Trimming the Federal Budget

Annual development of budgets and compliance with them were key parts of any management responsibility I had during my working years, and getting approval for an increase was always a challenge.  I wish we had some folks in Washington with such a conservative and fiscally responsible mindset, because there is apparently no limit to the voracious appetite of the federal government for spending.

There seems to be widespread recognition now that there is a problem, but few want to deal with it beyond tinkering around the edges with tiny cuts.  My suggestion is that, over a period of five years, federal spending be brought back in line with what it was during the Bush administration on a per capita basis and as a percent of GDP.

Here's my proposal which amounts to a cut of 9% over the next five years. It assumes 3% growth in GDP per year, 1% growth in population per year, and is based on hope that interest rates stay low so that growing interest on the national debt doesn't offset the other cuts. I believe such an approach combined with lower and flatter marginal tax rates without all the exclusions, exemptions, deductions, and credits would start paying off our debt by 2015.

Blue diamonds are history; Red squares are my proposal.  I'll be interested to see what the future looks like vs. these projections.



Our Great National Sickness

There are the symptoms, right on the front page of the Neighbors section of The State newspaper this morning.  First headline: “Grants Available to Detect Environmental Hazards.”  Richland County landowners have until March 15 to apply for grants from the U.S. Environmental Protection Agency to have their property assessed for environmental hazards!

And then just below that, “Grant Workshop Tonight.”  The focus of this workshop will be on how neighborhoods can get government grants to help with street signs, newsletters, events, and other neighborhood activities! You can probably get a government grant to take a course to learn how to apply for government grants!

Give me a break!  Do we not know that we are bankrupt…that our combined federal state and local governments are spending a trillion dollars a year more than they are collecting in taxes and that the total government spending in 2009 was 35% of GDP? I know some argue for bigger government. How big is big enough? 

If your community wants a newsletter, just pay for it and do it.  If you own some land that needs an environmental assessment, pay for it yourself.  Don’t be applying to the government to get money from somebody else to pay for it. The money is not there!

Of course these items, like all individual expenditures, are trivial.  But multiply trivial times 350 million people and several million communities and landowners and the total discretionary and unnecessary spending per year reaches billions of dollars.  Our great national sickness is over-dependence on and addiction to government spending.

Whether you are a “big government solves all” person looking for reassurance that Washington is in charge and all is well or a “small government do it yourself” type looking for opportunities for improvement, take a look at the Citizens Against Government Waste annual listings of wasteful government spending.  Depending on your personal philosophy you will be either impressed and comforted or depressed and agitated.

Take This Job and Do It

I was listening to a discussion between Mike Huckabee and someone opposing a Wal-Mart in NY City. Mike, obviously biased because of the Arkansas connection, was focusing on the positives of low prices for consumers and the number of jobs provided and his guest was arguing that turnover is too high, pay is too low, and too many products are imported from China. Of course they are both right.

In the volunteer work I do, I have talked to several former Wal-Mart employees and a few new Wal-Mart employees. We don’t often see long-term Wal-Mart employees because they generally don’t need help from social service agencies. Obviously turnover is high and pay is low because Wal-Mart offers entry level jobs and a chance to succeed to thousands of people every day. And it’s not hard for me to see why many of the former Wal-Mart folks I talk to didn’t survive the process.

Here’s the thing about such companies that have millions of entry level jobs: They don’t base their hiring on resumes and educational backgrounds and references and extensive interviews. But, they give lots of folks chances to prove they can be winners. They are looking for people who always show up on time and work hard all day, who are good communicators and congenial and helpful to co-workers and customers, who try their best to satisfy their bosses and learn more about the job every single day, and who come up with good ideas for improvement once in a while. Such folks will get full work weeks and raises and will be candidates for promotion. Those who cannot or will not meet those criteria will remain on probationary status or will be part-time employees and will not get benefits and raises. They will eventually leave. And those are the folks who come asking for help with food vouchers, clothing vouchers, eviction notices, and utility cut-off notices…and shop at Wal-Mart if they can get to one.

