college grading has either become super easy or college students have become super smart

What has been called a "doozy" of a report concerning college grade inflation has just been released. The report concerns the change in grading over the past several decades, and the findings are truly remarkable.

Way back in the dark ages when I attended college, grading on a curve was in vogue. It simply meant that relative performance in the classroom would determine what grade we received: For example, if ~10% A's and F's were granted, and ~20% B's and D's were issued, then the remainder of ~40% would be given C's. In curve grading, there was competition for grades. Although it wasn't a perfect system by any means, it seemed to work pretty well.


In contrast, the new study reviewed in A History of College Grade Inflation concludes in a most convincing manner that the "old school" curved system of grading, like Elvis, has left the college building. In my opinion, the study's findings also say something important about the state of our higher education system.


So what about the effect on the individual student? Well, with respect to him or her, maybe the obvious question is the following, "Why work harder than necessary if I can get A's just by scoring slightly better than the bottom one half of the class?" {This is especially telling if we consider the findings of another recent report which concluded that three fourths of students entering college weren't academically prepared.}


A's now account for 43% of all grades compared to 15% in 1960. That's an "upgrade" factor of ~3 to 1.


A's and B's combined represent 73% of the grades in public universities today. In private colleges and universities, it's an even higher 86% of the total. That leaves only 14% for C's, D's and F's. Wow!

And if that's not easy enough, the study suggests an even easier way to achieve academic stardom. The best way to graduate with honors while exerting little effort is to attend a private college in the north and "study" liberal arts.


Seriously, I wonder how bad this grade inflation is for our country, our kids and our educational system. If everybody wins, does America win? And if you think the answer to that question is yes, try telling that to the Asians.


Finally, here's perhaps a somewhat equivalent "Alice in Wonderland" thought to ponder. Maybe we'd all feel better about the economy if we just declared the unemployment rate to be 3% instead of 9.2%. That's apparently what the colleges have done with respect to the granting of A's. How ingenious.


Thanks. Bob.

speaking of taxpayer backed football stadiums and pre-mortems

Los Angeles taxpayers are potentially the unintended beneficiaries of a very expensive financial lesson being learned by Cincinnati taxpayers in connection with the football stadium that serves as the home of the Cincinnati Bengals.


To their credit, L.A. officials have adopted a go slow approach to their own pending football stadium proposal. They're taking a pre-mortem stance rather than putting on the rose colored glasses which were worn by Cincinnati officials. Learning from the Bengals stadium experience, there will be an open discussion and televised meeting prior to voting on the issue of a new taxpayer backed football stadium in the City of Angels.


Accordingly, L.A. taxpayers may owe a big thank you to Cincinnati taxpayers. After reading about the unfortunate experience of Cincinnati taxpayers with Paul Brown Stadium, one skeptical Los Angeles official received the support of his colleagues in putting the brakes on a plan to build a new stadium in L.A. with $300 million in taxpayer supported bonds.


Although the matter has yet to be decided, Los Angeles Slows Down Football Stadium Deal is a good example of "vicarious" learning through the experience of others. What the people of L.A. elect to do won't be decided for another few weeks, but whatever they decide, they'll be better off for having taken the time to look closely at their own football stadium proposal before putting taxpayers on the hook for $300 million. With funds scarce, the taxpayers may have a better use for that amount of money.


As if it were scripted for TV, the "special interest" private company promoting the L.A. football stadium project has threatened to rescind its proposal unless city officials and taxpayers quickly approve its construction. Sounds familiar.


In any event, it's good to see the taxpayers calling the bluff.



Thanks. Bob.

Stadiums and taxpayers ... avoiding post-mortems through a pre-mortem approach

Paul Brown Stadium, home of the NFL Cincinnati Bengals, is a good, albeit sad, example of the negative effects of public choice theory at work.


The representatives of the Bengals (special interests) out negotiated in every way the government representatives (Hamilton County), and the rationally ignorant (at least at that time) taxpayer is now stuck with the bill.


The project, in addition to being mismanaged during construction, missed all of its initially overly optimistic financial projections in a really big way. While the propensity for "forecast error" is present all the time, and especially in public projects, the likelihood of such error isn't often a part of the decision making process. In fact, what could go wrong is rarely, if ever, included at the front end of a public project, no matter what its size.


Unfortunately, the forecast error almost always is to the downside for taxpayers. The reason why projections consistently miss to the downside is straightforward. If the initial forecast shows that the proposed investment will be a really good thing to do, it enhances the chances of the project being approved by the taxpayers. In other words, since this project was being pursued by the team and government officials, the rose colored glasses were worn by those doing the forecasting. When presenting the project for approval, the forecast simply represented an absolutely "best case" scenario. That approach helped ensure its passage by the taxpayers.


Hence, while taxpayers are now engaged in a post-mortem concerning the stadium project, at the outset a more taxpayer friendly approach would have been a pre-mortem inquiry. Before committing to huge projects with enormous chunks of borrowed money, taxpayers need to make it a point to ask of the project's promoters the following simple question, "What could go wrong, and if it does go wrong, what will the "worst case" cost to the taxpayer be?". Then if with eyes wide open we decide to proceed, at least the risks will be better understood.


Now let's get back to the matter at hand in the land of the Cincinnati Bengals.


Paul Brown Stadium is located in Hamilton County, Ohio, a poor county where one of seven persons lives in poverty. The likelihood is that the vast majority of county residents have never seen a game played in Paul Brown Stadium. And they probably never will.


Upon completion in 2000, the actual cost of the football venue was more than $500 million, almost double the estimated initial cost of $280 million. In order to fund construction of the stadium, among other things, a one half cent sales tax increase (the almost free lunch approach) was overwhelmingly approved by the citizens. County officials promised that property taxes would be reduced later when the financial obligations related to the football stadium project had been satisfied.


As it turns out, while Paul Brown Stadium was completed more than a decade ago, the promised property tax reduction hasn't yet happened and isn't likely to happen anytime soon. Due to construction cost overruns through project mismanagement, coupled with lower sales tax receipts than predicted, the county now has big problems in addition to those caused by the weak general economy. Needless to say, the county's operating budget is and will remain under considerable stress for years to come.


A Stadium's Costly Legacy Throws Taxpayers for a Loss calls this project "one of the worst professional sports deals ever struck by a local government ---- soaking up unprecedented tax dollars and county resources while returning little economic benefit."


Unfortunately, the saga of the Cincinnati Bengals stadium is not an unfamiliar one. The Bengals threatened to relocate from Cincinnati to a new city unless the county built a new stadium. Team officials and Hamilton County representatives proceeded to negotiate a deal whereby the team would move into a new stadium to be financed solely with bonds issued by the county. When seeking taxpayer approval, both county and team officials predicted that both cash and jobs for the county would be the happy result. That was the prediction.


Here's the real world post-mortem. Last year alone the stadium's cost to the county represented $35 million, or 16% of the county's total operating budget. This 16% and growing piece of the county budget compares to a more normal cost of 2% for other cities in similar situations. As they say, the Bengals took Hamilton County to the cleaners.


The result is that the taxpayers of Hamilton County are stuck with a huge stadium related debt and an equally onerous annual charge. There are no realistic prospects for improvement anytime soon.


Look around and see what's happening in your area. Any new government funded "can't miss" projects on the drawing board? As Yogi says, you can see a lot just by watching.

Thanks. Bob.

city bankruptcy in Rhode Island due to "unfundable" public pensions

Cedar Falls, Rhode Island is about to enter bankruptcy largely as a result of its inability to make good on pension promises to retired police and firefighters. Those promises in large part weren't even made by the city but were made on its behalf by a panel of arbitrators appointed to settle the city's labor disputes in accordance with state law.


Municipalities are obligated by state law to negotiate with unions who represent police and firefighters. If a municipality and its unions can't agree on settlement terms, the matter is referred to binding arbitration and the decisions about wages and benefits will be made by the arbitration panel. So that's what happened over the years.


The "fair minded" but apparently financially ignorant arbitrators then sent the bill to the Cedar Falls taxpayers. Unfortunately, the poor taxpayers of Cedar Falls don't have the money to pay. The municipality has already closed its library and a community center due to it fiscal problems, but it has no such authority to reduce or cancel its retiree benefits for police and firefighters. Such is the law of Rhode Island.



Thus, how much the good citizens of Cedar Falls could afford to pay wasn't a factor under consideration for the arbitration panel when making pension benefit decisions for the Cedar Falls police and firefighters. In fact, if Cedar Falls were to properly make payments to its funds for retiree payments, an estimated 57% of its property taxes would have to be allocated solely to police and firefighter pensions. Obviously, that obligation doesn't leave much with which the municipality can do anything else for its citizens.



