system onto one that the states would operate themselves."

About a dozen state governments don't enroll their employees in Social Security. The federal government in the 1930s allowed state governments to opt out of the program if they provided workers with defined benefit pensions that guaranteed workers a minimum retirement income. That was at a time when state pensions weren't much more generous than Social Security. Nowadays these plans provide monthly annuities that are usually three to four times greater than Social Security benefits. However, workers and governments don't contribute much more to their retirements than private sector workers and employers do to Social Security.

Mr. Romney could have pointed out that the state plans Mr. Perry seems to be endorsing are a huge drain on taxpayers. State pension plans are a $3 trillion unfunded liability and suck more than $20 billion from taxpayers each year to stay afloat. Texas provides its workers with more modest benefits than most states but still has a $40 billion unfunded liability."

So there we have it. Neither Republican presidential hopeful talked about the elephant in the room that state pension plans provide benefits on average that are three to four times greater than social security benefits. And they do this at essentially no extra charge to the beneficiaries. The taxpayers will get the bill, as always.

In another recent editorial on this same general topic, Tin-Hat Time for Pension Funds said this about the funded status of remaining private sector pension plans: "As of mid-August, Credit Suisse analyst David Zion calculated that S&P 500 companies with pension funds faced a deficit of about $388 billion, meaning they were about 77% funded. That compares with an about $200 billion deficit at the end of last year. Market moves since August mean the combined S&P 500 deficit has now likely grown to around $450 billion."

The article goes on to predict that as a result of this funding issue, private companies will likely step up their pension contributions to make up for the unplanned current funding shortfall.

For state and local governments, however, no such step up in contributions is anticipated:

"For state and local governments, the market's double-whammy poses more of a long-term challenge. That is because the plans aren't as sensitive to interest-rate changes in calculating their deficits. This means they may feel less compunction to take the pain of contributing more in the short term."

Remarkably, this three trillion dollar underfunded liability is described as merely a "long-term challenge" for public plans. As far as the public employees are concerned, it's a long-term problem only for the taxpayers, in other words.

The article continues, "But that, combined with what appear to be overly rosy return-rate assumptions, just puts a fig leaf on the problem. With plans set to be in even worse shape longer term, taxpayers and some municipal-bond investors are at even greater risk than they realize."

So there we have it. State and local government officials aren't in any hurry to fully fund pension obligations, nor are they moving quickly toward adopting 401k plans and away from defined benefit pension plans. It's not viewed as their immediate problem. The problem is that of future taxpayers' instead.

So the taxpayers will be required to pay in full when the time comes. Although I believe that this taxpayers as suckers routine won't go on forever, I do wonder when it will end.

We'll have to ask each other and our fellow taxpayers to answer that one.

Thanks. Bob.

Why Our Debt levels Are So Troubling

The U.S. has huge, growing and unsustainable levels of actual government debt and more than that in unfunded entitlement commitments. That's widely known.

U.S. citizens also have historically high levels of individual and household debt as well. That's pretty well understood, too.

When the public and private debt levels are taken as a whole, we have a serious long term problem which will take years to address successfully. Of course, we haven't yet begun to come to grips with this complex set of issues. Neither are we likely to face them squarely anytime soon.

All that said, perhaps the least understood piece of our overall debt problem is its fundamental nature. Generally speaking, debt is often undertaken to finance investment. In our case, however, that wasn't what happened. The new debt wasn't used for investment purposes, either in the non-government or government sectors. We "consumed" it instead.

In other words, corporations did not assume extraordinary levels of debt to invest in productive assets that would provide future paybacks. Neither did individuals, households or small businesses.

To the contrary, much was "consumed" in such things as residential housing and similar non-productive construction endeavors.

Debt Levels Alone Don't Tell the Whole Story looks at eight European countries and their ascending government and non-government combined debt levels over time. The lesson to be learned for us can be succinctly stated as follows:

"The differences highlight the fact that debt numbers alone tell little. For a country, the ability of the economy to generate growth and profit, and thus tax revenue, is more important. For the private sector, it matters greatly what the debt was used to finance. If it created valuable assets that will bring in future income, it may be good. Even if the borrowed money went to support consumption, it may still be fine if the borrowers have ample income to repay the debt.

That is one reason many euro zone countries are struggling even with harsh programs to slash government spending. With unemployment high and growth low — or nonexistent — it is not easy to find the money to reduce debts. And debt-to-G.D.P. ratios will rise when economies shrink, even if the government is not borrowing more money."

As the article reasons, what the debt is used to finance matters most. In our case, much of that homeowner and non-government debt went to buy land and put homes and other structures thereon.

Accordingly, that lack of investment in manufacturing or "tradable goods" capability will not serve as a foundation for future American economic growth. {Number of the Week: Big Cuts in Manufacturing Capacity}

In a similar vein, growth in government debt was used primarily to support non-productive and non-investment "consumption" spending as well.

As a result, U.S. debt-to-GDP ratios will continue to rise for years to come. We will experience ongoing slow economic growth coupled with high annual deficits. Therefore, barring a political miracle, we should expect that our country's financial condition will continue to weaken.

In the private sector, the deleveraging process will act as an ongoing drag on consumer spending, thus producing subpar economic growth. As that continues, unemployment levels will remain high and tax receipts will remain low.

At some point in the not-too-distant future, we'll have to face facts and make an effort to reduce non-productive and non-value added spending throughout our economy, both as a government and individually.

The good news is that we will have many ripe and wasteful targets when we begin that process in earnest. But first we have to start, of course.

Thanks. Bob.

Government Schools Clash with Parental Choice and Result in Jail Time for a Teacher's Aide

The article Jailed for Switching Her Daughters' School District has to be read to be believed.

Here are three brief excerpts:

(1) "Kelley Williams-Bolar, 41, a single mother from Akron, Ohio, was convicted of two felony crimes in January and jailed for nine days after she falsified documents so she could enroll her daughters — one a third grader, the other in junior high — in a neighboring, higher performing school district.

(2) "QUESTION You registered your daughters in a school district that didn’t serve your neighborhood. Why?

ANSWER My home had been broken into in 2006. I decided to enroll my kids using my dad’s address. We’re over there a whole lot. He helps raise them. He’s very involved with my children. Everything was fine — at least I thought it was — until the second year. I was very concerned about their safety. I didn’t want them at home by themselves. I was in school. I worked long hours at the university. I wasn’t comfortable with them being that independent. My children were too young. One was in junior high and the other was in third grade. They were too young. I did not have an opinion if the schools were at the level they should be or not. That’s not why I did what I did. People do it all the time. My grandparents raised me, so I didn’t think it was a problem because I didn’t give them a fake address or anything like that. Their grandfather is involved in raising them."

(3) "Q. What was it like to hear a judge tell you that you were being sent to jail?

A. I remember standing there and shaking my head. I remember them putting handcuffs on my wrists and ankles. I can’t say it was devastating because it was worse than that. I can’t describe the intensity inside of me, what was happening to me. I can’t express it to you. It was horrible. I was 40 years old and I had never been in trouble. I didn’t know what the inside of a courtroom looked like before that, aside from what I had seen on TV shows. The lowest part was my very first phone call home to my babies. They’re crying; I’m crying. And then a television station got the tape and played it on air. That was a hard pill to swallow."

What a tale. The government, the schools, the prosecutor and the criminal justice system have really outdone themselves this time.

Thanks. Bob.

Real Estate Collateral Based Lending Run Amok ... Time for the Truth?

Our residential housing market is in a state of bust. That's for sure. New Home Sales Drop says this about the just released annualized number of new starts at 295,000:

"New-home sales amount to about a quarter of their peak before the bubble began deflating around five years ago. Sales are far below healthy levels, considered to be an annual rate of around 750,000.

Consumers have slowed their spending sharply this year, pulling down economic growth and preventing unemployment from falling. High joblessness and a weakening economy are raising Americans' doubts about their prospects for the future, leading many to save money and pay down debts rather than taking out loans.Some people can't get financing due to tight lending standards enacted after the housing bust."

And regarding homes already owned and occupied, the value of the collateral to the lender often isn't worth as much as the amount owed on the loan. As a result, far too many borrowers are in either actual or practical default status. Whatever the status, they are in a world of hurt.

In addition to the financial damage being done to individuals and their families, the housing bubble bursting has done great harm to banks. But if you are not in a mood to pity the banks, and who is, how about a little pity for the taxpayers?

