Education Reform?

In the volunteer work I do, we offer financial assistance for payment of rent when eviction is threatened and for payment of water bills when cut-off is threatened. A part of the process is a review of income and expenses for the client with the objective of being sure that available assistance will make a difference and that the client is in a sustainable situation in the immediate future. In other words, we don’t want to pay a few hundred dollars on their rent and then have them be evicted anyway or pay part of their water bill and have them still without water.

One question I have to ask during that budget review process is whether they have any outstanding loans or debts. A common answer is something like, “Just student loans but I’m not paying on them.” Maybe President Obama knows about this problem and that is why he is thinking of nationalizing the student loan program.

Here is a quote from the published text of Wednesday evening’s State of the Union Address:

When we renew the Elementary and Secondary Education Act, we will work with Congress to expand these reforms to all fifty states. Still, in this economy, a high school diploma no longer guarantees a good job. I urge the Senate to follow the House and pass a bill that will revitalize our community colleges, which are a career pathway to the children of so many working families.

To make college more affordable, this bill will finally end the unwarranted taxpayer-subsidies that go to banks for student loans. Instead, let's take that money and give families a $10,000 tax credit for four years of college and increase Pell Grants. And let's tell another one million students that when they graduate, they will be required to pay only ten percent of their income on student loans, and all of their debt will be forgiven after twenty years - and forgiven after ten years if they choose a career in public service. Because in the United States of America, no one should go broke because they chose to go to college. And it's time for colleges and universities to get serious about cutting their own costs - because they too have a responsibility to help solve this problem.     – President Barack Obama

I want to comment on several phrases and sentences in these two paragraphs that bother me a lot because I believe they ignore reality and show disrespect for important American concepts of personal responsibility and free enterprise.

“In this economy, a high school diploma no longer guarantees a good job.”

First, scratch “economy” and insert “country” because high school diplomas have not been qualification for much more than entry level fast food jobs for at least a couple of decades. Then, scratch “no longer” because no kind of diploma ever “guaranteed” anything. There was a time when a high school diploma enabled a person with some initiative and energy to get a good job that would support a family, but even college degrees never guaranteed anything beyond opportunity and, I hope, never will.

“…revitalize our community colleges.”

How about just revitalizing the high schools so that community colleges do not have to teach remedial stuff that should have been learned in high school? How about a requirement for high school graduation that the student be able to calculate the monthly payment on a $20,000 student loan at 5% interest and go to the internet to research typical salaries for the kinds of positions for which he or she might be seeking qualification and prepare a budget that would cover living costs and loan repayment?

“working families”

What the heck is a “working family?” Surely the president would include single moms who spend their time “working” at home to raise families in free public housing with food stamps and a little child support? Is he trying to exclude families in which only one parent “works” and the other takes care of the kids? Is there a proposal to lift some restrictions on child labor so that entire families can work? I just don’t know for sure what a “working family” is but I guess it may be some code language designed to attract union votes and support.

“unwarranted taxpayer subsidies”

A lot of banks and bank employees are involved in student loans so it sounds like his proposal is to nationalize that program and let government employees replace the bank employees. Maybe there are already enough government employees to take on the additional work, but I bet not. They would probably still contract with the banks to manage the paperwork. If the money earned by a bank and its non-union employees in making and managing student loans is an “unwarranted taxpayer subsidy,” it just makes me wonder if the money earned by a construction company and its union employees, for example, with a government contract is considered an “unwarranted taxpayer subsidy” to eventually be eliminated by nationalization of the construction industry.

“And let's tell another one million students that when they graduate, they will be required to pay only ten percent of their income on student loans”

I’m not sure what the background is or who the first million students who got this message are, but do students have no responsibility for making sure that their educational expenses make some sense in view of their job goals and likely earnings and for paying back money they borrow. Is this a reasonable and responsible message to give high school graduates? If a student accumulates thousands in student loans and then fails to graduate and works minimum wage jobs, is there no accountability? And who are these new million students who will get this wonderful message and how will they be selected?

“and all of their debt will be forgiven after twenty years”

What could the logic behind this statement possibly be? Talk about an incentive for foot dragging and late payments. Is the idea that recipients of such deals will bust a gut for twenty years to pay off as much as possible of their loans so that the amount to be forgiven will be as small as possible? I know about the Old Testament concept of Jubilee, but that was every fifty years and did not apply just to student loans.  That would have to apply to any money owed to the IRS also.

“and forgiven after ten years if they choose a career in public service.”

Who is deciding what is and is not public service? It seems to me that a fast food employee would be the epitome of public service…slaving away all day in that greasy atmosphere cooking and preparing food for hungry people. And what about physicians who relieve suffering and prolong life? Would that not be considered public service? What about the person who works at Lowe’s or Home Depot and helps people get the tools and materials that enable them to keep their homes in good shape? Is that not public service? What about people who work for the Red Cross and do disaster relief? I’m not sure what the president has in mind but suspect it has something to do with government employment.

I think the military has customarily paid college expenses in return for a commitment to serve a certain number of years in the military and I think that makes good sense. Telling somebody to borrow their college money and that if they can drag out their loan for ten years in some “public service” job, whatever remains at that point will be forgiven is absolute nonsense.

“no one should go broke because they chose to go to college.”

People may choose to go to college and later go broke, but this is not a cause and effect relationship. Over borrowing and going broke often is a cause and effect relationship. I guess this is a take-off on the mantra that nobody should go broke in America because they get sick. How about if somebody borrows money to start a business and hire employees? Should they go broke. How about if somebody borrows too much on a variable rate mortgage to buy an overpriced home? Should they go broke? Probably we can all agree that nobody should go broke, but if a person makes an unwise decision to borrow lots of money to go to college without some clear and realistic career objective that will enable them to earn a reasonable living and still pay back the loans, they should go broke.