Please see A Small City's Pension Fund Rattles Rhode Island for a full discussion of what this means to both Cedar Falls and many other Rhode Island cities similarly situated. It's also going to weigh heavily on the state of Rhode Island. A sad story from start to finish.


The citizens, cities, state, unions, arbitrators, police and firefighters all bear responsibility for this sad state of affairs. The result is that the retirees have ended up with an unaffordable rich package of benefits (e.g. retire at full pension after 20 years of service at age 45 and also receive health benefits for life) for which there is not enough money available. Now the mess is real and probably insoluble.


Cedar Falls is a small impoverished city and needs what it has no way of getting -- $80 million -- to make good on the pension promises made on its behalf by a panel of arbitrators appointed in accordance with state law. This $80 million shortfall is needed to fund the benefit payments for 214 police officers and firefighters. That's for a city whose residents have a median household income of $33,520 and where the average single-family house is valued at $130,000. Thus, there is no way the city's taxpayers can make good on these totally underfunded and even unfundable obligations.


While this is partially the story of a city doing the wrong thing, it's perhaps an even better example of how the officials of Rhode Island have ignored financial reality when it comes to public employees' retirement benefits needed to be financed with local tax dollars. The applicable Rhode Island law requires cities to negotiate with unions representing police and firefighters with respect to wages, hours and all other conditions of employment, including benefits. When the parties are unable to reach an agreed upon settlement, the law calls for binding arbitration. The real costs of these benefits have been ignored by the arbitrators and the unions seeking them. So Central Falls is broke, and its library and community center have closed. What's next?


Our system of government is based on representative competency and fiscal responsibility. Not much of that, if any, is in evidence in this case, either in Cedar Falls specifically or in Rhode Island generally.


My guess is that we'll see lots of similar situations in the months and years ahead.


Thanks. Bob.

Different Approaches to Pricing and Taxing

Private businesses, even the large kinds that get blamed for much of the evil in the world today, fulfill a positive role in our society.  In addition to providing products that people value at prices they can afford, successful companies provide employment opportunities and tax revenues, and employees of successful companies buy products, invest funds, and pay income taxes to governments.  So it is in society's best interests to have strong, growing businesses.

Governments, even the rapidly growing and sometimes wasteful kind that anger so many of its citizens, provide certain widely accepted services that need to be funded.  Valid arguments are made about the limits a society should impose on government involvement in the lives of its people, but few suggest that the government should play no role in serving citizens.

To pay employees, invest in equipment, and deliver products and services, private companies need to be able to attain revenue from customers.  Likewise, governments rely on tax revenues to provide services and pay employees.  But the mental approach to pricing products and services that leaders of successful private companies in competitive industries use differs fundamentally from the thinking applied to tax policy by government leaders.

Businesses can choose to price products using a "cost based pricing" or a "price based costing" methodology.  The former involves calculating the current costs of providing a product or service and adding a sufficient amount to provide for the desired profit, and the latter looks to the competitive marketplace for information about the highest price that can be charged consistent with the retention of enough customers to earn an acceptable level of profitability.  In the event that the prevailing competitive price is not consistent with providing sufficient profit given the provider's cost structure, the business is forced to control or reduce its costs.  Businesses that don't successfully employ a price based costing strategy either have the luxury of being a monopoly or they do not survive long.

Speaking of monopolies, government leaders appear to only use the cost based pricing method to securing funding from taxpayers.  All too often the deficit and long term debt debate is centered around the "fairness" of proposed cuts to various well meaning programs.  Government leaders seem to be saying they have calculated the cost of the programs they feel the government should provide and they are providing the taxpayers with the bill in the form of a proposed tax policy.  The leaders of an organization faced with competitive pressures would be forced to ponder the tax level consistent with conditions needed for an economy expected to compete with those throughout the world and adjust the spending to levels consistent with the resulting revenue.

Government leaders will have to adjust their thinking because we do face competitive pressures from citizens of other countries who want to start and work for companies that provide employment opportunities, life enhancing products, and tax revenues.  Just as customers of private businesses will, all other things equal, choose the less expensive product without regard to the cost structure of the company providing the more expensive one, these global citizens don't care about our cost structure and spending preferences.

public pension fund investment results and what that really means to taxpayers

Retirement benefits paid by both defined benefit and defined contribution plans are in large part financed through current cash contributions by both employers and employees. These cash contributions in turn are invested in various assets, but primarily in stocks and bonds. Thus, cash contributions plus investment returns on those contributions equal the amount of funds later available to pay promised benefits to retirees. At this point in the story, defined benefit pension plans and defined contribution 401k plans may appear to be quite similar. But here's where the similarity ends.



In a defined benefit plan, the amount of the pension is defined or fixed, regardless of how well it's funded or how well the money which comes into the fund is later invested. The employer is obligated to provide the promised benefit no matter what else may happen. On the other hand, in defined contribution plans no such promised or defined retirement benefit is to be paid. The employee's eventual payout is at risk, unlike the pension benefit.


To their plan sponsors, therefore, one very important difference between pension and defined contribution plans is the importance of investment performance. That's because with pension plans benefits are due and owing without regard to whether cash contributions and the investment performance of the fund are sufficient to satisfy the payment obligation. If unforeseen and unanticipated "makeup" contributions are to be avoided down the road, both cash contributions and investment performance must be sufficient to pay the benefits. No such required predetermined and fixed employer payment exists with respect to defined contribution plans.



Despite this guaranteed payment obligation, many pension plans initially are substantially underfunded. This is particularly so with many public sector pension plans. In these instances, taxpayers are assuming potentially huge future liabilities whether they intend to do so or not. In fact, they may not even know or understand that such makeup payments are going to be the inevitable result of any cash underfunding or lower than assumed plan investment performance.



To recap briefly, in pension plans the employer is firmly on the hook in the end, and where public sector employees are involved, that means the taxpayer will pay any shortfall as the ultimate guarantor. In 401k plans, however, the taxpayer isn't responsible for providing any guaranteed benefit.



Whenever it is determined that public pension plans are underfunded, as they usually are, and unless the taxpayer guarantee is invoked, some combination of the following events must take place: (1) future employer and employee contributions have to be increased, (2) benefits have to be reduced, or (3) actual investment returns have to outpace the assumptions used to determine future contributions. This often places stress on the investment managers to "overachieve", which in turn represents an unnecessarily risky approach to investing.



Let's briefly review the present commonly used rate of return assumptions for pension investments. According to Stocks Aren't an Rx for Pension Ills , most pension plans in the public sector are using ~8% as a total expected annual rate of return assumption. This breaks down into an ~11% annual return for stocks and ~4.5% for bonds, assuming a weighted mix of approximately 60/40 stocks to bonds in the portfolio. Both assumptions appear on the whole not unreasonable, but based on history the 11% assumed for stocks is somewhat optimistic. Although perhaps reasonable at 4.5%, it's hard to make a case for bonds outperforming that benchmark over time. That's due to the probability that interest rates will likely increase over the next several decades, barring an extended and unforeseen deflationary scenario.


However, that's not the biggest concern for taxpayers. Many public pension funds are substantially underfunded currently, even assuming that they are able to earn the assumed blended ~8% rate of return in the future. In fact, state pension funds are estimated to be approximately $3 trillion underfunded today. As you might guess, those states with the biggest public pension headaches have the most heavily unionized work forces (California, Illinois, Massachusetts, Michigan, Nevada, New Jersey, New York, Ohio and Wisconsin). In those nine states, almost 60% of public sector employees are represented by unions compared to what is still a very high 40% nationally. These highly unionized work force percentages compare to private sector union representation of ~7% in America as a whole.


There's more than a little irony here, since these public pension plans (and taxpayers) are betting heavily on the outstanding performance of private sector companies in the years ahead. Only through the strong operating and investment results of these companies and their stock prices will the money be available to pay the promised pension benefits. The even bigger issue concerns our nation's economy and the future growth prospects of companies. While we definitely need to be doing everything possible to encourage private sector investment and hiring, we don't seem to be heading down that path as a nation. Far too many members of the political class seem to be treating the private sector as a public enemy instead of as the goose that must lay the golden egg.



In any case, weak private sector growth resulting from ever growing government receives far too little attention today. Meaningful private sector growth is the only way we will be able to make good on those pension promises to our nation's public employees, the unavoidable reality being that the public sector and its retirement benefits are funded by the wealth created by the private sector. The money first has to be earned in order for it to be later distributed.