Most mortgages are held or guaranteed by taxpayer backed government agencies (FHA, Fannie Mae and Freddie Mac). So we the people will get the final bill, as usual.

By now, we know all about the housing bubble and its bursting. But how did it happen, how long will the pain last, and will there be more shoes to drop? We'll try to answer those questions now.

What is referred to as collateral or asset based lending played a big role in getting us into the hole we've dug for ourselves. This type of lending is also going to play a big role in keeping us in that hole for a very long time to come.

In an effort to make an extremely complex story simple, let's face facts. The collateral, or value of the real estate, isn't worth anywhere close to the outstanding loan amount.

And this problem of diminishing collateral value to the amount of the loan outstanding has been exacerbated by many people adding to the initial loan balance. We did this "adding" through an ATM approach to securing home equity loans and refinancings.

All this, when combined with government subsidized cheap and easy credit, as well as extending non-recourse walk-away loans to buyers, resulted in the widespread nationwide housing fiasco of today.

Let's use a simple example. If we purchase a home for $100 and borrow all the the money to do so, we owe $100. We also have an asset worth $100 to offset the loan of $100.

If the nominal price of homes more than doubles within a few years, which indeed happened between 1996 and 2006, we will then have an asset worth $200. But we owe only $100.

Our real estate related net worth or wealth has now grown by something approaching infinity, since we had zero net worth when we bought the house, while now we have $100. That's because the house is now worth $200, but we owe only $100.

Now we make a big mistake.

So we take our valuable appreciating $200 asset as collateral and secure an additional bank loan for another $100. Now we owe a total of $200 for the two loans, and our asset is worth $200.

We're back to square one. We own something valued at $200 and we owe $200.

Now we make a really big mistake.

We buy a boat, take a vacation, buy a car or go to Las Vegas with the $100 acquired by refinancing the original loan.

Now it hits the fan.

The housing price bubble bursts and the home is now "worth" less than $130. We still owe $200 and now sit squarely between a rock and a hard place.

That's debt induced deflation at work.

Sadly, many Americans are now in the situation described above. As a result of their underwater collateralized asset based loans, they are hurting with no easy solution available.

What would have been a bad situation, due to the collapse of home prices, has been compounded by the effects of prior "asset based" borrowing due to the housing price bubble. But now the bubble has burst, of course.

Are there other related shoes to drop and if so, on whom? Yes, there are.

Many local commercial borrowers are in serious jeopardy, and especially heavily leveraged raw land buyers, builders and developers.

The perverse incentives or law of unintended consequences applies in spades to our real estate industry, both residential and commercial.

Let's look to Spain for an interesting contrast to our American situation. Spain is a nation in a world of hurt financially, and in addition to their real estate and banking woes, they have an unemployment rate of in excess of 20%.

Yet less than 2.5% of the Spanish residential mortgages are in trouble compared to several times that percentage in the U.S. How can that be, and what does it mean? In other words, what lessons can we learn from Spain?

Spain's Banking Mess provides an analysis of the Spanish real estate market. It makes for an interesting comparison to the way we do things here. About the U.S. versus Spanish housing market contrast, the article says in part:

"The most important fact may be that refinancing is very unusual in Spain. They are generally unnecessary; since mortgage loans are made at variable rates, there is no need to take out a new loan if rates are declining. The absence of refinancing, along with the absence of home equity lines of credit, meant homeowners could not take out cash to spend on other things.

As a result, if you bought a house in Spain a few years before the peak, you still have equity in the home, even with prices down. If you lose your job and can no longer afford the payments, you can sell the home and emerge with something.

That would also be true in the United States if mortgages were for only house purchases. But in the housing cycle that led to the recent bubble — unlike previous cycles — it was far easier for homeowners to cash in their equity and use the money for whatever they wanted. So some people who have been in the same home for decades are desperately under water.

There were other differences as well. There were no “originate-to-distribute” strategies in the mortgage markets, so the loans were not bundled into securities to be sold to foolish investors.

Banks that made the loans expected to profit if — and only if — they were repaid. There were few loans to investors who planned to rent or flip homes. Moreover, mortgage loans in Spain are recourse. Buyers cannot walk away if they have other assets, as they can in some American states."

In the U.S. there existed a casino or ATM mentality with respect to using homes as collateral for acquiring other loans. Spain had no such approach.

Unlike us, Spain required from home buyers considerable down payments, loan terms with variable interest rates, offered no home equity loans and thus had no reason for home refinancings.

And to top it off, Spain didn't offer non-recourse loans to to home buyers. In order to make money on the transaction, banks needed to be repaid the loan, unlike our government subsidized walk-away practice.

Accordingly, whether taken separately or as a whole, the Spanish housing situation is completely different from our customary American practices.

Essentially, we encourage the assumption of maximum levels of debt and then make it worse by allowing underwater home owners to walk away from their real estate related debts.

And that's the story of why Spanish home loans have a 2.5% delinquency rate, a fraction of ours, despite the fact that home prices in Spain are collapsing and Spanish unemployment rates are in excess of 20% today.

For sure, the Spanish residential housing market is in much better shape than the American market. They do things differently than we do.

But the Spanish banks couldn't leave well enough alone, and that's a revealing story as well. It most likely augurs poorly for us, too.

In fact, my guess is that commercial real estate loans will be the next shoe to drop for many local builders and developers, as well as many community based American banks. Let's look to Spain for guidance here as well.

Spain has suffered falling land prices of 30% and home prices of 22% since the housing 2007 peak (both inflation adjusted), according to surprisingly candid comments by the Bank of Spain's head banker in Spain's Banking Mess. The banking official had this to say about the commercial real estate loan situation in Spain:

"“In both cases, we expect further corrections in the years to come,” he said. For land prices, he said, the bank’s “baseline scenario” was that prices would fall to little more than half of the peak level. The “adverse scenario” indicated that the decline could be significantly worse.......

But if lending to home buyers was conducted in a far more prudent manner than it was in the United States, lending to real estate developers and construction companies was, if anything, more irresponsible. The higher land prices went, the more eager the banks were to push out loans.

The story of how Spain’s banks got into the mess — and the way its mess differs from that of American banks — show that it is impossible for banks to walk away from a collapsing bubble in real estate. It also shows that the structure of mortgage markets can make a major difference in how a collapse plays out.

The figures released by the central bank this week showed that by the middle of this year, 17 percent of Spanish bank loans to construction companies and real estate developers were troubled — or “doubtful,” the term favored by the central bank. That figure has been rising rapidly, reflecting the deterioration in real estate values."

My guesstimate is that we have a similar troubling story developing in the U.S. If so, the end of the home owner mortgage debacle won't represent the end of the American real estate saga. Not even close.

For a clue, I suggest that you look at the situation in your neighborhood. What about the builders and developers that have raw land and incomplete or largely unoccupied finished construction projects? How good is that collateral in relation to probable loans outstanding? Not very, I would guess.

If I'm correct, these local real estate related loans will plague local commercial borrowers and their community based banks for years to come. The insufficient collateral values are now tied to empty or half empty offices, strip centers, retail stores and new neighborhood developments.

As these properties continue to sit half empty and the "asset based loans" don't generate enough cash to service the interest owed, let alone the agreed upon principal payments, what are the lessons to be learned?

There are many, of course, but perhaps the biggest is that housing mania in America was and is a sucker's game. For all of us.

But with the encouragement of almost everybody, including government, builders, developers, real estate brokers, lenders, teachers, families and friends, it was and still is a popular game to play. That will change, because it must.

In comparison, let's look at the "risky" stock market. Who encourages people to borrow money to make a single purchase of an undiversified asset like shares of stock? Nobody does.

In fact, if you want to borrow money to buy shares of stock, you are always at risk of having to repay the loan immediately if the stock's price falls (margin call).

Thus, while most people would correctly think it's crazy to buy stock with borrowed money, why do these same people buy homes with no money down and no money to repay the loan on demand?

It's not because of the difference in the value of the collateral. In one case, the collateral is the price of the stock and in the other it's the land and house.

Besides, we can always sell the stock on a minute's notice. Not so with the house.

So why did we get into this nationwide real estate related insufficient collateral mess?

My own view is that's it's our well developed and totally wrongheaded culture telling us that buying a house as early as possible, and borrowing as much as possible, makes all the sense in the world. The truth is just the opposite of that.

Thanks. Bob.

What The Depression Era Teaches About Government "Help"

In An Economy In Trouble, Amity Shlaes, author of "The Forgotten Man: A New History of the Great Depression," reviews the new book "The New Deal: A Modern History" by Michael Hiltzik.