Unfortunately many citizens are suffering financially now from such government supported baloneous assaults as, “Everybody should own their home. Get yours now for nothing down,” and “Everybody should get a college degree. Let us loan you the money to pay for it.”

“And it's time for colleges and universities to get serious about cutting their own costs”

I believe that government funding in the form of loans and grants is a major driver in increasing the prices of college educations and if all these proposals by the president become reality, we can expect a resulting boost in tuition and fees at colleges and universities because demand will be up and available funds will be up. More money chasing goods and services always results in higher prices. Infusion of government money also explains much of the excalation in health care costs.  Maybe all that money going to the colleges and universities and the folks who work there could be considered “unwarranted taxpayer subsidies” and could be eliminated if the colleges were nationalized and run by the government.  Certainly there has been a lot of interest in doing that with health care.

Wait a minute. The high schools are already government operated, and they aren’t working any more according to the president, so maybe nationalization is not a good idea.

Let me be clear. Make no mistake. The president’s focus is on government as the solution to our social and economic problems with an occasional conciliatory nod to personal responsibility and free enterprise. Or maybe he really does believe in personal responsibility and free enterprise and is just tossing some bones to those who have an opposing philosophy. How would we know?

Oh Death!

Dr. Ralph Stanley has been an annual visitor at Bill’s Pickin’ Parlor just up the street from our house, and I heard him play there last year and the year before. Great show! I know many of my readers probably have Oh Death on their iPods and like to listen to it as they drift off to sleep at night, but if you don’t know it, you can find it here. It will put you in a good mood.

Death is one of life’s greatest mysteries and adventures. Over the years I have lost quite a few friends and acquaintances and relatives to death. As far as I know, they all had at least one thing in common. They all had health insurance.

Talk of life and death keeps coming up in discussions of health care reform. There seems to be some belief that life expectancy should be proportional to health care expenditures. That leads some to argue that since US life expectancy is not much different from life expectancy in countries that spend much less on health care, we obviously are spending way too much. And there are those “death panels” that keep showing up in the conversation. Depending on one’s viewpoint, they will either deny life saving care once we are too old to be useful or prevent agonizing, useless, and expensive artificial extension of life.

Certainly doctors often prolong life by performing life-saving surgeries and other treatments and prescribing life-saving drugs, and we should be very thankful for that. But most of us never have to have life-saving medical procedures, and I don’t believe that most routine health care extends life significantly. It may reduce anxiety and make life more pleasant, or it might even increase anxiety and make life less pleasant in some cases. But life expectancy is largely a function of life style, genetics, and sanitation. Live clean, eat healthy food, exercise regularly, get plenty of rest, avoid stress, guns, automobiles, and bicycles, get your shots, and choose your parents wisely that your days may be long.

I think the main reason we spend so much on health care and are so focused on federal involvement in health care now in the US is that we have come to value security and safety and personal rights above almost everything else and certainly above freedom and personal responsibility. We are doing our best to eliminate all risk in the hope of…something. When I think about growing up without a bike helmet or seat belts and with Venetian blind cords dangling everywhere and with freedom to roam alone or with friends through much of my small home town or to ride in the back of my dad’s furniture truck (for which he might be arrested today) and even to drink tap water or to go out to play and risk dehydration without a water bottle in hand, it amazes me to see how much we have changed in fifty years. You may not believe it, but we didn’t even have an alarm system at our house. 

To avoid risk to our health we get annual physicals and regular colonoscopies and mammograms and PSA tests and EKG’s and CT Scans for minor bumps on the head in spite of the fact that sometimes, especially in the case of mammograms and PSA screening, anxiety and cost incurring false positives are much more likely than true negatives. Of course this screening drives up health care costs because the costs of such procedures are set at government established reimbursement rates unaffected by volume or competition. We buy more MP3 players or computers or flat screen TV’s and the cost comes down due to economies of scale and competition. Get more CT Scans and the cost just keeps rocking along at the same old government established reimbursement rate. And, the clear message to health care providers is this: If you want more income, do more procedures. That message is consistent with and reinforces the other more subliminal message: If you want to avoid a malpractice suit, test for everything.

It’s pretty easy for me to imagine two possible health care systems in which costs would be continuously driven down. One would be based on competition and market principles and the other would be based on total government control and rationing. The middle system, government meddling and bill paying without rationing, is a sure route to escalating costs.  Medicare experience proves it.  I believe the market based solution would result in better and happier health care providers and healthier patients, but I don’t believe either would result in any meaningful increase in life expectancy.  Rationing might cause a small decrease.

Life is terminal, and the death rate is 100%.

There is an alternate view, that physical death is conquerable, that seems to be supported by this interesting list from CDC of the 15 leading causes of death in the United States in 2006. According to CDC, these fifteen account for 81.5% of all deaths that year. It looks like all of these fifteen should be conquerable, and “Old Age” is not even listed. Maybe “Old Age” is #16.

1. Diseases of heart (heart disease)
2. Malignant neoplasms (cancer)
3. Cerebrovascular diseases (stroke)
4. Chronic lower respiratory diseases
5. Accidents (unintentional injuries)
6. Diabetes mellitus (diabetes)
7. Alzheimer’s disease
8. Influenza and pneumonia
9. Nephritis, nephrotic syndrome and nephrosis (kidney disease)
10. Septicemia
11. Intentional self-harm (suicide)
12. Chronic liver disease and cirrhosis
13. Essential hypertension and hypertensive renal disease (hypertension)
14. Parkinson’s disease
15. Assault (homicide)

Here is a great obituary that any of us might envy including a cause of death that didn't make the CDC list.

Deuteronomy 34:5-7 - Then Moses, the servant of the LORD, died there in the land of Moab, at the LORD's command. He was buried in a valley in the land of Moab, opposite Beth-peor, but no one knows his burial place to this day. Moses was one hundred twenty years old when he died; his sight was unimpaired and his vigor had not abated.