With respect to investment results, pension funds generate returns based on their investments, which in turn depend upon the profitability and financial success of the companies in which they own shares. When companies perform well or poorly, the benefits of future retirees are affected accordingly. We the people -- all of us -- depend upon the private sector's wealth creation for our financial stability, security and economic well-being.

So what will our pension plans actually earn on their investments over time? That depends upon how well our economy performs over time. And on how our companies perform. And that will determine what the level of employment in the private sector will be. And on what tax receipts will be as well. It's the same answer every time because to paraphrase President Clinton, "It's the private sector, stupid."

It's not the public sector that creates sustainable jobs and income. It's the private sector. If the private sector doesn't perform, the money won't flow to the public sector. It's really that simple.


Thanks. Bob.

"...we like explanations."

STATS.org, the website of the non-profit, non-partisan Statistical Assessment Service (STATS), explores the difference between causation and correlation.  After making the case for not mistaking an event that is correlated with, or happens at the same time as, another with one that causes another, STATS makes two simple, yet insightful, observations:


1)  "When the stakes are high, people are much more likely to jump to causal conclusions."
2)  "In general, we should all be wary of our own bias; we like explanations."


The state of the American economy is obviously an important topic, and the numerous challenges faced cause a wide range of diagnoses and prescriptions to be made.  In China vs. America:  Which is the Developing Country?, Robert Herbold describes the "highly effective," "autocratic" leadership of the Chinese government and the resulting tendency to "get things done fast," and contrasts these characteristics with the American system, where the government fails to make "big improvements," and "issues get polarized."

The American economy is employing far fewer citizens than it was several years ago, and the Chinese economy is growing relatively rapidly.  But the same "polarized" political climate that Herbold blames for America's current economic problems has prevailed since the time of our country's founding.  For the great majority of the past 235 years, America and its polarized (free) society has consistently distinguished itself economically from societies governed in a more autocratic manner.  To believe that today's troubles are caused by the existence and the political relevance of our citizens' diverse views and opinions, we must ignore our economic history.  Our free society, however polarized, has fostered the free markets that have allowed our citizens to reach the highest standards of living on the planet.

If freedom of expression, even the kind that denies a government the ability to "get things done fast," were the cause of economic stagnation, the solution would be simple:  Deny all but a few the authority to make decisions.  If history had proven this prescription to be the path to prosperity and fulfillment, our citizens may have embraced it by now.  But our history has proven the opposite.  Freedom makes things more complicated, but it also yields superior results.  China's supposed "new way" will have to pass the test of time before it becomes the "best way."

higher social security taxes or a self reliant 401k approach? it's our choice

To totally understate the problem, we aren't saving enough as a society to provide for the benefits of future retirees. That will change as indeed it must. The question, however, is not who will pay ---- we the people will pay, as always --- but rather who will do the investing for us? Accordingly, one critical question will be the extent to which we choose to rely upon the government (aka our fellow taxpayers) or ourselves to make those investment decisions.

I wonder how David Navari would answer that question. In the article 401(k) Suppresses Saving for Retirement, Mr. Navari, 45, is described as having maxed out his contributions in previous companies before going to work for a new company in 2008. That makes the story of Mr. Navari one worth repeating. Arriving at his new company, instead of contributing heavily to the 401k as he had done at earlier companies, he instead enrolled at the company's default rate automatic percentage of 3%.

As is the case with two thirds of employers today, the company auto-enrolled employees with a contribution level of only 3% for its 401k plan. While employees are free to change the level of contribution, strong evidence is mounting that they don't do so. This relatively new "auto" opt out in place of the opt in feature was passed by congress a few years ago to encourage greater participation in 401k plans, the idea being that people will not always opt in, so having an automatic feature will increase the number of employees who save for their own retirement needs. The new opt out law has worked to increase employee participation, but too many employees now simply stay with the 3% default contribution level. Overall an undesirable and unintended consequence.

But the much larger question presented by people like David Navari is who will take care of our retirement needs if we don't save enough? Our fellow citizens, that's who. {Nevertheless, the answer that most people would give, I fear, is social security. Either that or they just choose not to think about it at all. Or are afraid to think about it, so they ignore it except for hand wringing.}

We now are spending more in social security benefits than we are receiving from payroll taxes. And we're doing this even though employees and employers pay social security related taxes at a combined ~12% of employee pay. Despite this, the social security system is approximately $18 trillion underfunded, assuming it will meet its promises with respect to promised future benefits. So in the end we the people will pay, one way or the other. {Although the current level of payroll taxes may have been sufficient for some time longer, had they been invested properly, or at all, by the government, they simply weren't. The money was spent, and there's no money in the till. Zero. Zilch. Nada.}

To reiterate, that leaves us with a straightforward choice. Will we trust the bureaucrats with our money or will we instead trust ourselves?

As a firm believer in the MOM school of financial management and investing, I vote for MOM (my own money). My guess is that the "paternalistic" bureaucrats will vote for spending OPM (other people's money). But what about Mr. Navari and countless others like him? How will he vote? Well, we need to enhance his knowledge and help educate him about the reality of the situation. As we do, he'll vote for the MOM way, too, because in the end, he'll pay one way or the other, as will we all.

While this entire subject of pensions, social security, 401k plans and the like will take some considerable time to cover appropriately, it's definitely time to begin the discussion. It's an enormous issue affecting all of us and has not been addressed in a serious way by we the people as individuals, politicians, educational institutions, companies, investment advisers or government agencies. Or apparently anybody else, for that matter.

Our fellow citizens and taxpayers are all too often making uninformed choices about 401k plans and other aspects of our financial affairs without having the necessary education or knowledge to make informed decisions. As more people come to know the reality of what's going on and what they can do about it, they'll choose wisely.

In fact, here's an acronym about what needs to happen if we are to make our choices in an informed manner: PEGIT. PEGIT means planning, educating, giving, investing and taxing. If we can help each other become better at individual planning through improved education by freely giving what we know about relevant investing and taxing matters, that would be a wonderful end result and more than we could realistically expect to accomplish. But why be realistic about our goals, objectives and dreams? Instead let's just try to do it. So let's begin with some background about all this stuff.

During recent decades, a tremendous and largely unnoticed change has occurred with respect to retirement funding and the responsibility therefor. Unfortunately, we the people haven't been prepared to satisfactorily and with knowledge discharge our new and additional responsibilities. In the "good old days" individuals didn't need to know much about investing, and now we do.

Thirty years ago ago, defined benefit plans with fixed pensions at retirement were the rule for private sector employees. An employee didn't need to know anything about investing, pension funding, or other related matters. Retirement planning was really simple in that the company promised to pay a prescribed monthly benefit based on an individual's years of service with the company and, in many cases, based on the average annual compensation earned. In other words, the individual went to work for a company, stayed employed at the company, retired from the company and, upon reaching retirement, collected the monthly pension money from the company. And received a social security check for the rest of his life, too.

In the 1970s and 1980s, out of necessity that mentality began to change. Defined contribution plans became commonplace and offered to those employees who voluntarily participated in the 401k plans supplemental benefits which were in addition to the "guaranteed" basic pension benefits. An attractive feature of the 401k plans was that each employee had a personal account representing the cumulative value of his investment in the supplemental plan.

As global competition for market share became heated and companies had more and more difficulty staying competitive, 401k plans began to replace the more expensive and open ended costly pension plans. That's what changed everything. As a result, we now need to become quite knowledgeable about investing for our own financial retirement security. Unfortunately, the alarm bells didn't sound, at least with respect to retirement planning and investing responsibilities, and the necessary employee education didn't happen. And that's a shame.

And equally troubling, with respect to government promises and the social security system, not that long ago the word demographics was probably unfamiliar to most of us. We probably thought somebody was mispronouncing geography when the word demography was used. But what demographics and the baby boom generation would mean for our social security system was simply this: Fifty years ago approximately eight active workers were paying social security taxes into the system for each social security recipient receiving benefits. An 8/1 worker to recipient ratio. That's now three for one and within a few short decades will be two for one. From 8/1 to 3/1 to 2/1, and all that means for current and future taxpayers and social security recipients as well. A generational conflict in the making.

But this very serious and long time coming issue of an aging society and what it means still doesn't get much attention from the politicians. And it genuinely represents a huge threat to our future well-being as a nation. Social security financing is out of control and as presently constituted can't possibly meet the needs of future generations. Eight of us used to work and pay benefits to one of us, now it's three paying for two and will soon be two for one. That's not only not sustainable, but it's unfair to David Navari's child and eventually will be to his child's children as well. I wonder if David even realizes what's happening.