And meanwhile, because of Wal-Mart’s revolutionary use of information technology to enhance its supply chain management and drive down inventories and costs, customers keep flocking to their stores. And their biggest opportunity for improvement is probably lower employee turnover and fewer but more productive employees, both of which would be made possible by more winners in their hiring pool.

And, by the way, the owners and investors haven’t been getting rich either since the stock price has remained essentially unchanged over the past ten years even as earnings per share have almost tripled.  And the dividend is only about 2%.  Maybe it's a buy.  This chart covers 2001-2011.

The 80 - 20 Rule and Why It Doesn't Apply to Health Care

There is another great health care article by Atul Gawande in the January 24th New Yorker Magazine. This one focuses on so called “hot spots” in the health care system, situations that account for high percentages of the total cost. The data seem to indicate that the old standard 80-20 rule, a tool for separating the vital few from the trivial many may understate the degree of skewness in health care. That rule would predict that 80% of the cost is incurred by 20% of the cases. In the Camden, NJ, study cited in the Gawande article, 30% of the cost was incurred by the worst 1% of cases. That is 15 times as much as would be predicted by the 80 – 20 rule.  Here is a chart to illustrate the rule and this apparent outlier.

(Take a look at that polynomial equation.  When I was a student, it would have taken me a week to figure that out.  Now Excel just does it!)

Why would this unusual situation exist? I think it is because of the perverse incentive system institutionalized by fixed rate reimbursements per procedure or service performed. A hospital or other health care provider in a normal competitive situation and with large fixed costs in place would be motivated to address the highest cost situations and figure out ways to fix those problems or to provide service at a lower cost. Under the non-competitive system that has evolved with insurance companies and Medicare providing fixed reimbursements per procedure or service, the incentive is to pack the practice with high maintenance patients in order to keep the revenue flowing with as little turnover and paperwork as possible. I’m not suggesting intentional misbehavior but just saying that folks tend to do what they are being paid for.

The problem is aggravated by the simple fact that most of the health care cost is in place and fixed in the form of investment in bricks, mortar, facilities, technology, and employee costs. In other words, whether a particular hospital room is in use or empty, most of the costs are the same. The variable cost of moving a patient into an empty bed is the variable cost of the food the person will eat and the Kleenex and toilet paper he or she will use, and that is about it. The variable cost of a scan is the cost of the electricity to run the machine and the paper on which to print the results because the investment in the expensive equipment has been made and the employees have been hired and trained to run it and are on duty and ready to serve. The variable revenue, however, that results from filling a bed or doing a scan is very significant. So, the hospital has strong incentive to have patients occupy the beds and be scanned from time to time in order to get those guaranteed reimbursements and pay the bills. They have to do it to survive, and will have little or no interest in trying to figure out how to keep their beds empty. And, given that sorry situation, the only way to reduce or control costs is for governments to control the number of hospitals and for the insurance company or Medicare to ration available services.

In the real world, on the other hand, a competitive situation would have new and more efficient facilities being built and providers bidding on health care business with improved procedures at lower prices and aggressively trying to serve every available market. Availability would be increasing, prices would be decreasing, and older and less efficient facilities and practices would have to improve or lose business, fail, and close. Well, we can dream.

Gawande describes several efforts currently underway to better serve, at lower cost, these most expensive patients but hints at the difficulties ahead, given the current reimbursement and compensation systems, with comments such as:

“The most difficult obstacle, however, has been the waywardness not of patients but of doctors…”

“Can it really make sense for a hospital to invest in a program…that aims at reducing hospitalizations…?

And, about one particular “hot spot” program underway, “…if it works, hospitals will lose revenue and some will have to close. Medical companies and specialists profiting from the excess of scans and procedures will get squeezed. This will provoke retaliation, counter-campaigns, intense lobbying for Washington to obstruct reform.”

I say, free the doctors, and the hospitals, and let the competition begin!

Here is the abstract of Gawande's article.

"Giving Back" vs. "Paying Forward"

During a recent Home Works of America project, I was being interviewed by a local news person who suggested that we were to be complimented for wanting to “give back.” I resisted that terminology because most Home Works volunteers want to give time and money just for the joy of giving and trying, in some small way, to follow the commands of Jesus and because “giving back” implies that the person being helped has given the helper something or that the helper has taken something from that person. I’m not sure that made much of an impression on the interviewer, but at least the story that made it to TV did not include anything about “giving back.”