Preliminary 2009 Federal Spending and Income Figures Out

The Federal Government fiscal year runs from October through September. According to an AP release yesterday, preliminary results show income of $2.1T and spending of $3.5T for fiscal year 2009 which ended September 30. Here is what it looks like on the chart published earlier on this blog.  Click on the chart for a better view.

We know why the spending is up: Stimulus.  The income is down because profits and taxable incomes and capital gains are all down and people are paying less tax.  I don’t know what the answer to this is because clearly a big cut in government spending with no other changes would put a lot of people out of work simply because government has become so big…too big to fail, as they say. President Obama is said to be proposing a freeze, beginning with fiscal year 2011, of discretionary spending that does not affect security or entitlements. The freeze would be on less than 15% of the spending and would not reduce spending but would just stop increases in that small portion. The hoped for impact of $250M in savings over ten years, if successful, will not be visible on this chart. Eliminating that $447B of discretionary spending would, however, make a difference and could be done. Isn’t that why they call it discretionary?

That may seem extreme, but the question is whether the economy would be stronger with more federal borrowed money in the hands of businesses and consumers or in the hands of government. I vote for the former. So, here is a bold experiment: Cut taxes and federal spending now by $447B which would have no immediate impact on the federal budget deficit but would be a huge stimulus to the economy and a huge boost to future federal income as profits and taxable incomes rise and additional tax income is generated...without raising tax rates on anybody.

Well, don't hold your breath.

Manufacturing Jobs

I spent the first twenty years of my Eastman Chemical career in manufacturing, first as a process improvement chemical engineer and finally as superintendent of one of the manufacturing divisions with large scale complex continuous operations that were extremely vulnerable to any kind of operational mistake, equipment failure, or power failure. Most of the cost was in materials and capital and energy, and success meant smooth steady operation with consistent product, low waste, minimum energy usage, high capacity utilization, and no surprises. My anxiety level as a manager was always high, and I recall many days at work when these criteria were not met, and the frustration level rose to exceed the anxiety level. To be successful in that environment, one had to be well informed, cautious, and logical in the pursuit of smooth daily operation while relentlessly developing opportunities for longer term improvement and cost reduction. It is a good environment for economic conservatives. I wish our government (and the banking and investment industries) would adopt the same philosophy.

Labor was never a significant part of the cost structure for large scale chemical manufacturing, but process improvement, advancing technology, and automation have continually reduced labor requirements for operation of such facilities even as waste generation and energy consumption were being driven down. That is typical for many industries and is one of the main reasons for diminishing manufacturing employment in the United States. Productivity in such large scale operations just gets better and better and has to in order to have a shot at successful competition on a global scale. The sight of huge, almost empty, parking lots around older manufacturing plants does not necessarily mean business is down, though it might. It might just mean that the operation has become much more efficient and focused and, by doing so, has avoided total shutdown and resultant loss of all the jobs.

I spent some time digging around the the Bureau of Economic Affairs website looking at job and GDP data. Go here for an incredible list of tables of data on all aspects of the economy and here for inflation data. Using those sites, I was able to construct a couple of charts which show how much the value of manufacturing output per manufacturing job has increased over the years (It is 15 times as much in 2008 as in 1970.) and how much of the increase is due to inflation (about 40%) and how much due to productivity improvement (about 60%).

The third chart is there just to show the overall impact on manufacturing jobs and perhaps provide a little comfort and false hope by letting everyone know that job growth in government is essentially balancing out job loss in manufacturing. I think it might provide more comfort and real hope if we were manufacturing twice as much as we are and importing a lot less and stifling the government appetite for employees, but that is just a dream.  Click on the charts for a better view.

Separation of Business and State

Here is a brief lesson in patient and conservative investing along with some questions about cozy relationships between business and government. May 30, 1975, my granddaddy bought 600 shares of PECO (Philadelphia Electric Co.) stock for $7,780 (about the price of a new car) and, when he died, left half of it to my daddy (Yes, that is what I called him). October, 2000, PECO merged with Unicom and became Exelon, and Daddy got 300 shares of Exelon in place of the 300 shares of PECO. When he died in 2003, he left it to my mother. By that time, the value had increased from the original $3,900 to around $17,000 and dividends were around $600 a year or 3.5%. In May, 2004, the stock split 2:1 so now, 35 years after the original $3,900 PECO investment, she has 600 shares of Exelon worth $29,000 (about the price of two new cars if all the shares were still together) and paying $1260 (4.3%) a year in dividends. That is pretty good, but of course my granddaddy would have been better off buying Wal-Mart or Intel. However, if he had bought one of those stocks he probably would have patted himself on the back and sold it as soon as it doubled or certainly when it tripled and would have put the money into a good dividend paying utility. Granddaddy was a pretty conservative guy…a Hoover Republican as a matter of fact in case you are old enough to know what that means.

Because that Exelon stock is in my mother’s account, a Fortune Magazine article about Exelon caught my eye. The focus of the article is on the huge bet Exelon, under CEO John Rowe, made on nuclear power which generates no carbon dioxide and how much the company stands to gain if “cap and trade” is passed and how much Exelon is lobbying to get “cap and trade” passed and how many cozy relationships there are between the company and the Obama administration which wants very much to pass ‘cap and trade.” According to the article, Rahm Emanuel earned $16.2M in two years of investment banking during which his biggest deal was the PECO - Unicom merger which established Exelon. I wonder if that generous compensation consisted of bonuses or just straight salary. Also David Axelrod worked as a consultant to Exelon. So, both Exelon and the Obama administration have a strong interest in “Cap and Trade” which would be devastating to some utilities and would result in significantly higher utility bills for consumers, and they are helping each other try to get it passed.  Hopefully, they will fail.