Let's summarize. It's widely understood that most people aren't saving enough to satisfy their financial needs upon retirement. Since many employees have 401k plans, and many of these 401k plans have matching contribution features, it's appropriate to question why these plans are often either not used at all or are being underutilized by employees.

It's also widely acknowledged that social security has become the biggest source of retirement funds for most people. Of course, those retiree benefits are being financed by current workers and their employers through payroll deductions.

The demographics are unavoidable. We're getting older as a nation, and that's something the politicians can't change or we can't vote against, no matter who's in office.

And it's widely agreed that the social security promises may be empty ones without some serious overhaul of the system to ensure its continuing solvency for future generations. Stated another way, we know that social security is "insecure" as presently constituted, but the politicians still won't touch it. They're afraid of the reaction of we the people. To which I say that if we are treated as adults, we'll act like adults. They could try telling the truth.

So who's to blame for all this? Of course, we the people need to take our fair share of the blame. But through self help and collaborative efforts like PEGIT, we can make things right. At the very least, we as individuals can choose to to do the right things for ourselves and our families. And in the end, I'm betting on PEGIT working for people like David Navari, too.

Thanks. Bob.

dollar cost averaging

Dollar cost averaging is absolutely the right approach for long term investors. It refers to investing a set amount of money at regular intervals, regardless of whether the market is going up or down. It's a great way to invest "unemotionally" and is generally what happens with 401k investing. The recent article How to beat the market without even trying makes the case very well for an automatic and regular approach to investing. As suggested, while dollar cost averaging may be boring, it delivers solid results, and that's what matters.


When investing, boring is good. So are solid results over time.


Another article which discusses successfully acquiring the funds necessary to meet our retirement needs is 3 Biggest Drivers of Retirement Savings Success. Aligned with the advice contained in the article cited hereinabove, a disciplined approach to savings and investing is recommended.


One perhaps somewhat surprising fact is that upon reaching retirement, those people most prepared financially and those least prepared financially to meet their retirement needs earned approximately the same income. Thus, the broader point is simply that it isn't how much money we earn, but what we do with those earnings with respect to savings. What matters most is developing the habit of saving enough money routinely and then investing those savings through a dollar cost averaging or similar technique.


In sum, the market's historical tendency is to appreciate at rates of return well above the rate of inflation. However, the short term market is dominated by traders and not investors. Hence, on a daily basis stocks frequently move up and down in a volatile manner. An emotional roller coaster ride, if you're a trader. That's because the market is as likely to go down as up on any day, week or month, or even any given hour of any given day. News headlines or events du jour are usually the daily drivers.


So what's a long term investor, as opposed to a short term trader, supposed to do? Relax and employ the automatic and unemotional dollar cost averaging approach to long term successful investing.


Here's the heart of the matter. The only two points in time the price of the stock is critical are when it's bought and later when it's sold. That spread between the buy and the sell price, and that spread alone, will determine the realized profitability of the investment.


Psychologically, people experience more pain due to loss than than they experience joy with gain. This is especially true with "unrealized losses" when the market declines. Thus, emotions often have an undue influence over what individuals choose to do or not to do, as the case may be. Buffett says that while in the short run the market is a voting machine, in the long run it's a weighing machine. Companies are worth what they are able to earn over time. Nothing complicated about that.


In a nutshell, dollar cost averaging makes sense. It takes the short term emotion out of the investing decision. We buy regularly no matter what direction the market is heading, what the news headlines may be or what the "experts" may be saying at that particular time.


For some inexplicable reason, stock purchases are often an exception to the common sense rule that people like to buy things on sale. I've never understood that. My guess is it's attributable to fear and anxiety, and that acquiring financial knowledge about how markets work would go a long way toward helping individuals sleep well and also achieve successful financial security over time. We simply haven't acquired the general knowledge necessary for what I'll call "comfortable investing". We don't need investing expertise as such. We just need to know generally how things work and why they work that way. As we come to know the basics, that knowledge will help us achieve our long term financial goals.


We Americans are very much in need of a demystification process when it comes to markets, capitalism, education, governments and freedom.


Thanks. Bob.

frederic bastiat's timeless teachings

Please do yourself a favor and take the time to read Bastiat for the Ages , a great article which was brought to my attention by Wayne Schierbaum. Thanks for sharing this, Wayne.



Bastiat is an absolute favorite of mine. Why? Well, if for no other reason, he once famously described government in the following manner; "The state is that great fiction by which everyone tries to live at the expense of everyone else."



The article deals with the timelessness of things such as how governments and government bureaucrats regulate, dole out favors and otherwise act. It includes an economics lesson in analyzing the case of the "broken window" by following the "what is seen and what is not seen" methodology.


And it also contains an amusing but very much on point anecdote about why it's important to always be wary of "conventional wisdom" and the "ignoramuses" associated therewith. Then there are the issues surrounding the Anti-Corn Law League, protectionism and free trade. All in all, there are lots of good things to ponder about how things really work. And he wrote all this more than 160 years ago.


Give yourself a treat. Read the article and then reflect on his teachings. People are people.


Thanks. Bob.

middle class troubles .... and .... we need another Reagan

Following yesterday's discussion of why we're in for a long struggle to get back to what used to be normal, I came across How the bubble destroyed the middle class. The argument simply is that we have sluggish growth now, because nobody has any money. While some of his cheap shots at class warfare are bothersome, there are nevertheless plenty of relevant facts contained in the article to make it worthwhile reading.

As an example, while home prices are off ~30% from their peak, the average home owner has lost 55% of his wealth due to the effects of leverage. With respect to people earning between $39,000 to $62,000, it is estimated that 90% of their assets were "invested" in their homes. Not a good situation, either for now or for the foreseeable future.


For far too long, despite historical evidence to the contrary, housing was viewed by the public as a one way bet. The real estate industry did a masterful selling job. Buying assets using lots of borrowed money is speculative, pure and simple. Accordingly, leveraging works as a "great investment" only so long as prices are going up. That's also true for all other assets. When prices go down, as they inevitably do, the opposite is also true. To repeat Warren Buffett's sage advice, we should aspire to buy the house we can afford and not the house of our dreams. And we should never view our home as an investment. It's a place to live.

Speculation is dangerous. Every time.

A more uplifting article is 'We Need a Ronald Reagan'. What the Big Three of Ronald Reagan, Margaret Thatcher and Pope John Paul accomplished during the Cold War must never be forgotten.


In these difficult times of today, we especially need to remember who we are as Americans, why history can be made better and to always be loyal to the truth. Compared to those who came before us, we have no difficult problems. Let's always try to remember what they overcame to give us our precious freedoms of today.


We'll be fine as long as we stand for freedom and capitalism. They go together.


Thanks. Bob.

the road ahead for the economy and the markets

We are in a long term worldwide workout situation with respect to our indebtedness. What some call the age of deleveraging and others call the age of austerity both accurately describe the current environment of (1) too much individual debt, (2) too much debt accompanied by ongoing government operating deficits and (3) either too much government spending or too few tax receipts, or both, relative to our total output.


Obviously our country has arrived at what we all know are unsustainable debt levels, as have many individuals, families, municipalities and states, too. This has now gone on way too long, and the cure, unfortunately, will take way too long as well. I wish it were otherwise, but that's the way I see things. See Inside the Disappointing Comeback.


With respect to the investment climate, however, we may well be at a very good entry point, assuming we have the stomach to handle a bit of a turbulent ride. The equity markets appear undervalued and excessively discounting the prospects for an even weaker economic environment than is likely. (Of course, my crystal ball is only my take on things, so please consider these views for what they may be worth, which may be nothing.)

In any event, reconciling these seemingly inconsistent points of view of a relatively weak U.S. economy and a reasonably strong market in which to invest is essential if we are to become comfortable with the idea of investing in a slow growth, high unemployment economy.

First, the economy.

Although we'll most likely avoid another recession, the economic situation will remain subpar for a lengthy period due to the ongoing payback effect of all the debt we've incurred during the past few decades. In large part we borrowed the money to add to personal spending instead of investing in productivity gains, so now we'll have to repay that which we borrowed without any benefit of added output therefrom. In large part we'll do that by reducing our personal spending. To put it simply, we consumed more than we produced for many years, and now we'll reverse that process and consume less than we produce for the next several years.