{If you're choosing between the two books, I recommend "The Forgotten Man" by Shlaes. It's both entertaining and well researched, and it also teaches the unconventional and counter-intuitive lesson about what government can do to "help" during economic hard times.}

In any event, I agree with the conclusions set forth in "The Forgotten Man." Therefore, I wouldn't agree with much of the analysis set forth in Hiltzik's "The New Deal."

Here's part of the straightforward criticism Ms. Shlaes delivers concerning Hiltzik's new book:

"Notwithstanding the billions of dollars spent and the thousands of regulations enacted, the economy did not get back to its 1929 level in Roosevelt's first two terms. The Dow Jones Industrial Average likewise did not return to its pre-Crash level. Ten years into the Depression, total hours worked by the American labor force were a full 20% below the 1929 level. When it came to job creation overall, the New Dealers lost the battle: The unemployment data gathered so meticulously by Perkins and those who followed her averaged well into the double digits for Roosevelt's first decade. Even when temporary make-work jobs are counted, New Deal unemployment only occasionally moved into the single digits before World War II.

Mr. Hiltzik scarcely addresses this failure. He even more or less denies it by providing snapshots of year-over-year growth that seem impressive until you recall the low base from which they start. He also seems to mock efforts to understand why the New Deal failed. The scholar Robert Higgs has shown that Roosevelt's aggressive antibusiness policies caused companies to hunker down rather than start hiring, but when Mr. Hiltzik discusses business confidence he adds scoffing quotation marks around the phrase, as if business confidence is of little importance in economic matters.

The author also neglects the Wagner Act of 1935, which gave unprecedented clout to labor, inaugurating the era of the sit-down strike and the closed shop. The act drove up labor costs, spooking employers and discouraging them from hiring. This effect "The New Deal" obliviously marches past, banner waving. Mr. Hiltzik's chronicle would have been more effective if cast in a less triumphal mode, acknowledging the many ways in which the New Deal failed the economy it was trying to save."

Here's the short version of the story about the "helpfulness" of the effects of much of government spending during hard times. The Depression lasted throughout the entire decade of the 1930s and only ended when World War II began, regardless of what the Roosevelt administration tried.

In fact, President Roosevelt's popular and populist based vote getting attacks on business and anti-business policies and regulations caused companies to sit tight and lose confidence about making investments for the future (sound familiar?). Roosevelt attacked, and businesses lost confidence and hunkered down.

The conclusion by Shlaes, and with which I agree, is that most of the well intentioned 1930s New Deal efforts went for naught, and government spending begot more spending, but not better economic results.

Accordingly, the New Deal and Roosevelt's programs in no way demonstrate that government stimulus spending programs are helpful to economic recovery. They point toward just the opposite result, in fact.

Of course, that doesn't mean that individual and family assistance efforts regarding paying unemployment benefits, social security benefits, food stamps and the like aren't necessary. Of course, these payments help blameless individuals and families endure the painful effects of the economic downturn.

But neither does it mean that business is to blame nor that government can come to the rescue. Apparently the real cure is time. This simply means that the time to do the right thing is before the event. Once it's occurred, it's too late for quick remedies. I guess that's what "an ounce of prevention is worth a pound of cure" really means.

All this simply argues that there is no evidence that Keynesianism and demand stimulus is effective with respect to aiding or abetting the resumption of economic growth once a downturn occurs.

In fact, the additional debt resulting from this ineffective deficit spending is harmful to the long term prospects of the economy, since somebody someday will have to pay it off. But that's another story for another time.

Thanks. Bob.

Does Warren Buffett's Secretary Pay Enough Taxes?

President Obama and Warren Buffet say it's not fair that Mr. Buffett pays a lower tax rate than does his secretary. As I recall, Buffett represents that he pays ~17% of his income in federal taxes.

That makes sense as probably almost all of his personal realized annual income is of a capital gains nature, and capital gains are taxed at a 15% federal tax rate for individual taxpayers. (Of course, he could eliminate the guesswork by making his individual tax return public for all to see, but he has chosen not to do that.)

But how much would his secretary's earnings likely be if the secretary's federal income taxes paid are more than the 17% paid by Mr. Buffett? Let's take a look.

The Buffett Alternative Tax lists the average federal tax rates paid for various categories of individual earners in 2008.

For those earning more than $1 million, the average earner paid 23.3%. (Buffett paid 17%.)

Those earning between $500 thousand and $1 million paid 24.1%.

Those between $200 thousand and $500 thousand paid 19.6%.

Those between $100 thousand and $200 thousand paid 12.7%. (At 17%, Buffet paid more than that.)

Those between $50 thousand and $100 thousand paid 8.9%.

Those between $30 thousand and $50 thousand paid 7.2%.

From the above, it would seem that Buffett's secretary earns somewhere between $200 thousand and $500 thousand.

Accordingly, Mr. Buffett's secretary is apparently one of those Obama designated underpaying "millionaires and billionaires" with respect to taxes paid. If so, Buffett must want his secretary to pay even more in taxes, even though the secretary already pays at a much higher rate than does Mr.Buffett.

Confused yet?

Rather than all this supposition, the real question is why Mr. Buffett and President Obama don't just give us the plain and simple facts, now that they've elected to make the "Buffett Rule" a political issue.

On the surface, it's not at all evident that the average secretary pays higher tax rates than the Obama targeted average "billionaires and millionaires" pay. Actually, the Obama and Buffett argument looks like nonsense.

Maybe the Obama and Buffett team will elect to clear this up for all of us soon. If they do, perhaps we'll then understand what they already know, and why what they want to do makes so much sense.

In the meantime, don't hold your breath while waiting for their enlightening and clarifying commentary.

Politics sure makes for strange bedfellows, doesn't it?

Thanks. Bob.

Changing Our Expectations About The Role of Government

Ancient Chinese philosopher Lao Tzu wrote, "If you do not change direction, you may end up where you are heading."

With respect to the role of government and the responsibility of citizens, we need to change direction, because we surely don't want to end up where we are heading. That goes for most, if not all, of the rest of the world, too.

The Planning Fallacy is a recent editorial which summarizes its basic argument in the final paragraph:

"Over the past decades, Americans have developed an absurd view of the power of government. Many voters seem to think that government has the power to protect them from the consequences of their sins. Then they get angry and cynical when it turns out that it can’t."

We keep waiting for government actions to make things better, but that's simply not going to happen. Governments are not powerful instruments for solving complex problems, but as we've seen, they can do great harm.

Earlier in the article, the consequences of the "Planning Fallacy" are detailed:

"Over the past three years, the United States has been committing the planning fallacy on stilts. The world economy has been slammed by a financial crisis. Countries that are afflicted with these crises typically experience several years of high unemployment. They go deep into debt to end the stagnation, but the turnaround takes a while.

This historical pattern has been universally acknowledged and universally ignored. Instead, leaders in both parties have clung to the analogy that the economy is like a sick patient who can be healed by the right treatment.

The Democrats, besotted by the myth that the New Deal ended the Great Depression, have consistently overestimated their ability to turn the economy around. They regard the Greek crackup as a freakish, unlucky break, even though this sort of thing is a typical feature of a financial crisis.

Republicans, who should know better, also have an inflated sense of the power of government. In the presidential debates, Rick Perry, Mitt Romney and Jon Huntsman argue about which one oversaw the most job creation during his term as governor, as if governors have an immediate and definable impact on employers’ hiring decisions.

The reality, of course, is that the economy is not a patient. It is a zillion, zillion interactions. Government is not a doctor. Most of the time, it is a clashing collective enterprise that is occasionally able to produce marginal change, for good and for ill.

Democrats should be learning about the limits of social policy. As in the war on poverty, as in the effort to transform American schools, as in the effort to create prosperity in the developing world, it is really hard to turn around complex systems.

Republicans should be reflecting on the fact that if a Republican president were in office right now, and even if he or she did sensible things, the economy would still be in the dumps. It would be Republicans losing “safe” Congressional seats in special elections.

The key to wisdom in these circumstances is to make the distinction between discrete good and systemic good. When you are in the grip of a big, complex mess, you have the power to do discrete good but probably not systemic good."

We are in the middle of a complex mess. That much is certain.

Our multi-decade spending spree and resultant debt accumulation have produced a very complex problem, the solution of which will require a long term systemic approach.