“Giving back” is an appropriate descriptor for some giving, but if one is giving back something that was given to him or her or was taken by him or her, it’s not charity! “Giving back” may be an appropriate descriptor, for example, in the case of a business person, whose business has been strongly supported by a community, making a publicized gift to the community. Such donations are commendable and appreciated, but they aren’t really charity because the donor gets recognition and enhanced reputation and maybe even additional business as a result and will at least enjoy a proportionate share of the gift to his or her own community. For truly charitable activities, those motivated solely by love and caring, “paying forward,” a phrase that enjoyed short term popularity because of a 2000 movie, Pay it Forward, starring Kevin Spacey and Helen Hunt would be a better and more theologically sound descriptor. The idea in the movie was that giving, expecting nothing in return, could inspire recipients to give in the same way to others and that such generosity could expand exponentially. Sort of a reverse Ponzi scheme.

I can think of another case besides the local business person giving something to the whole community in which “giving back” might be an appropriate descriptor. I am just now beginning to receive Social Security and really wish that my monthly checks could be the result of careful investment of the Social Security taxes I have paid over the past forty years because those tax payments were certainly adequate to have provided significantly higher income, perhaps the same amount to me and some to others less fortunate than I.  Unfortunately, that is not the case, because that tax money was loaned, by the Social Security Trust Fund, to the government and spent as received. As a result, the government now has to collect money from somebody else in order to send Social Security income to me. So, Social Security is an example of "paying forward" involuntarily.  And that is why, even with Social Security taxes now around 12% of earned income, the system is bankrupt on a cash flow basis.

I was thinking of “giving back” some of that Social Security money, but it wouldn’t make any sense for me to give it back to the federal government because that was not the original source and because our representatives have such a long shopping list and would quickly spend my meager contribution. It might, however, make sense for me to give it back to someone from whom it was taken. I think I may do that with the first couple of monthly payments I receive, just as a token of my appreciation. I'll look for a couple of good candidates, hard working young professionals, who are paying high taxes and would appreciate getting a little bit back. 

(In a Google search, "giving back" gets 85 times as many hits as "paying forward.")

Partial Realization of Hope

My hope for (President Obama) is that he, like any good leader, will finally figure out where the American people are going and will scramble to get out in front of them and lead the charge.  - Why Blog Nov 10 2009

It’s probably not a good thing to begin quoting oneself, but the above is from a November 10, 2009, Permanent Fixes Blog posting.  And I am encouraged that we may be seeing some signs now, fourteen months later, that the president is growing into the job.

For anyone, no matter how qualified, the job of President of the United States (POTUS) has become a formidable and perhaps impossible challenge.  I had a wonderful 34 year career with Eastman Chemical Company, blessed during that time with about ten promotions resulting in new levels of responsibility or entirely new work environments and remember eventually accepting the simple fact that any such change was going to require about a year of learning before reaching a level of competence adequate for successful implementation of any desired strategic changes, process improvements, or permanent fixes.  Extrapolating that to the job of POTUS, I guess I would need about 20 years of experience to achieve minimal competency.  So, when President Obama took office, I expected an extended incubation period for the young community organizer and partial term senator with absolutely zero executive experience taking on such a formidable task.   Given his stated agenda, I was thinking, “The longer the better.”

After two years of extended campaigning, tending to direct comments only to his political base, sometimes referring to the rest of us as “enemies,” blaming his problems on the previous administration, failing to control arrogance, and pushing an unpopular agenda with the help of two unpopular and extremely partisan congressional leaders, I feel some sense of hope and sense some hint of change simply because I was able to listen to his comments at the Tucson memorial service without experiencing frustration.  I didn’t immediately recognize the change in tone as that significant but just thought, “Not bad.”  Others more perceptive than I, Noonan and Krauthammer for example, have written or commented on the speech as indicative of a major change for the president. 