As we spend less, debt liquidation will take center stage. Keynes wrote about the "paradox of thrift" which simply argues that while individual savings and debt repayment are good from the point of view of the individual, when the practice becomes pervasive across the society, the paradox is that total savings throughout the society decrease. Economist Irving Fisher wrote about what he referred to as the "debt deflation" cycle of the Depression era, and Hyman Minsky later formulated what is named the Financial Instability Hypothesis (FIH). Please see an explanation of the Minsky view in the 2007 WSJ article In Time of Tumult, Obscure Economist Gains Currency). Minsky explains how speculative financial bubbles (such as the recent housing bubble) are triggered by excessive non-governmental debt accumulation, and end up causing widespread havoc when the bubble inevitably bursts. That pretty well sums up where we are today.

For those interested in more of a detailed discussion about sovereign debt bubbles, there's an excellent book titled "This Time Is Different: Eight Centuries of Financial Folly" by Reinhardt and Rogoff. As the tongue-in-cheek title indicates, government debt catastrophes are nothing new. Neither are their causes, and they take many years to correct.


Due to our excessive indebtedness, interest and related payments on that growing debt will probably cause our own economy to experience ~1% less real growth each year for the foreseeable future. Since we only grow in normal times at a roughly ~3% rate, reducing that economic output due to debt servicing requirements will result in economic growth at a 33% slower pace than normal in the coming years. That's a major reason why we will continue to experience relatively high unemployment, too. We'll deal more with with what Keynes, Fisher and Minsky had to say at a later time, but suffice it to say for now that the debt problem isn't going away anytime soon.

In any event, the short term economic impact of servicing and hopefully someday soon beginning to repay the debts will require saving in lieu of spending. As we necessarily spend less and save more, accompanying that sound long term decision will be a weaker economy for a period of time. Because we've dug a really deep hole for ourselves, it will take a long time for us to dig out of that hole. But dig we must, and when we've finished digging, we'll be the better for having done so.



Now let's move on to the better outlook for the world of investing. {I'm assuming that we'll do what's necessary to begin to address our financial issues in earnest. To paraphrase Samuel Johnson, the prospect of being hanged focuses the mind wonderfully.}


During the past thirty years, both stock and bond investors have had the tailwind of continuously declining interest rates. As a result, it's been a great time to own bonds (even though they still didn't keep pace with stocks). In 1981 thirty year treasury bonds yielded a seemingly astronomical ~15%. Ten years later in 1991, they earned a still extremely high ~9%. Today they yield less than 4.5%. So the bond investor enjoyed both high interest rates and an appreciating bond price for the last 30 years, because bond prices move up when interest rates go down.

Simply stated, that's the underlying reason for my conviction about not planning to own government bonds for the next decade or more. Having said that, if we experience general deflation resulting from the current debt deflation situation, of course, then I'll be wrong, at least for the short term. Looking out thirty years, however, I have a very high level of confidence that interest rates will be higher than they are now.


In any event, we're definitely in a genuinely slow growth mode for now, and upon resuming normal speed down the road, whenever that may be, we will then witness gradually rising interest rates. Hopefully, we'll avoid excessive inflation but for now, inflation worries are not an immediate or even an interim concern. As rates rise, bond prices will fall, and that loss in value will probably not be fully offset by the interest income paid on the bond.



In sum, the past thirty years witnessed both rising bond prices and high initial interest rates paid on those bonds, both of which worked to the advantage of the bond investor. The next thirty years will see a complete reversal of that high rate beginning and low rate ending scenario, thereby resulting in a poor investment climate for "safe government" bonds.


In comparing investment opportunities, we need to consider the relationship between interest rate levels and stock prices, since stocks and bonds are competing investment choices.


As an example, if the price of a stock is $90, its per share earnings are $6 and the then current 30 year treasury bond interest rate is 4.5% (some use the ten year bond rate and others use the corporate bond yield, but we'll use the 30 year treasury yield), we have enough facts to render a reasonable opinion regarding whether stocks are a good investment choice. Here's how we look at it in simple terms.


If the company's stock price is $90 and the company's earnings per share are $6, the P/E (price to earnings) ratio is 15, which is calculated as follows: 90 divided by 6 = 15. The reciprocal of the P/E ratio is known as the earnings yield: 6 divided by 90 = 6.67%.


When the earnings yield is less than the bond yield (in this example 4.5%), stocks are usually overvalued. When the earnings yield is greater than the interest rate on bonds, stocks are usually undervalued. Since the earnings yield on the stock is now 6.67% and the bond yield is 4.5%, we get substantially more current "earnings" by owning stocks.


Of course, we aren't actually paid any money as a result of this interest rate to earnings yield comparison. It's just a valuation methodology. Until such time as we receive cash dividends from the company (dividend yield is not to be confused with the earnings yield) or realize cash by selling the stock, we won't realize actual cash. Our stock returns will be "unrealized". It's also key to our understanding that we know that if the company in fact earns more or less than the assumed $6 or if the interest rates generally increase or decrease, the comparative bond vs. stock calculation will change as well. Today we have a considerable valuation cushion favoring stocks.


Thus, we use this earnings to bond yield comparison as a general but important benchmark when deciding whether the general equity market is currently attractive. As a point of information, the S&P 500 at ~1340 presently with anticipated earnings of ~$95 this year would indicate that the market is undervalued. If earnings come in closer to $100 for the year or interest rates were to decline from present levels, that would make the case for stocks even stronger.


But what about the longer range picture? While the economy may well struggle somewhat for the next few years due to the elephant in the room debt issue, earnings should still increase nicely. Compared to the low interest rates in effect now and for the foreseeable future, that makes stocks the more compelling choice. And if the economy picks up the pace sooner than later, so much the better.


At a later point we'll go into more detail about the debt dilemma and its impact, as well as why the earnings outlook for companies is better than the outlook for the U.S. economy.

Thanks. Bob.

government sponsored monopoly (NEA) vs. market competition (NBPA)

The private and public sectors are different. The unions representing private and public sector employees have completely different interests as well. The taxpayers aren't directly impacted by private sector labor conflicts, but the opposite holds true for public sector disputes. Accordingly, recent news about the largest teachers union and the professional basketball players provides an instructive contrast between the two worlds. First, some background.


The National Education Association (NEA) is the largest teachers union in the U.S. with 3.2 million members. The union of public school teachers was formed in 1857, and its stated vision is to have a "great public school for every student." Now, some 154 years later, maybe it's time to review its progress (NEA Summer School) with respect to its stated goal. At the outset, let's be clear about not blaming the individual teachers for our systemic issues with public education. As in any endeavor, there are both good and bad. But the system itself is broken, and that's neither good for America's future nor for our future leaders.

In any event, the NEA could make an immediate and lasting contribution by campaigning internally to encourage teacher members to work more days and longer hours at no cost to the taxpayer. This would be a real public service and offer a huge benefit to the taxpayer in these difficult times ----- along with the school children (As Budgets Are Trimmed, Time in Class Is Shortened).

But then, just when I want to believe the sincerity of the union vision about having "a great public school for every student", I recall former AFT (American Federation of Teachers) union president Albert Shanker's quote about the union's role regarding representing the interests of the teachers and those of the children, "When school children start paying union dues, that's when I'll start representing the interests of school children." And if that's not bad enough, there's the just released report on teacher cheating to make the student test scores look better than the awful reality (Systematic Cheating Is Found in Atlanta's School System and Probe Finds Widespread Cheating in Atlanta Schools). How sad.


In contrast, the National Basketball Players Association (NBPA) was formed in 1954. It is the labor union of players in pro basketball's National Basketball Association. The players and owners are currently engaged in a labor dispute (NBA losses suggest long lockout looms). As a result, at least part of next season may be in jeopardy. While the fans (customers) wouldn't like that, the taxpayer won't suffer harm if the parties can't resolve their dispute in a satisfactory manner. I'm betting they will, because it's in both of their best interests to do so. And if they don't, that's ok, too. It's their business and their jobs. In due course the customers and advertisers will vote about all this when they either support the league and its profitability or elect to spend their money elsewhere. That's the private market at work.


The differences between the two organizations are striking in other ways as well. The NEA is extremely active politically and its convention delegates just endorsed President Obama for a second term in 2012 (See Nation's largest teachers union endorses Obama re-election and NEA Endorses Obama's Bid for Second Term). The teachers union intends to spend at least $60 million in that effort. Vice President Biden told the NEA convention delegates that while, in his opinion, Republicans are hostile to public education, the union "should have no doubt about my affection for you and the president's commitment to you".

Nobody should be surprised that the NEA endorsed the president without even knowing the identity of the Republican candidate in an election which won't take place for another sixteen months. We can all be confident that the public sector unions will remain a very strong advocate for union friendly Democratic candidates and the current administration.


Then there's the private sector.


Unlike the NEA, to my knowledge the NBPA doesn't actively side with, or provide financial support to, either political party during elections.