I don’t know that there is anything illegal or even unethical going on here, and I admire the fact that John Rowe, the Exelon CEO, made that huge bet on nuclear power which I think was and is the right thing to do. I just don’t like the idea of government meddling in ways that mess up the playing field and result in declarations of winners and losers based on artificially established prices. After all, that is what messed up the health care business…all those artificially established reimbursement rates for medical procedures which say clearly to hospitals and physicians that the way to get more money is to do more procedures. And it is also what messed up the residential real estate business…all those below market rate, nothing down, mortgages based on inflated appraisals being bought up by Fannie and Freddie so everybody could own their home.

I’d like to see a wall of separation between government and industry and between government and doctors like the one between government and church. Arms length regulation is fine, but it shouldn’t go any further than that and certainly not to the extent of driving strategy or declaring winners and losers. (By the way, I really doubt that corporations or unions or any other organizations have the absolute right of free speech as the Supreme Court decided yesterday. It seems to me that free speech is an absolute right that belongs to individual citizens and may be granted with limitations to corporations, unions, non-profits, political parties, and other legal entities.)

And finally, it seems like somebody in Washington has been trying to put up a wall of separation between government and the people, but the voters in Virginia, New Jersey, and Massachusetts have been taking chunks out of it even as construction continues.

The Exelon article is in the January 18, 2010, issue of Fortune in case you want the details. It doesn’t seem to be available on line yet.

Foreign Aid - How We Have Helped (Let Us Count the Ways)

A neighbor asked about the impact on our budget and financial situation of traditional “foreign aid.” We all wonder about the value of that aid given that much of it seems not to get to the intended recipients but goes instead to corrupt leaders. That traditional “foreign aid” total is not a huge deal, comprising about 1% of our total government expenditures even if military aid is included. Still, the federal budget is so complex and fragmented that, if examined in minute detail, one could say either that nothing matters or that everything matters. Any line item can be judged inconsequential which is probably one reason we can’t get spending in control. “Heck, it’s only a couple of million dollars.”

It seems to me that the United States has contributed heavily to the economic well-being and even prosperity of the rest of the world. There are six primary ways that we have done that:

1. We have provided expensive military protection allowing many countries to prosper in peace and stability while enjoying the economic benefits from US military pay spent in their local economies.

2. We have sent direct aid, sometimes in case of emergencies such as earthquakes and hurricanes but also more routinely in the form of grants for various economic development and humanitarian purposes.

3. We have built factories in and outsourced jobs to other countries and have imported products and services from other countries.

4. We have borrowed heavily from and made large interest payments to other countries, primarily China, in order to fund our purchase of imports from them.

5. We have allowed millions of guest workers, both documented and undocumented, to work and earn money and send that money back to their families in other countries.

6. Individual American citizens have sent billions in assistance especially in cases of natural disasters but also for routine health care teams, nutrition, water purification systems, shelter construction, etc.


We didn’t have to do all that. After World War II, we could have built a military so strong and established borders and immigration policies so tight and colonized oil rich countries so quickly that we would have been unquestioned rulers of the world for decades. But we didn’t do that. We pumped money and resources to our former enemies to get them back on their feet. And we started doing business with the world, importing oil at market prices and advocating free trade policies that eventually decimated many American industries including textiles and steel and automobiles and electronics.

At least partly as a result of all that beneficence, we have made little or no financial progress over the past twenty years or so. Failure to adjust to that economic reality has resulted in serious financial difficulty for our federal and state governments. Still, I personally believe we generally did the right things because just sitting on our wealth and refusing to “spread it around,” to use President Obama’s words, would have been both selfish and dangerous. Refusing to let developing nations build their manufacturing capability by using our technology and selling to us, for example, would have been like refusing to tip a waiter in a restaurant and helping that waiter eventually become a chef or restaurant owner.

But the problem is that we have failed to carefully control how much spreading and spending we do and, as a result, have diminished our own economic viability and jeopardized our future ability to continue to spread wealth. Lyndon Johnson said it first and established a U Turn precedent from sacrificial WWII Days with his “Guns and Butter” theme. And we have grown complacent and failed to protect our own competitiveness in education and infrastructure and manufacturing capability and personal initiative and personal responsibility. And, unfortunately, our beneficence has apparently done little to improve our popularity around the world (except that of course people from around the world are clamoring to come here to live.)

Here is a sobering fact. We are now spending more than twice as much on Food Stamps ($36B in 2008) for US residents as on total “Social Benefits” to the rest of the world ($16B in 2008). Why, in a vast and prosperous country wealthy with natural resources and with only 5% of the world’s population, do we have to spend more feeding our own poor than we contribute to feeding the poor in starving countries? We need to get to work…all of us!

Back to the original question, here is a table that shows the top twelve recipients of US Foreign Economic and Military Aid:

Balmy Breezes in January!

What a glorious South Carolina January day.  71 degrees and sunny.  I was amazed at these days when we moved here in the 1970's and still love them.  A friend and I took a 50 mile round trip to nowhere and back on the Congaree River, and at the halfway point right in the middle of nowhere, my starter conked out and the outboard wouldn't start.  Fortunately we figured out how to get it going with a home made rope starter and made it back OK.  Then I hopped on the bicycle and ran some errands around town.

Based on the amount of crop damage and shrimp and fish kills and human suffering during the recent record cold, it looks like we might be a little better off with a touch of global warming than we will be if it goes the other way.  There seems to be a touch of a balmy breeze blowing into Washington, DC, from the northeast today, so maybe that will help. (Later I thought I would clarify this comment by saying that I am not talking about the new Senator from Massachusetts but about the voters of Massachusetts. - DKW 1/21/10)

US Subprime Debt Set To Explode

Between 2000 and 2007 government encouraged and enabled artificially low introductory interest rates on zero down payment variable rate mortgages which set up banks and home buyers for the sub-prime mortgage blowup which occurred in 2008. After all, everybody should own a home even if they can’t afford it or take care of it. Right?

As of 2010, expanding government spending and borrowing and historically low interest rates are setting the United States up for a national debt blowup which will occur when interest rates begin to rise.