In essence, the cultural willingness to adopt lasting change must precede the political action necessary to effectuate that change. If we have the will as a society, the politics will follow. In other words, I believe our real problems are more of a cultural nature than they are political.

If, as and when we the people are willing to enact common sense financial solutions to decades long spendthrift ways (both as individuals and as elected officials in local, state and national governments), the politicians won't stand in our way.

That said, the politicians won't lead the way either. As always, the hard work to form the parade for the politicians to "lead" must be done by us. And that's the way free people should want it.

First, we need to tell the truth to ourselves and to each other as well. And that truth is that it's going to take time to "change direction" if we don't want to end up where we are heading.

Depending upon societal willingness to face reality, it could take until the end of this decade to get things under control and fully back on track. We can and should hope for a much quicker solution, of course, but we also must accept that taking ten years to eliminate a problem which took several decades to develop isn't an unrealistic timetable.

What would be unrealistic would be to believe that our government can make our problems go away by their actions and/or the mere passage of time.

Thus, fundamental, systemic and cultural change is required to change direction. My view is simple---I sincerely hope that the only question will be when smaller government and more personal responsibility will come, and not whether it will come.

So we'll soon be answering the two related questions of what we want the future of America to look like.

(1) Will we choose to continue to follow Europe down the dead end path to democratic-socialism and overall collectivism, or will we move back in the direction of free markets and individual self reliance?

(2) Will we choose to become fiscally responsible, both individually and as a nation, or will we adopt collectivism?

Only time will tell which path we'll choose, but in the end, it will be we the people who decide. That's fair enough for me.

Summing up.

Why the need to change direction?

Right now we are in the midst of a unique and pivotal period in our country's history. Our habit of living beyond our means has finally caught up with us.

If we want to be big time spenders, we have to be big time competitors, too. That's the way global and free markets work.

The president and congress, no matter who holds those offices, can't make our competitive problems go away. In fact, the next gang of officeholders (and I hope we get lots of new faces) won't be able to help us quickly solve our problems either. The problems are too ingrained for quick and easy solutions.

Of course, the right political leaders can and would facilitate solutions, but the citizens must first lead the way. So if as citizens, lead we must, then lead we will.

It has taken us many decades to dig the many deep financial holes we've dug for ourselves. One shovel won't be enough to dig us out. We'll require many shovels in the hands of many hard working citizens to eliminate the operating deficits and begin paying off the debts we've accumulated. And in every respect, we'll have to be globally competitive, too.

The concept of "reversion to the mean" is perhaps an appropriate way to understand why the solution to our financial dilemma will take time. As we've consumed for far too long by borrowing from the future, it's now payback time. Nothing complicated about it.

As a result, we will live in a future which will be much different than what we've known. It can a better one if we choose to make it so. So we will.

Pogo said it best about our present condition, "We have met the enemy and he is us."

Let's now say this to ourselves and each other, "We have met the person who can and will solve our problems, and he is us."

Thanks. Bob.

Local, State and National Politicians Combine with Union Leaders to Fleece Taxpayers

The Five Million Dollar Man tells the story of retired union official and public employee Dennis Gannon, former president of the Chicago Federation of Labor.

Prior to working full time for the union, Gannon was employed by the city of Chicago at an annual salary of $56,000. He then took a leave of absence from the city, went to work full time for the union, and received a union salary of $200,000.

Subsequently, while he continued to work for the union, he applied for and was granted a city pension.

Thus, in addition to the $200,000 union salary, he was receiving a city pension of $150,000, or a total of $350,000 per annum.

No longer a full time union official and now just a city of Chicago pensioner, Mr.Gannon's city pension of $150,000 is roughly three times what his full time city worker pay of $56,000 had been.

Therein lies an interesting story about the actions of governments, unions and politicians. Meanwhile, we largely unsuspecting and scammed taxpayers will receive the bill for being fleeced, as always.

That is, Chicago, Illinois and national taxpayers will pay what the city's ailing pension plans can't afford to pay. We're the "backstop" for the wasted money and abuse of office by government and union officials.

Whatever the government officials choose to spend, they tend to spend. And in the end, we the people always get the privilege of paying for their profligacy. How thoughtful of them to include us!

Put simply, we taxpayers have a well established habit of allowing the politicians and public employee union leaders to play fast and loose with our money. To be sure, they tend to do just that.

And in this modern era of federal bailouts, jobs acts and related federal stimulus-er-handout programs, it's not just the Illinois taxpayers that will get the bill for Mr.Gannon's pension payments. We all will.

In fact, the worse the Illinois politicians act, the more non-Illinois taxpayers will be asked to serve as backstops for their profligacy. For example, this indirect Texas to Illinois backstopping is done through the circuitous route of Washington.

Although he didn't go anywhere close to acknowledging the deal enjoyed by "public servant" Mr.Gannon, Mr. Obama did have many wonderful things to say about government employees and their unions at a Labor Day rally earlier this month. Here goes:

"In his Labor Day speech in Detroit, Barack Obama issued a ringing endorsement of government employee unions:

Having a voice on the job and a chance to organize and a chance to negotiate for a fair day's pay after a hard day's work, that is the right of every man and woman in America--not just the CEO in the corner office, but also the janitor who cleans that office after the CEO goes home. Everybody has got the same right.

And that's true for public employees as well. Look, the recession had a terrible effect on state and local budgets--we all understand that. Unions have recognized that; they've already made tough concessions."

Here's my question. How does Dennis Gannon, being paid a $56,000 salary as a Chicago city employee, end up with an annual city pension of $150,000? (We won't ask the further embarrassing question of why he received that city funded pension of $150,000 while being paid another $200,000 by the union at the same time.)

And "The Five Million Dollar Man" provides the answer:

"Since the 1950s ... city workers who take leaves of absence to work full time for unions have been able to remain in city pension funds if they choose. The time they spend at their union jobs counts toward their city pensions.

Union jobs, however, are far more lucrative than city jobs. Gannon's city salary was $56,000 a year; his union salary, $200,000. But he retired from his city job in 2004--at age 50, and 13 years after beginning a leave of absence. Between then and 2010, when he retired from the union, he collected both the $200,000 union salary and a $150,000 city pension.

How did the city end up paying him a pension nearly three times his salary? That's where things get interesting. Few labor leaders took city pensions, the Tribune reports, "until the law was changed in 1991 to base those workers' city pensions on their union salaries instead of their old city paychecks, dramatically boosting the amount they could receive"--a provision that "became law with no public debate among state legislators and, more importantly, no cost analysis."

And no accountability: "No one from either the state Legislature or city government will take credit for the law, which passed in 1991, and the process of drafting pension legislation in Springfield is so shrouded in secrecy that there's no way of knowing exactly whom to hold responsible."

And no possibility of reversal: "The state constitution says pension benefits cannot be diminished once they are earned."

"Gannon told the Tribune that he was only following the law in filing for a city pension," the paper reports. The scandal isn't that what they're doing is illegal but that it is legal."

And that indeed is the scam or shame of it all, as the effect of all this on the already overburdened American taxpayer is essentially unlimited:

"And as The Daily's Jillian Melchior reported last month, state pension funds frequently make risky investments, knowing that if they don't pan out, taxpayers will have to make up the losses. What's more, the boards that manage these funds are stacked with union representatives and political appointees: "Because public unions are an influential constituency, they're inclined toward union priorities."

Let's summarize what this illustrative scam of "taxation without representation" really involves.

(1) People who work for the city are eligible for a pension upon retirement.

(2) If elected or appointed to a union office, the city worker then takes a leave of absence but augments the city pension entitlement based on the much more lucrative union salary.

(3) Gannon becomes entitled to even more city pension money while employed by the union. That's due to being credited for years worked as a city employee while serving the union on a full time basis, and while on a leave of absence from his lower paying city job.

(4) Then Mr. Gannon retires at age 50 from the city job and is entitled to be paid for the rest of his life at a rate of three times what he had been paid while working as a city employee.

(5) He then continues to work for the union at an even higher salary until he retires several years later.

(6) And the taxpayers everywhere, and not just those in Chicago or the state of Illinois, will pay for the city worker's retirement benefits.

(7) Out of "fairness," if Illinois taxpayers can't pay the entire bill, national politicians like President Obama will send federal "stimulus" money to Illinois to make up for the pension fund shortfall and see that "justice" is done. Enough said.