If the teachers strike, the taxpayers are affected. If the players strike, the taxpayers aren't affected.

If the NBA has a lengthy or financially debilitating work stoppage, or in the process loses the support of its customers and eventually goes out of business, the owners and players will pay for their errors and suffer accordingly.

As long as the public schools continue to function as a de facto monopoly, the school districts will continue to provide employment to the teachers and NEA union members. Since the government employer of the teachers won't go broke, the teachers union will make every effort to influence the political process to its advantage. That's why they'll spend $60 million in 2012 to re-elect President Obama and other 'affectionate' politicians.

The players are paid individually in contracts negotiated with their employers. Depending upon their talents, the market and the financial position of the team, they are paid accordingly. Teachers have contracts which mandate that they be paid strictly according to seniority and degrees earned.

Members of world class teams that win titles earn incentive pay. Teachers have no incentive to graduate world class competitive students.

Players are cut from the team if they aren't deemed capable of helping the team achieve its targeted goals. Teachers gain tenure and are guaranteed continued work.

They both get the summers off.

And so on.

There are lots of differences between the private and public sectors. To continue to be viable in the long run, the NBA and its constituents will of necessity focus on satisfying the customer with a competitive offering. The NEA has no such customer, competitive or existential issues so long as they are able to elect the 'affectionate' politicians to protect, er, support them.

Thanks. Bob.

Doing the People's Work .... But Which People?

We know that politicians are elected to do the people's work, as they often remind us. My questions are simply, "Which people? All the people or a special interest subset thereof?"

The answer has been special interest subsets, of course, and we've allowed our elected officials to overspend for way too long now. When we add up all the subset spending for the public schools, the elderly, medical care, agriculture and so forth, we find ourselves in debt up to our eyeballs with no resolution in sight. It's time for a gut check, my fellow Americans

As a society we have reached, or are rapidly reaching, the point where we can't keep spending money we don't have. But our politicians spend OPM (other people's money) all the time. That's their job. So let's change their job description to limit OPM spending to what we can afford as a society, regardless of which particular subset of people they're serving.

The same old game simply doesn't work any longer, if it ever did. We've run out of OPM, including that from other countries, for them to spend. But I'm optimistic about the choices that the people will make and the political class will then follow. My guess and hope is that this new fiscal sanity will mark the beginning of a long term trend whereby we become serious about living within our means, both as citizens and as a nation. Time will tell, but that's my bet.

Now let's look briefly at one of the games long played for the benefit of a select few as opposed to the interests of we the people. I'm referring to agricultural subsidies where doing the people's work has for far too long meant taking care of the farm lobby. It's been a bipartisan game, in large part a result of the outsized influence of the farm states in the entirety of Congress, and especially in the equally weighted Senate.

Agriculture has long been a protected industry in the hallowed halls of Congress. Both Depublicans and Remocrats in a real spirit of bipartisanship have joined over the years to grant trillions of dollars to our nation's farmers, and especially the big ones. And the game is still very much being played. It's a demonstration of public choice theory and politics at its worst, or close thereto.

Soon there may or may not be a new day on the horizon. But whether it comes now or later, it must come, so it will. Any evidence of the arrival of this bright new day versus business as usual will become visible when the nation's debt ceiling negotiations have concluded. We the people will at some point be given the details of the deal reached by the ruling, er, governing class at the conclusion of the debt ceiling negotiations. I have no hope for any substantive change in either medicare or social security at this time, but doing something about the farm subsidies would at least indicate that business as usual is becoming out of favor. Let's hope that's what we discover when our public "servants" emerge from their discussions in the next several weeks.

In the real public servant corner are apparently genuine public servants like Mike Pompeo, a first year congressman from Kansas, and Jeff Flake of Arizona. In the business as usual corner are dedicated pork barrel spenders like Frank Lucas of Oklahoma, the powerful head of the House Agriculture Committee. All three of the aforementioned are Republican House members. Two are trying to do what's right, and the most influential is playing the same old game.

If Congress is to be brought under control, we first have to get their attention. Hopefully, that's now occurring. Historically our own short sighted rationally irrational ignorance approach to citizenship has combined with the politicians' help the farmers with OPM to further weaken our country's financial condition.

And as a result of the law of unintended consequences, we've also made life more difficult for farmers in poor countries who can't compete because we pass out "free" foreign aid in the form of subsidized food. And that "free food" is possible since we've given our farmers a much higher than market price for what they've produced. What a sad result. Except for the politicians and the lucky farmers and their lobbyists, of course.

All free market enthusiasts who are concerned about America's fiscal condition should take the time to read and reflect on the contents of both Notable & Quotable and The GOP's Debt Ceiling Divide.

Here's hoping that when the debt ceiling negotiations have been concluded, at least some of the much needed change will have begun with respect to how things are done in Washington. If those members aligned with the positions on agricultural subsidies taken by freshman Pompeo and veteran Flake emerge victorious over people like Lucas, "We the People" will record a "W" as well.

Thanks. Bob.

Happy Fourth of July ..... and why blog?

We live in a nation where freedom of speech is our birthright. As citizens of this wonderful country, we have the right to do what we want and when we want, so long as we do no harm to others. Accordingly, we are free to express, orally or in writing, our own particular point of view on any subject, at any place, to any person and at any time.

That seems like an invitation to make an effort to have reasoned opinions about things that matter to each of us, and then to willingly express what we believe in an open forum.

In that spirit, this blog sets forth my "point of view" on whatever the topic du jour may be. Hopefully, both complementary (not complimentary) and contrary points of view will come forth from others from time to time as well, since it's impossible to learn if I'm the only one doing the talking. So in case you're wondering why I'm blogging, it's because I enjoy it.

On a similar note, The Insidious Evils of 'Like' Culture warns us about some disturbing aspects of social networking resulting from the tyranny of conformity. The writer disapproves of our developing "Like" culture by saying in part that it is "antithetical to the concept of self-esteem, which a healthy individual should be developing from the inside out rather than from the outside in."

And later, he advises, "Share what makes you different from everyone else, not what makes you exactly the same. Write about what's important to you, not what you think everyone else wants to hear. Form your own opinions of something you're reading, rather than looking at the feedback for cues about what to think." Makes sense to me.

Now here's my particular patriotic point of view for you to consider on this Independence Day.

American exceptionalism is real, and it is lasting.

The idea of American exceptionalism is not attributable to our genetic makeup. It results from the system of self government spelled out in the Declaration of Independence. We can't lay claim to being exceptional individuals, since we believe that all humans are created equal. Our exceptionalism is derived from the simple fact that we are, have been and will remain a free people who belong to a free and self governing society. It's our system and way of life.

So today let's take a few minutes to reflect on what the Declaration has to say about those enumerated self-evident truths and our "system" of self government. And then let's continue to spread the word.

"We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are life, liberty and the pursuit of happiness. That to secure these rights, governments are instituted among men, deriving their just powers from the consent of the governed."

Happy Birthday, America.

Thanks. Bob.

Minimum Wage; Seen and Unseen; Foresight

A seemingly good thing to do at the time often turns out to be a bad thing to have done down the road. We can see the immediate beneficial effects of our decision. Cause and effect is direct and visible. But often there are unseen and harmful consequences, too.

The immediately unseen effects require foresight. If we decide to do something now, we must consider the foreseeable long range consequences accompanying that decision.

Minimum wage laws are an example of what's seen is often good and what's unseen is bad.

In "The Jobless Summer", the troubling current levels of youth unemployment (ages 16-19) are discussed. A large component of the youth employment problem results from the minimum wage having been raised from $5.15 in 2007 to $7.25 per hour in 2009. This "seen" political decision has negatively impacted the youth employment levels today, especially those of the poor and unskilled.

So what are some of our brilliant thought leaders considering now? Another increase in the minimum wage.

From 1950 until 2000, approximately 45% of teenagers between the ages of 16-19 worked, but during the past ten years youth employment has fallen to ~25%. While there are many reasons for today's situation, including the state of the economy, the more than 40% recent increase in the minimum wage has been a big contributor, too.

But there's an even more consequential economic issue to be considered.

The political decisions about our minimum wage laws will serve to illustrate what Frederic Bastiat in 1850 described in "That Which is Seen and That Which is Not Seen".

In brief, Bastiat reasoned that it's wrong to focus solely on the "seen" short term favorable impact of our decisions at the expense of the "unseen" long term consequences. Sadly, politicians consistently practice this short term "seen only" way of decision making.

The current headline debate taking place in Washington, along with many States and cities, is about whether to raise taxes, cut spending or both. In the short term, doing either or both will make the current economic situation more difficult. In the long term, we the people must choose to live within our means. That requires us to be serious about holding both ourselves and our politicians accountable each and every day.