It is common to relate the amount of national debt to the gross domestic product based on an argument that so long as that ratio is reasonable, it will always be possible to repay the debt. However, it is a more accurate measure of the impact of national debt on the economy to relate it to total government receipts. The debt is currently about 70% of GDP, but it is 400% of annual federal receipts.

With the current interest rate on the debt at around 3%, it takes about 12% of the annual federal receipts to service the debt. If interest rates were to increase to 9%, it would take 36% of the current annual federal receipts to service the debt. So, that would mean either

1. taxes would have to increase by around 24% or
2. government spending would have to be reduced about 24% or
3. extreme inflation of the currency would occur.

Which would you prefer? I bet the folks in Washington will choose inflation as the easy way out. If they do that the smart thing to have done personally will be to have borrowed heavily and invested in good quality real estate at depressed prices or, for the more conservative, to have piled a lot of money into inflation indexed bond funds. The problem for such personal financial planning and decision making is that we just don’t know if escalation of interest rates will begin in 2 years, 5 years, 10 years, or 20 years. But it will happen, and it will be serious.

Here are some charts which illustrate the problem.  Click on the charts for a high resolution view.

War at Stalemate, Costs Rising! Now What?

January 8, 1964, Lyndon Baines Johnson declared “War on Poverty” in his State of the Union Address. Later that year I graduated from Vanderbilt University, got married, and entered graduate school at the University of Tennessee to get an MS in Chemical Engineering.

In 1964, the first year of the "war," government social transfer payments to individuals totaled $31B or $161 for each man, woman, and child in the United States. The poverty level for an individual was an annual income below $1,558.

In 2008, after 44 years of “war,” government social transfer payments to individuals totaled $1.84T or $6,000 for each man, woman, and child in the United States. The poverty level for an individual was defined as any annual income below $10,991.

As a result of this massive increase in social payments to individuals, the percent of families in poverty, after some decrease in the first three or four years of war, has been cut from 10.4% in 1969 to 10.6% in 2006. Oops. That is actually a small increase.

Before trying to think about what this means let me say that the growth in expenditures is not as bad as it sounds. While $6,000 is about 37 times as much as $161, the figures really need to be put on a percent of GDP basis to correct for growth in the economy and population and for inflation. Looking at the payments that way shows a 217% increase from 6% of GDP in 1969 to 13% of GDP in 2008. However, there is no way to adjust for the lack of improvement in the % in poverty over the past 20 years unless you want to argue that since the definition keeps changing there is some incentive to keep it fairly high to continue the liberal push to increase benefits. I don’t believe that is the case based on the amount of poverty I see in the volunteer work I do.

So, how do we interpret this result and what shall we do about it? Some might say that it is a good thing we have these huge transfer payments because without them many millions more would be in poverty. I don’t believe that either. I believe that the social transfer payments have robbed many of initiative and personal responsibility that would have made them productive citizens and have made millions of us dependent on government social payments and loyal voters for those who promise to increase them.

It will take another fifty years to undo what has been done, but let’s switch the emphasis from transfer payments to rigorous education in science, business, finance, and job skills and launch a new focus on economic development and personal responsibility. I don’t see any other way to rebuild the US economy other than possibly massive discoveries of gold or silver or crude oil deposits. If there is a better way, I would like to hear about it.

If we continue on the present path, what will this chart look like in another twenty years? I suspect we will get a chance to find out.  Click on the chart for a better view.

All Eyes on Washington!

One thing for sure is that the Federal Government has increasingly become the primary focus of attention and a major source of wisdom and guidance and financial resources for many of us since the sub-prime mortgage collapse, the election of President Obama, and the beginning of health care negotiations. Now we apparently no longer have sense enough to keep blind and shade cords away from our children without warnings and mandated recalls issued by the Consumer Product Safety Commission. And we can’t buy a house or car or new appliances without some help from Washington. This is a terrible situation and a gloomy leading indicator for the country.

If we all look to Washington for solutions to our problems we are certain to suffer only disappointment and to face continual erosion of our personal freedoms and personal responsibilities and national economic well being.

I think this is happening because failures of many families and of the education system to teach freedom and responsibility have resulted in many citizens putting little or no value on these intangibles. The high values instead are put on safety, security, federal funding, rights, inclusivity, diversity, political correctness, fairness, and equality, and the assumption of many seems to be that the folks in Washington, DC, can provide the safety and security and funding and protect our rights while we all just behave ourselves and be nice to each other and make sure we get what we are entitled to.

One highly visible symptom of the problem now is the proliferation of ads from debt settlement companies telling us that if we owe thousands of dollars on our credit cards we have a right to settle for much less. What baloney!

This reliance on Washington is not a new situation but is the result of a long period of gradual change and seems to have been working OK except for one big thing. We apparently can’t afford it because we continue to borrow heavily to finance it. The continuing tug of war between those who believe routing more and more of the wealth of the country through Washington will strengthen the country and those who believe it will result in economic decline is currently at a standstill as federal spending grows due to new programs and bailouts and federal income decreases due to lower tax revenues in the weak economy. We cannot afford this “Nanny State” that is being created, or, if we can, we don’t value it highly enough to cough up the money to pay for it. We want it for nothing or at least we want somebody else to pay.

We have had universal Social Security and universal Medicare for seniors for about half a century. Both started very modestly but have grown over time into deficit generating behemoths. Now many seniors feel entitled to both, whether needed or not, and get upset if they don’t get an inflation based increase every year even if there is no inflation. Thanks be to God that we do not have universal Food Stamps. If we did, we would be spending 20% of our national income on food because there would have been no competition driven productivity improvements in agriculture over the past fifty years. If only Social Security and Medicare had been set up as safety nets like Food Stamps rather than as universal rights, we would be much stronger today.