Fittingly, the article concludes:

"That is the system President Obama defended on Labor Day. And his support for it is not merely rhetorical. Both the 2009 stimulus and the recently proposed Stimulus Jr. include vast payments to states and localities--in effect, a federal taxpayer bailout for governments that have been so profligate with their own taxpayers' dollars. Some of that money, of course, gets kicked back as campaign contributions and independent expenditures to support the campaigns of Obama and other Democrats. It's all legal, but that doesn't mean it isn't a scam."

Meanwhile, union officials work hard with dues paid by janitors, teachers and other hard working people in an effort to keep the Democrats and President Obama in office. They do this in large part by vilifying those evil CEOs and other fat cats who pay the bills, and whose offices the janitors clean, as our "non-class warfare" President Obama says.

And now you know the story of public servant Dennis Gannon. I hope the janitors, teachers and other hard working, dues paying union members hear about it, too.

Thanks. Bob.

History, Economics , Math, Science --- Communication and Comprehension Skills

The Education Our Economy Needs is an interesting look at how our 12th-graders performed when tested on the subjects of science, economics, history and math. The results revealed that students performed worst in history and best in economics. The editorial calls this worrisome.

Yet the editorial writer, the retired CEO of Lockheed Martin, doesn't even question the assertion that our best subject is economics. Talk about a lack of critical thinking!

Here's my question. How can we claim that our best subject is economics if we're testing for useful knowledge? My experience points to a staggering lack of general knowledge concerning economics and the debilitating effects of debt and deficits. And besides that, this knowledge deficiency is widespread, longstanding and true for all age levels.

It's simply impossible to reconcile our so-called first class economic proficiency with today's dangerous financial mess and debt issues, both with respect to individuals and for our society as a whole.

Far too many of our citizens owe more on their homes than the homes are worth. Even if we'd rather blame the bankers for the current state of affairs, Pogo teaches that we did this to ourselves (with encouragement to take on more debt over many decades by our government and the tax code, but that's another story).

So how can we possibly claim that our greatest knowledge is in the area of economics? Relative to economics, I sure hope that we're better in math, science, history and all the rest of the subjects, at least with respect to practical knowledge.

The writer had only this to say about the students' performance in economics, "And despite what might be suggested by the number of underwater home loans, high-school seniors actually fare best in economics."

But enough of our discussion of economics for now.

Let's return to a subject upon which the writer and I completely agree. He calls for a "modern" approach to the study of history.

In the editorial, he describes the many ancillary benefits of studying history:

"Well, it's not primarily the memorized facts that have current and former CEOs like me concerned. It's the other things that subjects like history impart: critical thinking, research skills, and the ability to communicate clearly and cogently. Such skills are certainly important for those at the top, but in today's economy they are fundamental to performance at nearly every level."

Later, he sums up:

"Far more than simply conveying the story of a country or civilization, an education in history can create critical thinkers who can digest, analyze and synthesize information and articulate their findings. These are skills needed across a broad range of subjects and disciplines.

In fact, students who are exposed to more modern methods of history education—where critical thinking and research are emphasized—tend to perform better in math and science. As a case in point, students who participate in National History Day—actually a year-long program that gets students in grades 6-12 doing historical research—consistently outperform their peers on state standardized tests, not only in social studies but in science and math as well.

In my position as CEO of a firm employing over 80,000 engineers, I can testify that most were excellent engineers—but the factor that most distinguished those who advanced in the organization was the ability to think broadly and read and write clearly.

Now is a time to re-establish history's importance in American education. We need to take this opportunity to ensure that today's history teachers are teaching in a more enlightened fashion, going beyond rote memorization and requiring students to conduct original research, develop a viewpoint and defend it.

If the American economy is to recover from the Great Recession—and I believe it can—it will be because of a ready supply of workers with the critical thinking, creative problem-solving, technological and communications skills needed to fuel productivity and growth. The subject of history is an important part of that foundation."

What he says makes lots of sense.

Now let's try to connect these arguments to the historically low performance by high schoolers on the reading and writing portion of this year's SAT exam.

How to Stop the Drop in Verbal Scores posits that the record low performance on the verbal part of the SAT is attributable to the compounding effects of not beginning to read rigorously at an early age:

"Those who are language-poor in early childhood get relatively poorer, and fall further behind, while the verbally rich get richer.

The origin of this cruel truth lies in the nature of word learning. The more words you already know, the faster you acquire new words. This sounds like an invitation to vocabulary study for tots, but that’s been tried and it’s not effective. Most of the word meanings we know are acquired indirectly, by intuitively guessing new meanings as we understand the overall gist of what we are hearing or reading.

The Matthew Effect in language can be restated this way: “To those who understand the gist shall be given new word meanings, but to those who do not there shall ensue boredom and frustration.”

My take on both of these articles is straightforward. To optimize learning, kids need to read and then discuss what they've read, both in writing and orally.

These regular readers also need to be challenged to analyze and cogently communicate the meaning of what they've read.

Whether that involves reading and communicating about history, economics, government, politics or other relevant topics isn't what's important.

What's important is that our youth is reading, thinking, discussing, analyzing and communicating on an ongoing basis.

Now let's return to economics and the fact that we're in a world of hurt with respect to our knowledge thereof. This glaring shortage of useful knowledge is especially germane to the housing and related debt for individuals, as well as the unsustainable operating deficits and onerous debt levels of our national government.

Kiss of Debt for the Flagging U.S. Economy is also worth a few minutes of your time.

Household and individual debt levels are at record highs.

With respect to government, in 1980 our nation's debt totaled $1 trillion. In 2011 that debt is now in excess of $14 trillion. And it will continue to grow each day for as far as the eye can see.

If those facts don't convince you that our knowledge of economics and personal finance isn't what it needs to be, here's another way of looking at our nation's debt.

We now generate annual operating deficits greater than our total national debt was in 1980. Succinctly stated, what took us 200 years and several wars to accomplish, we now do each and every year. And that doesn't even count unfunded social security, medicare and medicaid liabilities.

Sadly, this "worrisome" performance is likely to continue indefinitely or at least until someone pulls the plug. We could sure use a plug puller about now.

Although housing related debt levels are now unsustainable, government continues to encourage individuals (i.e., mortgage interest deductions, property tax deductions and so forth) to become even more indebted.

Accordingly, my conclusion is that economics as generally taught today probably isn't teaching kids anything very useful. Or adults either. Maybe that's why it's reportedly our best subject.

Thanks. Bob.

The good news is that a candidate who demonstrates capabilities in critical thinking, creative problem-solving and communication has a far greater chance of being employed today than his or her counterpart without those skills. The better news is these are not skills that only a graduate education or a stint at McKinsey can confer. They are competencies that our public elementary and high schools can and should be developing through subjects like history. Far more than simply conveying the story of a country or civilization, an education in history can create critical thinkers who can digest, analyze and synthesize information and articulate their findings. These are skills needed across a broad range of subjects and disciplinesIn fact, students who are exposed to more modern methods of history education—where critical thinking and research are emphasized—tend to perform better in math and science. As a case in point, students who participate in National History Day—actually a year-long program that gets students in grades 6-12 doing historical research—consistently outperform their peers on state standardized tests, not only in social studies but in science and math as well.

ObamaCare's Political Prevarication .... What's New?

Our political leaders are held in low esteem, if not contempt, by many citizens. Unfortunately, the politicians continue to offer plenty of ongoing examples as to why we should not tend to believe what they tell us.

They sure don't follow the tell the truth, the whole truth and nothing but the truth code of conduct. Not even close.

Many people expressed appropriate disbelief at the politically advertised cost savings attached to the enactment of ObamaCare at its inception. Although the legislation was billed by its proponents as being able to add another 30+ million people to health care coverage while saving taxpayers money at the same time, that seemed too good to be true. In fact, it looked like a lie at the time. It still does.

Now we have concrete evidence that truth telling was not exactly what the politicians had in mind when they were trying to "sell" citizens on the virtues of what they dubbed the "Patient Protection and Affordable Care Act of 2010."

In making their "affordable" cost savings case, a few untruths apparently needed to be told to the people. But what did a few untruths matter when their much desired national health care legislation and re-election efforts were at stake?

In other words, there's really not much new here about the way things are all too often done in Washington.

That said, it's still somewhat sickening to behold when such a disregard for the people's right to be told the truth rises to the surface. Accordingly, let's look at the story of the ObamaCare "Class" program.