When the economy is strong again, as it will be, we can create a budget surplus or "rainy day" fund, in addition to paying down the nation's debt. Thereafter when we face a future recession, which we inevitably will, we will avoid a future debt and deficit debacle. By having such a rainy day fund, we'll be able to use some of that cushion when the need arises. Of course, we have no such cushion today. Instead we now have a deep hole, which gets deeper each day.

That's precisely what Bastiat tried to tell us in 1850 when he compared bad and good economists, "Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, - at the risk of a small present evil."

There is an enormous consequence when we consider only the visible short term effects of our actions and neglect the long term. Bastiat puts it this way, "the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee." So while we experience the "seen" consequences of our decisions, we are well advised to make an effort to foresee the longer term effects as well. While we can never know for certain what will happen in the future, a little thought up front more often than not will enable us to see that future. Clearly.

Now let's return to the minimum wage laws and their impact.

The minimum wage "debate" has been going on for many years, even though there is no logical basis for any debate. If the price of something is raised, all other things being equal, the demand for that thing will decrease. The basic economic principle is simple; when prices go up, demand goes down, and vice versa. Along with everything else, the pricing rule applies to youth wages. The more the wages are increased, the lower will be the demand for labor. That's simply the market at work.

And the more we individually and as a country save when times are good, the more rainy day funds we'll have to spend when times turn bad. And vice versa.

Thanks. Bob.

President Calvin Coolidge's Speech on the Occasion of the One Hundred and Fiftieth Anniversary of the Declaration of Independence

Calvin Coolidge, aka "Silent Cal", was a man of very few words. Our 30th President was born on July 4, 1872.

An entertaining story about Coolidge, albeit perhaps apocryphal, concerns an incident that occurred at a dinner party. Reportedly a lady seated next to him said that she had made a bet with a friend of hers. The friend had wagered that the then Vice President wouldn't say three words to the lady during the dinner. Coolidge replied, "You lose".

But when Silent Cal did decide to speak, he had important things to say.

And in his 1926 speech about the significance of the Fourth of July, he knocked the ball out of the park. On that occasion, our 150th American birthday, he delivered a thoroughly researched, moving and truly American story about the underpinnings, meaning and importance of our Declaration of Independence.

Commenting upon the unique significance of the Declaration, he said, "There is something beyond the establishment of a new nation, great as that event would be, in the Declaration of Independence which has ever since caused it to be regarded as one of the great charters that not only was to liberate America but was everywhere to ennoble humanity."

Coolidge described America as a nation founded on great ideas and self-evident truths, the three most important of which are that all men are created equal, all are endowed with inalienable rights, and that the powers of government are therefore derived only from the consent of the governed.

He uses these words, "If no one is to be accounted as born into a superior station, if there is to be no ruling class, and if all possess rights which can neither be bartered away nor taken from them by any earthly power, it follows as a matter of course that the practical authority of the Government has to rest on the consent of the governed."

The following excerpt from that 1926 speech is another favorite of mine.

"ABOUT THE DECLARATION THERE IS A FINALITY THAT IS EXCEEDINGLY RESTFUL. IT IS OFTEN ASSERTED THAT THE WORLD HAS MADE A GREAT DEAL OF PROGRESS SINCE 1776, THAT WE HAVE HAD NEW THOUGHTS AND NEW EXPERIENCES WHICH HAVE GIVEN US A GREAT ADVANCE OVER THE PEOPLE OF THAT DAY, AND THAT WE MAY THEREFORE VERY WELL DISCARD THEIR CONCLUSIONS FOR SOMETHING MORE MODERN. BUT THAT REASONING CAN NOT BE APPLIED TO THIS GREAT CHARTER. IF ALL MEN ARE CREATED EQUAL, THAT IS FINAL. IF THEY ARE ENDOWED WITH INALIENABLE RIGHTS, THAT IS FINAL. IF GOVERNMENTS DERIVE THEIR JUST POWERS FROM THE CONSENT OF THE GOVERNED, THAT IS FINAL. NO ADVANCE, NO PROGRESS CAN BE MADE BEYOND THESE PROPOSITIONS. IF ANYONE WISHES TO DENY THEIR TRUTH OR THEIR SOUNDNESS, THE ONLY DIRECTION IN WHICH HE CAN PROCEED HISTORICALLY IS NOT FORWARD, BUT BACKWARD TOWARD THE TIME WHEN THERE WAS NO EQUALITY, NO RIGHTS OF THE INDIVIDUAL, NO RULE OF THE PEOPLE. THOSE WHO WISH TO PROCEED IN THAT DIRECTION CAN NOT LAY CLAIM TO PROGRESS. THEY ARE REACTIONARY. THEIR IDEAS ARE NOT MORE MODERN, BUT MORE ANCIENT, THAN THOSE OF THE REVOLUTIONARY FATHERS."

I recommend that you take the time this Fourth of July weekend to read in full his excellent address. Just bing or google it, and I'm confident that you will consider the fifteen to twenty minutes with Coolidge to have been time well spent. In fact, I'll wager that you in turn will urge others to read it as well.

However, if you only have time for the "CliffsNotes" version, please see "What Silent Cal Said About the Fourth of July".

Finally, here are a few more coincidental facts about July 4th. Coolidge was our only President born on the Fourth of July. One hundred years prior to his 1926 address, two Presidents died on July 4, 1826. They were John Adams and Thomas Jefferson, our 2d and 3d Presidents, respectively. Five years later our 5th President, James Monroe, died on July 4, 1831.

Thanks. Bob.

for the long run, own stocks; skip bonds and cash

Many investment "experts" are advising their clients to temporarily hold extra cash in lieu of stocks and bonds as part of a "defensive" investment move. Their concerns revolve around the possibility of both stocks and bonds going down in the near term. (The New Cash Hoarders: Smart or Not-So-Smart?) My view is that it's at least as likely that the market will go up as down in the near term. In fact, during this very week when the article was published, the market has rallied explosively to the upside. But that's not the issue, because it could just as easily have gone down this week.

As one old saying goes, predictions are dangerous, particularly those about the future.

But first, let's review a little background concerning bonds as an appropriate investment. My belief is that bonds will be a poor investment and not be a suitable investment vehicle for many years to come. That's due to the present abnormally low level of interest rates. From this low base, rates will probably increase substantially over time, and since interest rates move in the opposite direction of bond prices, the price of bonds will decrease. Thus, the conclusion is pretty simple for long term investors. Stay away from bonds, both now and for the foreseeable future.

Where I really part ways with the "experts" concerns their advice to hold lots of cash now (and which cash would otherwise be invested in long term assets). This temporary market timing approach makes no sense for the long haul, and an in-and-out trader mentality is inappropriate for long term investors. Besides, market timing is usually harmful to a portfolio's performance in the short term as well. Cash hoarding is not good advice for one very specific reason; nobody knows the direction the market is going to take in the short term.

But even if this time our expert had gotten lucky and guessed accurately that the market was going to decline, that still would only have been one half of the story. In addition to having guesstimated correctly to sell and raise cash before the decline, he also would have to have known when to have bought again. In other words, it's not enough to guess accurately once. He would have had to have done it twice in a row.

To restate the obvious, nobody knows what the market will do in the short term, or even the medium term, for that matter. Price volatility is quite common, and the daily "noise" of the market causes many people to be squeamish, if not intimidated. As a result, people are easily persuaded to either stay away from stock investing entirely or to trust their money to the judgment of an investment "pro". In my view, both these choices are poor ones.

If our investing horizon is long and our investment goals are established, let's just buy a basket of strong and well managed companies at good prices, monitor the operating performance of the companies owned, hold the stocks for the long haul, then intend to just sit back and take advantage of the magic of compounding over time. In this regard, the real expert investor Warren Buffett says that his preferred holding period for a stock is forever.

With respect to the above referenced cash hoarding article, it warns market timers as follows, "..... the new cash hoarders could miss out on gains when the market recovers. Consider: Investors who stayed invested in the S&P 500 Index over the past 20 years had an average gain of 9.1% a year, roughly 5 percentage points higher than the average investor who moved in and out of funds ......"

That pretty much sums it up. During the past twenty years, the buy-and-hold individual investor beat the market timer by an enormous amount. For example, $100 invested for the 20 years at 9.1% annually would have grown to $570. That same $100 growing at 4.1% (5% less than the buy-and-hold approach) for the in-and-out investor would have been worth $223 at the end of the two decades. $570 is greater than $223. A no brainer.