The financial problem is pervasive and complex. There are so many small parts that don’t seem to matter, but put all those small parts together and there is a huge problem. Just this week, Columbia, SC, is celebrating the announcement of a $1.3M federal grant to expand the Edventure Children's Museum across the street from our home. The purpose is to “expand its health programming and encourage middle and high school students to pursue careers in science, technology, engineering and math.” I have two questions. What the heck are the parents and public schools supposed to be doing, and where is that $1.3M coming from? I think the museum is fine and is an asset to Columbia so long as it is financially self sustaining, but I don’t believe school kids from all around the state need to be pulled out of class to spend hours being bussed on field trips to Columbia to visit this museum. Let their parents bring them on weekends, evenings, and holidays and spend quality time with their children discussing what they see and learn. If the students are going to spend school time on field trips, let them be to operating businesses and factories and research labs to find out where and how the wealth of the country is created.

I raise this futile objection in spite of the fact that the Edventure project is an advantage for me personally. Any money spent to develop downtown Columbia will enhance our property values and make Columbia a more attractive place to live. But give me a break. We don’t need that project if we have to borrow money from China to do it. And that is the attitude we are going to have to adopt in Washington and nationwide if we are to avoid continuing slow economic collapse. Now, I really don’t expect individuals and communities and states to stop asking for more. So, let’s keep all eyes on Washington and see what they do. Can we see a little responsibility at the top?

High Earning Folks and the Taxes They Pay

President Obama has frequently said that he will not increase taxes on people earning less than $250,000 a year. I guess all the additional bills to be paid will be paid by those rich folks above that income level because they can afford it. I think that idea and the implications of it, that some of us have no obligation to support the nation financially, is detrimental to our society and to the whole concept of democracy. If the 1862 congress that started the income tax had targeted consumption instead, we would be a much stronger economy today.

But, it’s far too late to worry about that so I did a little investigation to find out what this plan to raise taxes only on those with incomes over $250,000 a year would mean in practical terms. Unfortunately, IRS data on tax returns is not broken down that way. The pertinent categories of income in publicly reported IRS data are $100k to $200k and $200k to $500k. I hope it's healthy skepticism and not paranoia that makes me think the president's advisors steered him to the $250k break because they knew it would make it tough for data hogs like me to figure out what is going on and whether he sticks to his pledge or not.

The most recent data available are from 2007 tax returns and are available here. I constructed a chart to illustrate how many returns were filed in each income category reported and how much of the total tax bill was paid by the folks filing those returns. Here it is (Click on it for a better look):

The first question is, “Who the heck are those 18,349 people who earned more than $10M?” They averaged $27M income for a total of about $495B. If we had just confiscated all their income above $1M we would have had a surplus in 2007 instead of a $236B deficit! Where is Hugo Chavez when you need him?

Well, there are some issues with that confiscatory approach. Probably many are in this category because of a major capital gain representing sale of a business or land or stocks or other long term investment or a retirement payout or exercise of stock options which means that the membership of this group of high earners is probably different from year to year. In other words, such incomes probably often represent gains from years of hard work and wise or lucky investments in properties or businesses that employed people and added to our gross domestic product over a number of years. The gains accumulated with uncertain payout and were diminished in true value by inflation, so a confiscatory approach doesn’t seem fair, does it? As a matter of fact, why wouldn’t we want to trust these same folks to continue to make such investments in America and pay reasonable taxes on the income and gains rather than siphon their hard-earned money off to some government program? And these top 18,349 are not necessarily the “richest” people because the richest often have large non-dividend paying stock or tax free bond holdings resulting in surprisingly low taxable incomes as they wait patiently for an eventual payout.

What about those folks in the $500K/Yr. to $10M/Yr. category? There were about 1 million returns in that group, about 1% of the total. There we would find the sports and entertainment people we worship and send tributes to. Even some college football coaches! And of course CEO’s and other executives and business owners and investors who provide the capital to keep the economy humming. Lots of doctors and lawyers and maybe some trust fund babies and lottery winners. The common thread is that this group consists mostly of smart, well educated, hard working achievers who make personal sacrifices and spend their money on goods and services and invest in companies that provide them, thereby creating jobs, rewarding others who aspire to success, and keeping the economy humming. And many of them give away a lot of money to charitable causes. Of course they can afford to pay more tax, but that is not a justification for asking them to do so. Maybe some think congress can spend the money more wisely than the wealthy folks do on average, but I doubt it. And they do spend or invest all the money. They don’t put it in mattresses. 

For me personally, I never wanted to make the personal sacrifices or assume the additional responsibility that would have gone along with being in that category.  It’s not just a bed of roses. 

Let’s get to the heart of the economy now, the folks in the middle group earning $50K to $500K. Most of this group is people the president promised not to raise taxes on. Just thinking out loud now, I wonder if requiring them to buy a health insurance policy or taxing a “Cadillac” policy they might already own would count as increasing their taxes. I think it would, but doubt that the administration will agree. But the fact is that if we keep spending recklessly, we cannot get out of debt without taxing these middle earners.

And finally there were 48 million returns, about half the total, that accounted for only 8% of the income tax paid. Many of those folks pay nothing at all or even get “earned income tax credits.” Many think that is reasonable…that a person making $25K or $30K a year shouldn’t have to pay taxes. I don’t agree. I think representation without taxation is just a bad in principle as taxation without representation.

One thing you can say for sure about the US Income Tax Code: It is a big job creator because it takes hundreds of thousands of accountants and lawyers and tax preparers and financial advisors and writers and pundits to help us get through it every year. True tax reform and simplification would result in a lot of job panic and dislocation.

Geoengineering and the Coming Ice Age – Word from MIT

This blast of Arctic weather is very interesting. Still, life must go on. I spent a couple of hours on Lake Murray yesterday fishing (not catching) and rode my bicycle to and from my volunteer job Monday and Tuesday. Have to work off those extra holiday calories. I know as well as anyone that short term extremes such as this don’t necessarily have anything to do with any long term climate trends, but I can’t help believing that if we were having an unusually warm winter, the global warming enthusiasts, encouraged and supported by the media, would be out in force trying to use it to advance their agenda.