Maybe President Obama is slowly realizing that it’s not all about him and his agenda…that the success of this great country is based on people from different cultures and with different agendas joining together with an historic set of common principles and ideals and slowly melting together to become American…that pitting one group against another has failed time and again, or is in the process of failing, and will continue to fail…that he is servant and not dictator…that trusting government to do what only it can do is radically different from trusting government to “spread the wealth around” or to run hospitals and car companies or to serve as a lending institution or to pick winners and losers in our economic system.

Does this mean that I am about to become an Obama supporter?  Not a chance!  I don’t believe he has changed his fundamental philosophy, which is vastly different from mine.  I don’t believe he is qualified by experience or by education to be the president.  And I hope for a viable conservative and patriotic candidate, Democrat or Republican, with years of executive experience to replace him in 2012.  I am just seeing some evidence that he is learning and growing and realizing what we have and may now begin being president of all the people, quit apologizing for us, and start giving thanks for and championing the greatness of The United States of America as a unique beacon, to the whole world, of hope, freedom, and opportunity.  That’s what we need from our president.

That and getting federal government spending under control!

Notes from The Simpleminded

Tennesseans and Texans tend to be pretty independent minded folks. It was a hardy breed that crossed the Appalachians a couple of hundred years ago to settle East Tennessee, and some of the more adventuresome, Boone, Crockett, Houston, and others, headed out from there to Texas. Eastman Chemical Company, where I spent most of my 34 year career, had its two largest manufacturing sites in Kingsport, TN, and Longview, TX. We had a good mix of scientists and engineers and managers moving back and forth between the two sites over the years, and we tended to think alike and get along pretty well (though the Texans were slightly more independent).

Maybe that is why I don’t have any trouble understanding the thinking processes of George W. Bush and why I don’t get too upset that The New Yorker writer George Packer sees George and would probably see me as “simpleminded” and “sententious,” descriptors used in his review of Decision Points, Bush’s new memoir. I thoroughly enjoyed Bush’s memoir, but I don’t want to be critical of Mr. Packer who, if he had been an adviser in the White House, might well have improved President Bush’s unsatisfactory conduct of early years of the war in Iraq. He is obviously a brilliant guy, excellent writer, and very knowledgeable about Iraq. He just doesn’t have the necessary background to understand George and me.

After 68 years of observing, I am not looking for any political heroes and don’t consider George W. Bush to be one. But I think he was and is an honest man who saw the presidency as an opportunity to serve and did what he thought was right to the best of his ability. And it wasn’t that bad, considering the challenges he faced. Not the least of his virtues is that he takes full responsibility for all that happened on his watch. People have forgotten that, although the dot com bust began just as Bush took office, he never grumbled about what he “inherited.”  After falling tax revenues during the resulting recession wiped out the federal budget surpluses of the last three Clinton years, Bush got approval for across-the-board tax cuts, now demonized as “BUSH TAX CUTS FOR MILLIONAIRES AND BILLIONARIES,” that boosted the economy and resulted in several years of federal revenue growing faster than federal spending, in spite of the expense of the wars in Iraq and Afghanistan. (Look at the data here.) Of course that ended with plummeting tax revenues and soaring spending after the real estate bust which Bush had warned about and tried to minimize by stricter regulation of Fannie Mae and Freddie Mac. Democrats, led by Barney Frank, trivialized and defeated his attempts to do that.

In his book he mentions President Clinton about 40 times and President Obama about 25 times without an unkind word about either. And surely impartial observers of the Washington scene would have to agree that he was as helpful as possible in smoothing the Bush/Obama transition, involving Mr. Obama from the first in the government response to the financial crisis, and has been gentlemanly and supportive of President Obama in his behavior and comments since leaving office, even as the current President has persisted in blaming his problems on what he inherited from the previous administration.

If you like and understand George W. Bush, get Decision Points and read it for enjoyment and further understanding about the issues and decisions of his presidency. If you despise him, you should read the book with an open mind, recognizing that there is not and never will be “the one” who can do that job to suit more than about 50% of the people. We have to do more ourselves and quit looking for some earthly messiah to solve our problems. And I, for one, am thankful I have not been wading through an Al Gore memoir trying to understand his responses to the challenges Bush faced. That would have been an extreme inconvenience.