GOP Vets an ObamaCare Program tells the story of how political games are played in Washington. Since the article is brief, it's worth quoting in its entirety:

"The Solyndra solar subsidy flare-up is getting all the media attention, but arguably as great a White House scandal concerns one of ObamaCare's multiple new entitlements. A trove of internal emails uncovered by congressional investigators shows that administration officials knew that a new program for long-term care really was the fiscal disaster that critics claimed at the time.

Known by the acronym Class, the government-backstopped insurance for nursing homes, home health aides and the like was among the worst accounting gimmicks used to make it seem as if national health care would reduce the deficit. The voluntary Class program will collect premiums upfront next year but won't pay out benefits for another five years. The $70 billion accumulated during that lead time will finance other parts of ObamaCare, and then the Class program goes broke somewhere around 2020 and starts to drain taxpayers in part because the same money can't be spent twice.

The emails, obtained by a joint Republican panel led by Sen. John Thune and House Energy and Commerce Chairman Fred Upton, reveal that the administration knew the program was designed to fail and went ahead anyway. A Health and Human Services deputy secretary repeatedly warned his superiors and Democratic staff on the Hill that the Class program "seems like a recipe for disaster to me." Later, he even suggested that Democrats include a "failsafe" for public support.

Chief Medicare actuary Richard Foster, who has been a hero of fiscal honesty during the health-care debate, also warned that "adverse selection" could be "a terminal problem for this proposal" as early as May 2009, nearly a year before the bill passed. Because of the way Class is structured, healthy people are unlikely to buy in and premiums for the remaining sick will spike, leading to a classic insurance "death spiral."

"Thirty-six years of actuarial experience," Mr. Foster wrote to the Medicare legislative affairs office, "lead me to believe that this program would collapse in short order and require significant federal subsidies to continue." He later wrote that "I assume you've conveyed these concerns to the staff but, if not, let me know and we can express these concerns in a memo."

A Senate committee staffer "decided she does not think she needs additional work on the actuarial side," an HHS email later reported back. Of course not."

And that's the simple story of "Class" affordability and a clear example of how the use of the word "Affordable" is a misnomer when describing ObamaCare.

President Obama and Democratic leadership were the contemptible players this time, but they're not alone. Republicans tend to do the same kind of things when they're in charge.

Time after time future American taxpayers are taken for granted when it comes to legislation and government spending. MOM is in absentia and OPM is very much alive and well in Washington. Why does this happen?

My view is that it's simple time inconsistent gamemanship. When the real bill finally comes due, the politicians will likely have either served their terms or moved on to other legislative and political concerns. So will the people. As a result, the politicians are never held accountable by the taxpayers.

Making things worse, the taxpayers at the time the legislation is enacted often enjoy the benefits of the lies. It's often the future taxpayers that get the bill.

How long has this game been played? At least since Social Security was passed in the 1930s. Congress passes legislation and doesn't make provisions to pay for its full costs over time.

To the contrary, they deem it to be very much "affordable" at the time it's adopted and promote it just that way to the taxpayers and other concerned citizens.

Post-audits are never conducted to see if what we thought would happen financially did in fact happen. There is simply no accountability with respect to political promises made equating to political promises kept.

Then as time goes on, the "unexpected and unpredicted" costs mount. In the meantime, however, people have become accustomed to the received benefits or entitlements. It's only the future taxpayers who will pay the full bill. This Washingtonian custom and practice has been a way of life with social security, medicare, medicaid and many other entitlement programs, too.

Our politically inspired deficit ridden debt accumulating gamesmanship has been going on for far too long, and its continuation will be entirely unfair to future generations.

But there's a simple solution at hand if we can muster the political willpower. If actual costs later exceed initial projections, which they invariably have, there would be an iron clad rule that after a trial period, either the benefit is immediately reduced or increased taxes are immediately implemented.

It would be very simple to do, and it sure isn't the way things are done now, nor have been done for a very long time.

Maybe it's time for a much needed change in our political discourse. Perhaps our politicians could even be held accountable for not telling the truth. Let's hope so.

Thanks. Bob.

The Right Question: Do We Choose Higher Taxes or Reduced Entitlement Benefits?

When asked the proper questions, people tend to exercise their common sense. At least that's the case with respect to choices that don't cost us anything.

But what if the real hard questions were asked? Then what would we choose to do?

Voters Want State Government Reform reports on the results of a survey dealing with state budgets and public employee spending. In essence, the strong point of view expressed by voters is to cut state spending and reduce public employee benefits before raising taxes. The article says the following:

"Americans believe that bold action to restrict spending is necessary to stabilize the finances of state government.

Last month, in a wide-ranging national survey of 1,000 randomly selected, registered voters, and in 10 polls in individual states each with 400 respondents, my polling company found that voters strongly favor measures to pare the compensation of current and future public employees. They strongly oppose higher taxes.

Specifically, over three-quarters (78%) say their state faced a budget crisis this year, and 68% say that the crisis was resolved with spending cuts. Overwhelmingly they blame politicians for creating and exacerbating the problems: 48% say "elected state officials made careless and self-serving decisions," while only 6% say "state governments did not tax enough."

The top priorities for resolving current fiscal issues are to cut government spending (47%) and to ask for greater sacrifice from current public employees, by having them contribute more towards their benefits (31%). By almost two-to-one, they think that current public employees should have to contribute more toward their pension benefits because of budget problems.

A majority (51%) say they would not be willing to cut "social service programs provided by your state" to maintain the compensation of public employees; and 60% say that "education and health care" should not be cut so that "the salaries and benefits of public employees could be paid at current levels."

That's fine as far as it goes, but what about federal entitlement promises with respect to OUR OWN social security, medicare and medicaid underfunded benefits, along with public education spending? Other than defense, those four areas are where the real future spending and tax issues lie.

Taxes Emerging as Defining Issue for 2012 argues that higher taxes versus reduced entitlements will be the defining issue in the next presidential election. I agree.

In other words, we have some hard choices to make. Specifically, what we will elect to do about our future entitlement benefits and our current and future taxes? Will we choose to begin paying higher taxes for what we promise ourselves in the future with respect to benefits, or will we promise ourselves less?

The clear view of those surveyed in the "Voters Want State Government Reform" editorial was that we prefer public employees' compensation to be reduced rather than for our own taxes to be raised.

But that's not the real question that needs asking and answering. In other words, our fiscal and budgetary issues relate to the four biggies of social security, medicare, medicaid (the biggest component of which is for nursing home care) and K-12 public education spending.

Hence, here's the real question. Should we raise taxes ON OURSELVES or reduce benefits FOR OURSELVES?

And whatever option we choose, how much of a tax increase, benefit reduction, or both, will be required to put our current overwhelming financial, deficit and debt problems behind us?

President Obama wants to tax what he calls the millionaires and billionaires more. He doesn't propose increasing taxes for the other 98% of earners for one simple math reason; he wants the 98% to vote for him and his political party. But other than perhaps promoting class warfare, that won't begin to address our severe fiscal and financial problems.

In other words, the president's political strategy, while perhaps a winning one with respect to getting votes, won't seriously address, let alone solve, our nation's spending, revenues, deficits and cumulative debt dilemma.

Unfortunately, the Republicans probably won't give us a clear choice either. They want our votes, too.

For the real long term solution, we will simply have to choose between substantially higher taxes for everybody and reduced government provided benefit promises for everybody.

Maybe someday the proper question will be asked of voters. Then we will be forced to choose.

To repeat, the question to be asked will be this; Do we choose for ourselves and our descendants higher tax rates and bigger government or reduced entitlements and more self reliance?

Until we're asked or forced to choose, we'll simply waste more precious time and not address the fundamental issues facing our nation and its long term financial health, national security and ongoing viability.

Politics sucks. So does populism. So does needlessly and willfully avoiding the real issues.

We need some truth telling leadership.

Thanks. Bob.

Civil Disobedience, Thoreau and the Chinese

Henry David Thoreau's 1849 essay on "Civil Disobedience" sets forth his views on simplicity, the subservience of government, the responsibilities which accompany our individual freedoms, and the importance of listening closely to the dictates of one's own conscience.

The views articulated in the essay later served as a model for 20th century human rights activists such as Mahatma Gandhi and Martin Luther King.

As free Americans we are quick to point out the many imperfections of our government and its leaders. Too often we forget that not all that many people in the world, even today, enjoy the freedoms to make such personal observations and criticisms.

Like Thoreau in 1849, Americans are and have been free to speak our minds and work to change the things that we believe require changing. That's both our birthright and our Constitutional right. In my opinion, it's also among our responsibilities as good and informed citizens, too.