Let's face the facts. Most investment pros simply don't beat the performance of the general market indices over time. They don't even come close, all things considered. And what are some of the things that need to be considered, in addition to the general market performance? Well, let's never forget the negative impact of those "intermediary costs" to the investor such as commissions, fees (disclosed and hidden), transaction costs and taxes (where applicable).

In fact, it's not all that uncommon for a fund to report double digit increases in fund performance over a period of time while the average investor in that same fund loses money. That's because our emotions often cause us to act both often and irrationally. We buy high and sell low, become trigger happy and lose our money doing so, in other words.

The basic lesson to be learned is simply that it's silly and expensive for individuals to try to time the market. Why then do we continue to do just that? In part, the answer is that it's caused by the "professionals" who make their living by advising (and charging) the individual investors to trade often. Sad but true.

Now none of this is meant to suggest that we should not engage responsible people that we trust to help us invest. And for that "value added" service we should expect to pay a reasonable fee. It also means we should assure ourselves that the people we've retained to help us possess both the required expertise and a low cost approach to fees.

Because of intermediary costs, we're recommending that most people, at least initially, put their money in a low cost passive S&P 500 Index fund.

To repeat, intermediary costs reduce the amount of money earned on our investment. If the general market increases by 9% and the intermediary costs are 4%, then we only earn a net of 5% annually.

Stated another way, that 4% (9-5) difference means this: a 4% lower annual intermediary cost would result in a doubling of our investment after 18 years, in addition to the general market's investment return. Over 36 years (remember the rule of 72), that's a 4-fer effect, again excluding market returns. In an investing career of 36 years, we therefore end up with four times more money than taking the high touch, high cost, "expert" route.

In addition to the rule of 72, we also need to become more familiar with the concept of dollar cost averaging, churning, reversion to mean, valuation, trendlines, sector investing and such. We'll try to address all these issues and more in future writings.

To recap, there are only two times we should be concerned about the price of any stock --- when we buy it and when we sell it. If we intend to own the stock for several decades, we should trust the historical record and have confidence that the stock's price will appreciate over time at a rate which is comfortably greater than inflation. And that it's very likely that the stock price will increase even more rapidly than that.

At a later date or dates, we'll go deeper into the reasoning behind our unconventional and perhaps controversial recommendation for owning all stocks and no bonds. Suffice it to say for now that we firmly believe this approach, when combined with a focus on low intermediary costs, is the absolute right thing to do.

So for now, think all stocks with low costs coupled with the "magic" of the rule of 72.

Thanks. Bob.

Which Way Will Be The American Way of the Future?

"We the People" are faced with a momentous decision and thus have a compelling reason to become both deeply aware and knowledgeable. It's very much about choosing the right path forward for our American future.

Robert Frost's 1920 poem "The Road Not Taken" must have been written with just this type of decision in mind. His poem is definitely worth reading again, so you may wish to take a few minutes to bing it or google it at your leisure.

While all the daily headlines currently review every piece of theatrics from the Washington based politicians and their positions about how to resolve the issue du jour ..... the debt ceiling resolution ....... that's not the fundamental issue facing us. Here's the real question for us to decide.

Will we embrace freedom, personal responsibility and what we've always believed to be the big idea about what it is to be an American, or will we choose to become even more like the Europeans?

While this America or Europe choice may sound like "Greek" to some, the choice is certainly not Greece for me. Similarly, the way forward is not Italy, Portugal, Spain, Britain, France or Germany either.

Please take the time to read A Debt-Limit Election.

Thanks. Bob.

Public Employee Pension Benefits Need to be Addressed Now

Almost 40% of public employees belong to unions. For comparative purposes, only 7% of the employees working in the private sector are union members.

Public employee unions are too strong and represent a huge fiscal problem for the well-being of many large and small cities nationwide.

By looking at just the retirement portion of the compensation program for public employees, we can shed some light on what is rapidly becoming perhaps the single most important issue facing American cities today. It's important to all of us as American citizens, because whether we belong to a union or not, and whether we work in the public or private sector, we're all in this together.

Unlike governments, private sector businesses have been adopting defined contribution plans in increasing numbers. Governments continue to offer pension plans while struggling with a multitude of other financing issues. This single issue goes way beyond defined benefit vs. defined contribution choices concerning employee retirement benefits. It strikes at the very core of the public versus private sector "system" of economics.

Public employee unions today are much stronger than unions representing the employees of private businesses. That's changed over the years as worldwide competition has heavily impacted private companies while, of course, that's not been the case with our cities. As a result, pension plans for the private sector have been disappearing even while they remain omnipresent in the public sector.

The pension benefits promised today by taxpayer representatives won't come due until well in the future. As such, their true cost to future generations of taxpayers won't be known for many years. On the other hand, a particular private business may not exist several decades from now. But if it does, it will be because it has done what is necessary to remain competitive.

It's reasonable to ask why the taxpayer of today makes promises regarding the highly uncertain cost of tomorrow's benefits. Those future promised benefits for today's workforce, since in most instances they aren't being adequately prefunded, will of necessity be funded by the taxpayers of the distant future.

Here's my simple question: If we want to provide the benefits for tomorrow, why can't we fund them today? And here's my simple answer: Because that would raise taxes today, so let's stick the taxpayer of the future with the bill.

Doesn't seem fair. Not at all.

So let's briefly summarize what makes businesses and governments act so differently when it comes to pensions and 401k/IRAs.

(1) Businesses and governments have totally different purposes. Peter Drucker, management guru, stated that the purpose of business is simply to create and keep a customer.

In stating the purpose of government, John Locke (whose views served as the foundation for our Declaration of Independence) believed that it is simply to protect its citizens from each other and provide for the common defense.

(2) Businesses and governments are financed quite differently. Businesses are financed by "at risk" investors, both owners and lenders. Governments are financed by taxpayers (and all too often by lenders as well).

(3) Businesses have to compete successfully with other businesses to stay in existence whereas governments are basically monopolistic creatures and have no existential issues.

Summary of the Differences

The customers sought by businesses have freedom of choice concerning whether to buy from a particular business, another and different business or to elect not to buy at all. Investors put their money at risk with the hope of receiving a satisfactory return, or profit, on their investment. By selling their stake, investors can withdraw their money from a particular business investment. Earning a satisfactory profit for investors is therefore the cost of staying in business, and this staying power is only achieved by satisfying customers and investors alike.

Governments ----- Governmental entities fund their operations through taxes, fees and sometimes borrowings. When they occasionally do "compete" with the private sector, they do so as a favored and protected monopoly, and thereby are in an advantaged position relative to their private "competitors".

Recipients of government services, unlike customers of private businesses, are generally not free to choose when "purchasing" from a monopolistic government agency. The bureaucrat knows this and so does the citizen taxpayer. We're not treated like customers who have choices, because we don't have choices.

Compensation Differences

Compensation, including benefits, is another area of difference between businesses and governments. If businesses commit to future employee benefits which they cannot fulfill, they either have to convince employees to accept less or else go bankrupt, in which case all employees will lose their jobs. The firms will then cease to exist, and the investors will lose their investment.

When a government entity makes promises concerning benefits for the future which it can't fulfill, however, it won't go broke. And it won't cease to exist. The government's power to tax its future citizens puts the public employee union representatives in an apparent "no lose" situation while simultaneously putting the future taxpayer in a "no win" position.

That's the fundamental reason why the responsibilities of public employee union officials are different in kind from private sector union officials. The public sector representatives have lots of advantages with respect to negotiating power. In the private sector, however, the company can either lose its customers, investors or both if its labor or other costs get out of hand. Thus, the unions, while not powerless, have considerably less power with private companies than unions have in the public sector.

To reiterate, staying power is not a problem in the public sector. Whereas the private company may enter bankruptcy and go and out of business, that's not going to happen to a city. Due to its taxing power, the government won't cease to exist. The taxpayer makes all the difference. And that taxpayer pays.

It's as simple as that. Unions, employees and investors all know the different games being played. It's time the taxpayers wise up, too.

Hopefully, this brief public to private sector comparison will help clarify things. Regrettably, far too many American cities are facing huge financial issues today, in large part because of the pension benefits they've granted to public employees over the years. For a sobering analysis of the issue as it pertains to cities such as Providence, New Haven, Madison, Chicago, Detroit, New York and others, please read The Local Government Pension Squeeze. And lest we forget, the identical problem exists in England and elsewhere, too (Britain's Classroom Arithmetic).

In sum, businesses must control costs, get and keep customers, and earn a satisfactory profit for their "at risk" investors or they will go out of business. But governments are a totally different story. Unfortunately.

Thanks. Bob.