And, by the way, even though Packer charges that, “Bush credits no collaborator,” Bush makes it perfectly clear that the book was written with the assistance of Chris Michel, his chief speechwriter. I have no idea why Packer made that statement. One thing for sure, when you are President of the United States, no detail goes unrecorded. A president can be pretty confident that if he or she ever wants to know what happened and what was said and done on a particular day, the information will be available. I guess that’s why we have to fund all those Presidential Libraries around the country.

Congressional Reform Through Constitutional Amendment

Those “pass it on” emails, modern day chain letters, are sometimes interesting, but I rarely forward one. I don’t mind receiving and deleting them, but if I want to share any of the information with someone in particular, I normally cut and paste pertinent parts or links into a new email. And what is the deal with all those blue lines running up and down the left side and the sorry formatting of so many of those messages?

I got one from a friend this week that proposes a Congressional Reform Act of 2011 with interesting provisions. Though I liked the basic idea, I thought it needed some editing and minor modifications. There was something, for example, about forcing congresspersons to be on Social Security, but they already are. With a little thought, here is what I came up with as a proposed amendment:

1. No individual can serve more than a total of 12 years in the House of Representatives and/or the Senate.
2. Total compensation expense for all senators and representatives, including health care, retirement funding, and other benefits is pegged by law at 2010 levels with annual adjustments to be equal to percent change in the Gross Domestic Product, whether positive or negative.
3. Total spending for staff and expenses of senators and representatives is pegged by law at 90% of 2010 levels with annual adjustments to be equal to percent change in Gross Domestic Product, whether positive or negative.  (I'm confident a 10% cut will help rather than hurt.)
4. Former senators and representatives may not lobby congress or do direct business with the government or work for companies that do direct business with the government until five years after the end of their service. (We need a "wall of separation" between business and state.)

These provisions are based on the idea that a professional political class with special privileges and rich compensation and the abilities to perpetuate their service through earmarks and other benefits to various constituencies and to use their government contacts to profit from private business after leaving office is detrimental to the concept of a free and democratic society.

Of course these changes would require a constitutional amendment, but, as the email I received pointed out, when the people demand some change such as granting the right to vote to 18 year olds, an amendment can be approved very quickly. In that case, the 26th Amendment was passed by Congress on March 23, 1971, and was ratified in a little over three months on July 1, 1971.

I was asked to pass the email on to 20 people, but I’m an independent kind of guy and had to put a personal touch on it. If you like the idea, pass it on, after putting your own personal touch on it of course!

Texas 25, New York 19

No sports results here but just a bit of interesting information from Michael Barone’s January 8 WSJ column on population trends in the United States. And it is not the absolute numbers that matter. It is the trends, one of which is shown in the chart below. With Texas population up 316% and New York population up 46% since 1930, there is some support for the idea that businesses and their employees tend to accumulate in states with low taxes and minimal regulations. I guess it is one way of voting…with one’s money and feet. Or maybe it's just the weather. I was tempted to make the lines red and blue but didn’t want to imply anything political.

Read the Barone Article here. It describes several interesting long term trends.

Irrational Exuberance (About Health Care)

Americans seem to be especially susceptible to irrational exuberance.  We succumbed to it during the dot com boom and then again during the real estate bubble.  Many fell for it during the Obama presidential campaign.  South Carolina fans suffered from it during the football season just ending.

Now I suspect that many are experiencing irrational exuberance over the new health care legislation, the Patient Protection and Affordable Care Act.  Lots of folks seem to believe that they are almost sure to be a patient at some time in the future and will need protection and affordable care.  The bill seems to them to be designed just for their benefit, and they are excited.

It’s not hard to see why.  We have been told that we cannot be denied health insurance coverage regardless of pre-existing conditions.  We have been told that our coverage can never be cancelled.  We have been told that there can be no lifetime cap on benefits.  How can we lose?

Here’s the reason the exuberance is irrational.  In spite of the three promises, there is no guarantee that any particular procedure will be available in a reasonable time frame or will be covered by the insurance.  I was discussing this with a physician friend and he suggested that a common scenario a few years down the road will be a diagnosis with two or three treatment options at various prices and that the insurance will sometimes authorize only the least expensive or perhaps none at all.  Of course he is right.  That is the only way it can work.

