Monday, February 28, 2011
Sunday, February 27, 2011
Social Security "Privatization"
“The market collapse should be the final nail in the coffin of Social Security privatization.” – Elliot Spitzer, February 4, 2009
At the depth of the market crash two years ago, liberal pundits were exploiting the event to falsely declare the stupidity of Social Security “privatization” which President Bush had advocated five years earlier. The quote above from Elliot Spitzer is an example. Well, at least any Social Security taxes that had been invested in stock market indices rather than loaned to the federal government and spent would still have had half the original value, even at that low point, instead of the zero value we are now stuck with.
According to this USA Today 9/2/2004 article, the essential elements of the Bush proposal, in his own (poorly chosen) words, were:
Spitzer’s primary but specious argument was that anyone who reached retirement under the Bush plan when markets were down, cashed out their investment, and bought an annuity would be stuck with much lower income than under Social Security. Maybe, but that would be a very unwise move, and the regulations that would have to be in place for the system to work would prohibit such rashness and require that folks stay invested and accept regular monthly payouts during retirement, the size depending on life expectancy, as with IRA’s and 401k’s. Investing monthly over thirty five years or so in a broad selection of stock index funds and then leaving the investments in place and withdrawing monthly over the next twenty five years or so would never have failed to pay off. If it ever does, it will be because the economy has failed, and the government won’t be able to print enough money to solve that problem.
I think the Bush plan was good, but the most important element was not the so-called “privatization” but rather the requirement that Social Security taxes collected be invested in the private economy rather than loaned to the government for current spending. The very time that Elliott Spitzer made his assertion would have been the perfect time to use the “stimulus” and “TARP” money to redeem treasury bonds in the Social Security Trust Fund and put the money into stock index funds (because we cannot tolerate any more investment of taxpayer funds in selected individual companies, picking winners and losers, as was done during the bailouts a couple of years ago). Much of the Social Security unfunded liability could have been wiped out by so doing since the market has about doubled since then. And our economy and employment would have recovered more quickly.
And now that the market has recovered, where are those folks who were exploiting the plunge two years ago in an attempt to justify larger government at the expense of the private sector?
Just to offer a little perspective on relative values, the current total stock market value for all US companies is about $14T or approximately 95% of GDP. You can see the data at gurufocus. Note the chart at this same link which illustrates market values generally growing with GDP and the one below from Fortune which shows that, while the market sometimes gets ahead of GDP growth and sometimes lags behind, a long term expectation of a ratio of about 75% is reasonable.
The total value of treasury bonds being held in the Social Security Trust Fund is currently about $2.6T , a little less than 20% of the total stock market value. Had the excess Social Security taxes not required for benefit payouts been invested in market indices over the past 45 years rather than loaned to the government and spent, the value would be much higher than $2.6T, it could be drawn on without having to collect taxes to redeem government bonds, and there would be no Social Security funding problem today. And a side benefit of that steadily increasing infusion of money into American business and industry would have been greater GDP growth, higher and steadier employment, less market volatility, and more total tax revenue available for government at lower tax rates.
Of course we can never prove what would have been the result of the path not taken, but that is my story and I’m sticking to it.
At the depth of the market crash two years ago, liberal pundits were exploiting the event to falsely declare the stupidity of Social Security “privatization” which President Bush had advocated five years earlier. The quote above from Elliot Spitzer is an example. Well, at least any Social Security taxes that had been invested in stock market indices rather than loaned to the federal government and spent would still have had half the original value, even at that low point, instead of the zero value we are now stuck with.
According to this USA Today 9/2/2004 article, the essential elements of the Bush proposal, in his own (poorly chosen) words, were:
“We will always keep the promise of Social Security for our older workers. We must strengthen Social Security by allowing younger workers to save some of their taxes in a personal account – a nest egg you (they?) can call your (their?) own, and government can never take away. In all these proposals, we seek to provide more freedom and more control over your own life (individual lives?).”Besides the fact that lots of folks, unfortunately, prefer government guarantees over more freedom and control over their own lives, President Bush’s proposal presented serious financial hurdles to overcome since, under the current system, Social Security taxes simply fund government spending and are not put aside for future Social Security recipients. It was obvious that if that money currently being spent were diverted to investments set aside for the taxpayer, whether privatized or not, either taxes would have to be raised or government spending would have to be cut.