Having lived in Rochester, NY, and Boston, MA, I have some actual experience with real winter weather. In 1989-90 my wife and I spent a year in the Boston suburbs while I was a Massachusetts Institute of Technology Sloan Fellow sponsored by my former employer, Eastman Chemical Company. What great winter fun it was talking walks in that fluffy white snow and across frozen ponds in the Needham, MA, parks.

MIT, a world class research institution, seems to be pretty much on board with strong interest in research on global warming and geoengineering technology and has two interesting articles in the current issue of MIT Technology Review.

The Geoengineering Gambit by Kevin Bullis, Energy Editor of the publication, seems to support the positions of those who argue that climate change is happening at an accelerating rate and that something will have to be done to avoid catastrophe. Options currently under consideration include blocking sunlight by injection of sulfur dioxide into the stratosphere to simulate gradual eruption of a volcano or, assuming carbon dioxide is the major cause of projected warming, design, installation, and operation of carbon dioxide extraction systems.

The article mentions several significant problems with such geoengineering solutions:

1. We don’t know how to implement them in a way that will deliver the desired consequences.

2. We don’t know what the side effects and unintended consequences will be.

3. We don’t know what would happen if a system were implemented and used successfully for years and then failed as man-made systems are prone to do. (Catastrophic change with no time for adapting maybe?)

4. Methods developed could be used unilaterally and prematurely by one nation to the detriment of others.

5. Even if implementation of some geoengineering strategy were somehow shown to be beneficial to the whole earth on average, it would almost certainly be detrimental to some regions and helpful to others. Resolution of that issue could lead to war. (Even worse, it could lead to a worldwide replay of the health care bill negotiations in the Senate.)


Another big issue, which is actually an advantage and huge attraction for research institutions such as MIT, is R&D cost.  According to Bullis, “Figuring out the consequences of various geoengineering plans and developing strategies to make them safer and more effective will take years, or even decades, of research. ‘For every dollar we spend figuring out how to actually do geoengineering,’ says Schrag (Daniel Schrag, Harvard professor and Obama climate issue adviser), ‘we need to be spending 10 dollars learning what the impacts will be.’” I suspect the federal government and some private foundations and even some industrial companies will be lining up to pump money into research institutions for such endeavors. Oh well, even if it turns out that we don’t need to take drastic action, maybe there will be important and valuable spin-offs as new things are learned.

The second article, Global Warming vs. the Next Ice Age by Franklin Cocks, Duke University professor, points out that, in the long term, global cooling is sure to be the next big problem because fossil fuels will eventually run out and all the excess carbon dioxide that will have resulted from their use will disappear by natural processes and the earth will enter a new ice age. Dr. Cocks thinks this will be the big thing in about 2,300 years. So, he says we need to invent systems and processes to keep the earth cool in the interim and eventually warm it up after all the fossil fuels are gone. Now that is what I call long term thinking. Once again, it comes back to money because Dr. Cocks’ concluding words are: “MIT alumni could play a prominent part in discovering the technology needed to keep us all going. And there are fortunes to be made from the effort. It’s worth thinking about.” Well, we may not have the money, but at least we have time on our side for this problem.

Federal funding of R&D is vital for universities, totaling about $31B or 60% of the total university R&D expense in 2008 according to this NSF website. Like most federal budget line items, that total is pretty small at a little less than 1% of total federal government spending in 2008. And while I favor investment in R&D, I do wonder how and by whom the priorities are established and it does bother me that we are borrowing the money from China.

Population Age Distributions Interesting

I first became aware of age distribution charts like the ones available at the US Census Bureau website when I got involved in international business at Eastman in the late 1980's.  Since we only take a census every ten years even in the US, population numbers are all estimates and probably have far too many significant figures reported in the tabulations found here. Still, the charts are helpful in understanding more about a country. Is it young and poor and hormone driven or is it old and stable and interested primarily in security?

I duplicated the charts of six countries of interest below. They are, from oldest to youngest:

A few interesting things are obvious from the charts. In China for example, the under 15 group has 116 males for every 100 females. That is going to create an interesting situation over the next few years. It seems the “One Child” policy adopted in 1979 has had some unintended consequences. You can read about it here  and can clearly see from the chart that it stopped the population growth.  Also, there is some indication that abortion is not an equal opportunity killer.

The drop in the birth rate in Iran is highly unusual and is due either to brilliant government education and lots of condoms and vasectomies as reported a few years ago by the BBC or to spiritual decline and decay of morale as reported more recently by Asia Times.

Meanwhile, age and health care costs continue to climb in the USA while procreation proceeds unabated in Nigeria and Yemen and lots of other poor and undeveloped countries. 

At this website you can choose any country and any year and get a quick snapshot of the population age distribution.

Airline Safety and Health Care - A Link!

How self centered we have become to think some TSA employee in an airport doing a full body scan in search of weapons or explosive devices has the tiniest bit of interest in the configurations of our privates and may even make copies of the “ghostly naked images” to post on the internet. Were that to become common, we might need a new name for "Face"book.

And how foolish we have become if we believe any system of inspection will ever prevent terrorists from using airplanes as weapons. As the New York Times reports, “...body imaging technology has its limits — the machines cannot, for example, detect objects stowed in bodily orifices or concealed within the folds of an obese person’s flesh.” I assume this also means that the machines cannot detect objects surgically implanted so how much time and money will we spend on full body scanning that will simply force terrorists to recruit somebody with minimal surgical training to implant explosives in the abdomens of willing suicide bombers? The spleen and gall bladder and appendix can always be taken out to make room for a little bomb. Take out the stomach! Or just put the device in the stomach! The killer should be fasting in preparation for sacrifice anyway.