And we will never get that news from Medicare or the insurance company.  It will be the doctor who will have to deliver the message: “Yes, you are 'covered,' but that procedure is not authorized.  You are on the watch and wait list, and your insurance will pay the cost of doctor visits while we watch and wait.”

Don’t get me wrong.  I think that is reasonable and practical and the only way universal health insurance can be provided.  It’s the irrational exuberance I don’t like.

More Careless Tax Language

Sloppy, inflammatory, and emotional language continues in the Beltway class war going on over the regrettable US Federal financial situation. Two major areas of confusion are over the difference between raising or lowering income tax revenues and raising or lowering income tax rates and the difference between income and wealth. Those terms require careful use.

Everybody can understand that there is some point above which higher tax rates will result in lower tax revenues as earners lose motivation to increase income and/or make moves to reduce or shelter from taxation the income they have. And probably most understand that there are some individuals with high incomes but so much debt that they have less than zero wealth while others are very wealthy but get little or no taxable income because they have invested in tax free or tax sheltered bonds and non-dividend paying equities.

Still, in spite of my very clear July 3, 2010, explanation of the difference between raising tax revenues, which is probably necessary given our current situation, and raising tax rates, which will compound our problems, The NYT continues its simplistic campaign (See Deficit Hypocrisy) for higher and higher tax rates for fewer and fewer tax payers along with higher and higher government benefits for more and more recipients. A higher bracket, maybe as high as 40%, for earnings in excess of a million dollars a year might be OK, but raising tax rates on incomes lower than that would be detrimental to the economy. And the Times continues to insist that any tax rate cut is a “cost” to government or equivalent to government spending as if all the money belonged to the government and the question was how much to pay the citizens.

And the president is not listening either. He keeps talking about Republicans wanting to “give tax breaks to millionaires and billionaires” when all Republicans are trying to do is keep current tax rates on everybody earning over $250,000 per year. Those are two entirely different things.

I’d like all the Times writers, and President Obama, to be sent to MIT for a two week crash course in System Dynamics (not taught at Harvard) to develop some understanding that our economy is a connected system, all parts of which respond to seemingly isolated tweaking of individual parts and that the predictable response to increasing taxes on any one thing will be less of that thing. Maybe they will be able to take a refresher course in the law of unintended consequences while they are there.

Such education would help them understand why many conservatives have no objections to lots of folks making over $250,000 paying more in taxes, but want to get there by eliminating deductions, exclusions, and exemptions while lowering their tax rates. Such changes would result in a system that rewards greater achievement with lower marginal rates but collects more tax revenue because of a broader base of taxable income. I think even President Obama likes the idea, though he would probably want a higher rate than I would. And he would probably continue to patronize and disrespect folks with income below $50,000 or so by not asking them to pay any fair share.

I just got 2010 Turbo Tax installed so was able to play around with it a bit to develop some hypothetical income tax bills. I checked tax bills for three individuals earning $500,000 a year. One is a high-living bachelor with a leased Maserati, a classy apartment, and no assets, one is a family with two kids, a mortgage with $50,000 in annual interest, and generous donations to their church of $50,000 a year, and the third is a wealthy retiree with $10,000,000 invested in tax free bonds resulting in zero taxable income.  Click on the chart if you need a better view.

In today’s world, it is not the business of government to use the tax code to encourage people to get married, have children, take out big mortgages, and give money to their churches. But that is exactly what it is doing. Nor is it the business of the federal government to subsidize states and municipalities by allowing them to sell tax free bonds, but that is what it is doing. Get rid of all that complicated manipulative garbage and put a flat 20% tax on income and the total taxes paid by the three in my example above will be higher, fairer, and, because of lower marginal rates, less demotivational than the current system.

And, yes, folks making $50,000 a year should also pay the same flat rate whatever it is. We can provide welfare as needed, but welfare should be separated from the income tax system.

Finally, of course I would prefer the “Fair Tax” which is a proposed flat tax on consumption rather than on income but just don’t see how to get there and am concerned about a serious temporary dampening of consumption and higher unemployment. A flat tax on income could be a good intermediate, easily implemented, step on the way to the “Fair Tax.”