There were two strong beliefs underpinning the essay on "Civil Disobedience:" (1) Thoreau vehemently disagreed with America's pursuit of the Mexican War; and (2) he was totally opposed to slavery.

In protest, he refused to pay his taxes, for which transgression he spent one night in the local jail. An anonymous friend bailed him out.

Thoreau then wrote "Civil Disobedience," in which he argued for limited government. In fact, he believed that in an ideal world the best government would be no government at all. Only our individual conscience about right and wrong would dictate how we would live and interact as citizens.

Obviously these radical and somewhat unique views did not exactly endear him to government officials.

Today Thoreau is widely recognized as one of the great American minds of the 19th century. "Civil Disobedience" is still widely read and discussed throughout America.

But that's not the way it works in China. Not at all.

China just released a self-congratulatory first ever annual report on what it claims to be progress with respect to the free exercise of human rights by Chinese citizens. However, the article Human Rights With Chinese Characteristics is tellingly sub-titled "A new report shows how Beijing Justifies Disappearing dissidents."

Here's more of what the article says, "To understand ... one has to go back to Mao Zedong's most important speech, "On the Correct Handling of Contradictions Among the People." The people, Mao said in 1957, have the right to take part in politics. But the people is defined as those who are loyal to the Communist Party. Anyone deemed disloyal to the Party is excluded from the people and loses his rights.

Likewise in today's China, human rights protect you only if you subscribe to the Party's definition of those rights. All members of society work toward economic development and the collective good. Those who insist on individual political rights threaten economic development. Because that imperils the cause of human rights, they are no longer members of society and the government is right to silence them.

In that spirit, an amendment to the Criminal Procedure Law is pending to allow authorities to detain suspects in secret locations without notifying their families. This would legalize the increasingly common practice of having high-profile dissidents "disappear.""

Doesn't sound much like Thoreau, does it?

Here's the story. China says people can speak their minds as long as what they say agrees with the Communist party line. Otherwise they may disappear.

Thoreau didn't disappear when he spoke his mind more than 160 years ago. My guess is that had he been Chinese, we never would have heard of him or been exposed to his opinions.

I also wonder how many Thoreaus there might have been in China over the past several centuries.

On the other hand, I don't wonder at all how lucky I am to be an American.

So let's roll up our sleeves and get to work changing what needs changing in our great country. That's both our civic right and our responsibility, too. By so doing, we will make America an even better society for our future citizens.

Thanks. Bob.

SAT Scores Hit A New Low .... So What's New?

In case you've been off the planet, the SAT scores for the 2011 graduating class achieved a trifecta this year. Reading, writing and math all declined from the prior year results.

Setting historical records, reading and writing hit all time lows. Wow!

SAT Reading, Writing Scores Hit Low reports that 43% of high school students taking the test are ready to do college work. Earlier ACT scores stated that only 25% of those tested were prepared to do college work. See also Average Scores Slip on SAT.

Whatever the correct percentage may be, it's a continuing and very sad story and saga for American students and their families. Taxpayers and other interested citizens, too.

Quoting from the article, "At the precise time the importance of a college degree is increasing, the ability of the U.S. to compete in a global economy is decreasing," said Jim Montoya, vice president of the College Board. "We, as a nation, have to do a better job preparing our kids for college."

Using common sense, it would be eminently reasonable to assume that a radical overhaul of our K-12 government controlled public education system should take place asap or even sooner.

But since the government and the teachers unions run the schools, and we the people are willing to passively sit on the sidelines, this miserable performance is now not only pretty much accepted but also widely expected.

And that's not all. In addition to the overall horrible test results, the costs for government run schooling go up each year. Still, vouchers aren't being considered as a viable option due to the powerful influence of government officials and teachers unions. And lest I forget, the Democratic party, too.

In looking for a solution to the problem of poor test score results, let's try a thought experiment based on the evidence: (1) one reasonable hypothesis would be that more national or state government control (beyond the local level) yields poorer student outcomes; and (2) another would be that the more money spent as specified by the government and in the manner in which it is currently spent, combine to yield poor test results.

Both of the above hypotheses make sense to me, and I believe they are based on the available facts, as well as common sense, too. In any event, something new should be tried, since our ability to compete as a nation is now under serious challenge.

What do we have to lose by trying something new? Even if we're wrong, how much worse can it get? Not much downside, I would argue.

But admittedly, I'm NOT any of the following; an official of any governmental body, a school administrator, or a teachers union official.

So what could I possibly know, being just a taxpayer, parent and grandparent? Not much, I guess.

We could sure use a "civilly disobedient" Henry David Thoreau about now.

Thanks. Bob.

Lessons From Solyndra's Debt Debacle

Q- What often happens when private sector debt is created with government "stimulus" monies?

A- In the Solyndra example, we observe poor business judgment by both the government lender and the private borrower, which resulted in heavy losses for taxpayers (private investors, too).

Lesson- The Solyndra stimulus enabled debt debacle arose from a combination of easily available cheap credit, ignorance, arrogance, and greed. It was an accident waiting to happen, and there will be more such accidents to come.

Lesson- The Solyndra stimulus story is neither remarkable nor unusual. The saga played out about as could be expected, given a set of similar circumstances. {In that regard, I doubt that anything illegal was done. Probably not anything all that unusual either.}

Lesson- My guess is that Solyndra is a simple matter of financially ignorant government bureaucrats "investing" taxpayer stimulus monies in the businesses chosen to be favored by the government. In this case, the color green was in vogue, so the government story was written to fit the desired outcome.

Lesson- In addition to not being objective with respect to which companies receive government loans, financially ignorant and biased bureaucrats spending OPM invariably do a poor job compared to knowledgeable MOM investors.

Lesson- One problem with government spending programs is making lots of OPM available to government officials which, of course, is the very nature of government "stimulus." And that's precisely where Solyndra got its $535 million.

Lesson- Another less obvious problem is often the lack of sound business judgment by the borrower. The Solyndra "stimulus" money was used to expand the company's capacity, even though more than sufficient capacity was already installed. Moreover, the company was unprofitable due to both its high costs and high prices, accompanied by low demand. Thus, its competitive situation should have restricted all concerned from digging the company's hole even deeper.

Lesson- Since the company was losing money and not fully utilizing its then existing capacity, the obvious question is why the company wanted to expand and build another factory. Well, the short answer is that the company's management wasn't spending/investing its own money.

Lesson- In an apparent greedy and get rich quick effort, the CEO and his management planned to cash out later by selling the company to public shareholders. The government partnership and $535 million of expanded capacity would provide a story they could "sell" and make appealing to public investors.

At least that's my guess about management's motivation to secure the unneeded and speculatively dangerous government loan. If there was a more straightforward reason, it's not apparent in light of the company's operating performance.

Lesson- The market is indifferent to who owns what, who does what and why they do what they do. Customers simply want value, or to buy the best product possible for the least money spent. That's the simple and unvarying nature of competition and markets. And in the Solyndra sphere of competition, the Chinese were in the game and playing to win as a low cost provider.

Loan Was Solyndra's Undoing tells the simple story of an inappropriately granted and sought-for loan extended by the government to a greedy business management. Although the loan made no business sense for either party, billions of dollars for economic "stimulus" were there for the taking. Both the project and money were green, President Obama had a story to tell, and he proceeded to tell it. I wonder what he'd say now.

The management exercised very poor judgment in seeking the government loan, but the government officials approved it. Whether the loan was granted out of abject ignorance or for other reasons, we'll never know. Still, our government shouldn't have "invested" taxpayer money that way. In any event, they did just that, even though the deal was an obvious loser from the get-go. In the end we the people will pay the bill.

The combination of government bureaucrats and taxpayer money generally causes bad things to happen, so we shouldn't be surprised when the obvious occurs. That said, we could stop it if we chose to do so, since this is America.

Let's look a little closer at the Solyndra matter and a few excerpts from the referenced article.

With respect to the appropriateness of the $535 million loan: "The new factory built with Department of Energy funds foisted fixed costs on a company already struggling through an industry shake-out, they say. What's more, the debt paradoxically made raising more money difficult. Once the government demanded priority in the event of failure, private investors were less likely to prop up the company."

One Solyndra investor said that, in retrospect, "the worst thing that happened to Solyndra was the loan."

With respect to the extremely poor judgment exercised by company officials: "Behind the political firestorm lies a company with a business case that never quite added up, owing to a fundamental cost problem that quickly got worse after the infusion of taxpayers' money that began in 2009, according to investors, analysts and people familiar with the company."