The bottom line is that airline attacks cannot be prevented by inspection to identify the one in several million carrying a bomb because such effort can never be perfectly executed and, even if perfectly executed, can always be circumvented by the next big idea. The only way to prevent airline attacks is to use a process that allows boarding only for those with advance approval and background checks. The basic principle, which many learned from Total Quality guru, W. Edwards Deming, is that “prevention is better than detection.”

Success in prevention of airline attacks begins with the assumption that nobody has a “right” to fly. We already know that is true and have accepted it because we have a no-fly list with a few thousand names on it. The responsibility has to lie with the person wanting to fly to prove he or she is harmless rather than with government to identify and isolate, through some inevitably flawed inspection system, the one in several million intending to do harm. This is the essence of the famous Six Sigma philosophy that leads a manufacturer to require a supplier of some material or part to guarantee that all materials or parts meet Six-Sigma requirements and do not need to be inspected. (If you are interested in TQM philosophy and Six Sigma, there is a brief intro in a separate January 4th posting.)

Of course such a pre-approval strategy would require a huge database on 308 million residents including some foolproof ID such as iris identification and on consistent use of passports or some other national identification document, another trigger of “privacy concerns.” The upside is that we could forget all that time-consuming and privacy invading airport security which has already been proven ineffective. (Non-residents would still have to be dealt with on a one-by-one basis but with the burden of proof on them and not on the inspection system. And of course non-complying foreign airlines would have to be denied access to US air space which should give a big boost to the US owned airlines.)

If you are thinking that such a comprehensive database on residents would be impossible to create, check out the plans in the proposed health care bills for an “Office of the National Coordinator for Health Information Technology” who will create a “national database and a plan for “the utilization of an electronic health record (EHR) for each person in the United States by 2014.” (Bold italics mine.) Talk about job creation! Talk about an invasion of privacy! I guess even ED will have to be documented! However, the upside is that with that "EHR" as a starting point, all we need to do is add the iris identification and a background check for any who wish to travel by air and expand the title to “Office of the National Coordinator of Health Information Technology and Air Travel Clearance (ONCHITATC).” A bonus is that if anything has been surgically implanted, it should show up on the database.

So, with this massive government effort we could accomplish three objectives: There would be no attacks by terrorists on US airlines, nobody would die due to lack of health care records, and tens of thousands of possibly boring jobs would be created. And congress could move on to the Next Big Thing. And terrorists would be forced to turn their attention to malls, tunnels, bridges, stadiums, and concert halls.

Or, if that all seems too complicated and expensive, we could just keep on enjoying our lives with some freedom and privacy, knowing there is some small risk that we will all eventually die, but refusing to be intimidated and controlled by terrorists or by any kind of national database (IRS excluded of course) or even by our elected representatives, and choosing to expend our energy creating and producing rather than worrying. Now that would take some courage and an admission that we are not and never will be totally in control. A bonus is that we would no longer have to worry about unauthorized public posting of our body images.

For some laughs, read this review of one of the previous Big Things, the Y2K scare which cost billions, created many very boring terminal jobs, and contributed significantly to the dot.com bubble of the late 1990’s.

Quote of the Day: Be thankful we are not getting all the government we are paying for. – Will Rogers

Unionization of Government Employees

Senator Jim DeMint has been resisting confirmation of Erroll Southers as head of the Transportation Security Administration because he believes Southers' agenda would include unionization of and collective bargaining for the TSA employees. You can read about it here.  If you wonder whether Senator DeMint is justified in resisting further unionization of government employees, read this article from The New Yorker.  The title of the article is The Rubber Room.  A quick search shows 40 appearances of the word "union" in the article, usually referring to the United Federation of Teachers.

Six Sigma Theory and Airline Terrorism

Beginning about 1981, after 16 years of manufacturing experience, I began to get some essential education in Total Quality Management philosophy, which focuses on reduction of variability in processes with the goal of output or product that almost never gets outside specification limits and therefore does not have to be inspected.  It was a revelation to me and totally changed the way I looked at business and manufacturing processes from focusing on averages to focusing on variability.

One way to describe a process that almost never delivers a defect or error is to say it is a “Six Sigma” operation meaning that the specification limits for a particular property or variable are at least six standard deviations away from the average result. For a normal distribution, that means that only 3.4 times in a million will the variable fall outside the specification limit. Looking for that small number of defects would be totally useless, like the proverbial search for a needle in a haystack.

For a normal distribution, we usually think of a range of average plus or minus three standard deviations as including all the data, but it theoretically includes only 99.7% of the results. The problem is that the remaining 0.3% outside limits allows 3000 defects for every million results. If the object of a process is to build cars or cell phones or to insure that only safe and responsible citizens board airplanes, 3000 defects in a million may well result in sudden death for a product or a company or for a large group of airline travelers. Inspection, the traditional way of addressing such problems, might find most of those defects but hundreds are sure to get through the inspection process.

Here is what it looks like on a distribution chart of 5000 data points generated using Excel. The average of the 5000 points is zero, and the standard deviation is 1. In this case, 10 of the 5000, about 0.2%, were outside the Three Sigma limits. None were outside the Six Sigma limits.  Click on the chart for a better view.

So, the way to success, according to TQM theory, is to improve the process to the point that existence of defects and the resulting need for costly inspection to find them is essentially eliminated.  

For airline safety, we now have a process that allows just about anybody to buy a plane ticket and get in line at airport security and then we do a massive inspection to try to identify and stop any potential troublemakers. So, what is the chance that such a system will eliminate the possibility of a potential terrorist boarding an airplane? Based on theory and on recent experience, it is essentially zero.  

We are going to have to accept the risk and quit worrying about it or design a new "Six Sigma" process because adding layers of inspection causes additional problems and cost for everyone and is sure to fail.  There will be a process improvement idea in a future posting which was already cumbersome enough without further bogging it down with statistical theory.