With respect to the Solyndra investors: "The company, founded in 2005, was blessed early on with influential backers. They would ultimately pump nearly $1 billion into the company.

Solyndra's largest backer was the family foundation of George Kaiser, a billionaire whose family had made a fortune from natural gas. Other venture-capital luminaries piled in, attracted with the help of Goldman Sachs Group Inc., Solyndra's financial adviser. Investors included Madrone Capital Partners, which manages money for the Walton family of Wal-Mart Stores Inc. and the Virgin Green Fund, which includes investments from Richard Branson."

Thus, the company, had it had a solid business case, would have been able to secure additional funds for investment from private market investors. That means they probably perceived the government loan terms as a "sweetheart deal." Another example of "be careful what you wish for."

In the end, everybody lost money, including us ignorant taxpayers, even though our interests were supposedly being represented by our government.

With respect to Solyndra's competitiveness: "Solyndra's costs stayed relatively high because of the tricky manufacturing process. In late 2009, Solyndra's tubes cost $4 for every watt of power output to produce, according to company securities filings. The problem was the company could sell them for only $3.24 per watt. One reason for the losses: the company often had to throw out defective or test panels, according to one former production executive.

As it was losing money, competition was getting worse. China's solar panels were dropping in price. U.S. rival First Solar Inc., was making panels at less than a quarter of Solyndra's cost then and today produces panels at about 75 cents per watt. In 2009, Solyndra lost $172.5 million on revenue of $100.5 million."

In other words, the handwriting was on the wall, but that didn't stop the government goodie "stimulus" giveaway.

With respect to the business judgment and motivations of the various players: "In mid-2009, Solyndra had a choice: It could hunker down with its existing factory and try to slash costs to meet competition, drawing on additional private capital as needed, according to the people familiar with the company. Or, with a loan from Uncle Sam, it could gamble and build a brand-new, bigger factory in a bid to gain economies of scale and dominate the market.

The Obama administration was eager to help. The loan-guarantee program dated to the George W. Bush administration—it was created in a 2005 energy law—and now was swimming in funds from the economic-stimulus package.

Solyndra's founder and chief executive at the time, Chris Gronet, decided to go for the gamble."

Summing up

Of course, that decision to gamble by the CEO sealed the company's fate. But what's the lesson for us? Well, my takeaway is that the money loaned by our government to back the CEO's long shot gamble was the taxpayers' money. It belonged to we the people.

We should not trust our government with taxpayer money to "stimulate" the economy. They will want to help their own political agenda, and this will almost never coincide with what MOM would want-- that they would make solid business investments in solid projects. Besides, they don't have the necessary competence to do so.

At the same time, when monies are there for the taking, private actors will try to access it. They will want to take an all expenses paid for ride underwritten by the taxpayers.

Thanks. Bob.

What Would President Jack Welch do about Bailing Out States?

Yesterday we talked about the importance of focusing on revenue growth and expense management in difficult economic times. We also contrasted what would be the fundamental difference in approach between Sam Walton and President Obama in addressing the problem of our national debt and deficits.

Today let's look at capital allocation and how it's best managed in economically challenging times. We'll review these choices in the context of America's dual or federalist system of government. Specifically, we'll discuss the national government's responsibility to provide funding for the various individual states (localities, too) in relation to their debts and deficits.

To bring clarity to this capital allocation issue, we'll compare what I believe would be the very different approaches of Jack Welch and President Obama.

No less than America's unique federalist system of government is at stake. Thus, the substantive issue of capital allocation between the central government and several states must be confronted directly. In other words, calling a bailout a jobs act won't make it a jobs act. Instead it's a wrongheaded and even dangerous thing to do, and inconsistent with our American way.

When comparing capital allocation decision making within a business to that of government, the obvious question to ask is why choose Welch over Walton? Why not simply stick with Walton?

The answer is simply because of the different government and business interests of Wal-Mart and GE. Yesterday's theme of revenue growth and expense management contrasts meaningfully with today's topic of capital allocation in a dual system of governance.

Today we'll deal with federalism, and the relationship between a central government and its satellite sovereign states. GE's several disparate businesses and our nation's fifty separate states make the comparison with GE an appropriate one.

Simply stated, the type of entity Jack Welch led was dual federalism in action. On the other hand, Sam Walton led an enormously successful but structurally simple single focused retail business.

Both Walton and Welch were great CEOs and great leaders as well, but one focused on a single retail business while the other oversaw several distinct businesses within one big corporate umbrella. Sam Walton focused his career on growing one business, the retail business of Wal-Mart. In contrast, Jack Welch was responsible for a portfolio of businesses within GE which included jet engines, NBC, commercial finance, medical systems, plastics, appliances and others.

Each separate state is an important piece of our unique American system of federalism. And one national government combines with those fifty sovereigns to make up our dual system of government.

Let's now review how a President Welch would handle these matters in comparison with President Obama's approach to the latest stimulus-er-jobs program. Stated another way, would Welch propose bailing out poor performing states with borrowed stimulus funds, as Obama has?

My unequivocal opinion is that the approaches taken by Obama and Welch would be as different as night and day. Welch's would make sense.

A Blue-State Bailout in Disguise says this about President Obama's latest $447 billion stimulus-er-jobs-bailout proposal:

"Last Thursday, the president urged Congress to pony up roughly $200 billion in taxpayer money to "provide more jobs for teachers [and] more jobs for construction workers" and more money to carry out other state and local activities. He urges Congress to spend this money even after handing out hundreds of billions of dollars for similar purposes as part of the 2009 stimulus package, as well as a score and more billion dollars again in 2010.

These vast contributions to the coffers of state and local governments, though pitched as a jobs bill, are in reality the latest in a series of bailouts for debt-ridden state and local governments. They are of special benefit to states in the blue regions of the country where the president's most fervent supporters reside.

In many blue states, legislators have copied the politicians in Washington by running up state debts to extraordinary levels. Nationwide, state debt is running around $3 trillion. If unfunded pension liabilities are factored in, estimated liabilities leap forward by another $1 trillion to $3 trillion, depending on the optimism of the assumptions made."

Jack Welch required that GE's various businesses be strong competitors and that each was a #1 or #2 performer in its sphere of competition. If an individual business didn't perform at that high level, its leadership and employees were challenged to "fix it" or know that Welch would "sell it" and remove it from the GE portfolio.

Totally unlike President Obama, GE didn't reward poor performers by bailouts or supplying them with additional investment monies. Basic economics teaches that investment funds are scarce, and choices have to be made about how to use them. As a matter of common sense, those scarce funds should be allocated, if at all, only to that piece of a business or federal structure where the money will be best spent or invested.

Investments should reward those doing well instead of those doing poorly. Said another way, we should not throw good money after bad but invest money only where we will realize appropriate rates of return.

That's only common sense portfolio management at work, and that's exactly what Jack would do. It's also what any other good stewards of the public trust would do.

That's the way our American brand of federalism has always worked. Until President Obama came along, this is.

The above referenced article candidly labels Obama's bailout proposal an existential threat to our remarkably unique and successful federalist system:

"But federal fiscal bailouts put our federal system at risk. In essence, the national government is acting as if states are too big to fail. In the next financial crisis, the federal government may decide that states need to be treated like General Motors or, at least, be given ever bigger handouts of the kind the Obama administration seems committed to making.

But if the federal government is going to tacitly assume responsibility for state debts, then those $3 trillion in sovereign state debt must be added to the $14 trillion national debt that has already caused grave concern, pushing the current U.S. debt into the danger zone. Even if pension liabilities are ignored, the combined federal-state-local debt runs in excess of 120% of GDP.

The costs go beyond dollars and cents. The more often the federal government bails out the states, the more Washington bureaucrats will insist on regulating state and local affairs. At some point the United States will see the end of state fiscal sovereignty and the demise our federal system of government."

Suffice it to say that Texas, North Dakota or other well functioning states shouldn't be forced to send money to Michigan, California or Illinois via Washington, D.C.

But if for some inexplicable reason they are so forced, there should at least be a recognized legal debt incurred which needs to be repaid on time and with interest.

Calling the latest government giveaway proposal the American Jobs Act and then making it a gift to the poor performing states and localities is disingenuous at best. And things like this would, if left unchecked, lead to the demise of our federalist system and American way of life.

Jack wouldn't do it that way, nor should we.

Thanks. Bob.