Spitzer’s primary but specious argument was that anyone who reached retirement under the Bush plan when markets were down, cashed out their investment, and bought an annuity would be stuck with much lower income than under Social Security. Maybe, but that would be a very unwise move, and the regulations that would have to be in place for the system to work would prohibit such rashness and require that folks stay invested and accept regular monthly payouts during retirement, the size depending on life expectancy, as with IRA’s and 401k’s. Investing monthly over thirty five years or so in a broad selection of stock index funds and then leaving the investments in place and withdrawing monthly over the next twenty five years or so would never have failed to pay off. If it ever does, it will be because the economy has failed, and the government won’t be able to print enough money to solve that problem.
I think the Bush plan was good, but the most important element was not the so-called “privatization” but rather the requirement that Social Security taxes collected be invested in the private economy rather than loaned to the government for current spending. The very time that Elliott Spitzer made his assertion would have been the perfect time to use the “stimulus” and “TARP” money to redeem treasury bonds in the Social Security Trust Fund and put the money into stock index funds (because we cannot tolerate any more investment of taxpayer funds in selected individual companies, picking winners and losers, as was done during the bailouts a couple of years ago). Much of the Social Security unfunded liability could have been wiped out by so doing since the market has about doubled since then. And our economy and employment would have recovered more quickly.
And now that the market has recovered, where are those folks who were exploiting the plunge two years ago in an attempt to justify larger government at the expense of the private sector?
Just to offer a little perspective on relative values, the current total stock market value for all US companies is about $14T or approximately 95% of GDP. You can see the data at gurufocus. Note the chart at this same link which illustrates market values generally growing with GDP and the one below from Fortune which shows that, while the market sometimes gets ahead of GDP growth and sometimes lags behind, a long term expectation of a ratio of about 75% is reasonable.
The total value of treasury bonds being held in the Social Security Trust Fund is currently about $2.6T , a little less than 20% of the total stock market value. Had the excess Social Security taxes not required for benefit payouts been invested in market indices over the past 45 years rather than loaned to the government and spent, the value would be much higher than $2.6T, it could be drawn on without having to collect taxes to redeem government bonds, and there would be no Social Security funding problem today. And a side benefit of that steadily increasing infusion of money into American business and industry would have been greater GDP growth, higher and steadier employment, less market volatility, and more total tax revenue available for government at lower tax rates.
Of course we can never prove what would have been the result of the path not taken, but that is my story and I’m sticking to it.
Tuesday, February 22, 2011
Japan, Saudi Arabia, and the USA
Living in Japan in the early 1990’s, we often read and heard that Japan is a "small island nation with no natural resources (No. 1 on their list is fish.) and that the people must work hard to produce and export goods for economic success." I suspect that Japan’s strong work ethic, low unemployment, and half century of economic expansion have been primary results of that powerfully motivating common national understanding. However, high costs resulting from that economic success, the need to import all energy, and a shrinking population of working age citizens have made it increasingly difficult for Japan to compete in the global economy, and their own economy has never fully recovered from the crash that followed their real estate bubble of the 1980’s.
At the other extreme is Saudi Arabia which owns the world’s largest oil reserves and doesn’t have to do any work at all or produce anything. The royal family just cuts deals with developed nations to exploit their oil reserves, hopefully by using some of it within the "Kingdom" to produce derivatives of the crude oil and perhaps create some jobs. Saudi’s two big challenges have been keeping minds and bodies meaningfully occupied and sharing the wealth of the country just enough to avoid rebellion. Perhaps the only thing that has grown faster than the national bank account is the royal family (Tens of thousands of members with several thousand entitled princes according to this article.), some of whom are probably lying awake nights now that civil unrest is being openly expressed in the Middle East. In the 911 attacks involving several young Saudi’s, we have seen ample evidence of the truth of that old saw about idle minds or hands and the Devil’s workshop.
In contrast to problems in Japan and Saudi Arabia, the United States has considerable energy resources and an adequate workforce. We have simply chosen to handicap ourselves through failure to develop and use our own energy resources, failure to educate our workforce and align it with some national purpose, and through implementation of a tax and regulatory environment that encourages even American companies to move their operations to lower cost parts of the world and to reinvest their foreign earnings in those countries.
The idea of conserving rather than using our own natural resources may be good, but, for our own security and success we should be exploring and developing and making ready for use every single proven resource (oil, coal, natural gas, and nuclear) we can identify. Even if we were to suddenly double our known oil reserves, we could and probably should continue to import oil just to conserve our own for later decades when the price per barrel is sure to be much higher. Besides, for now, it is a way for us to share our wealth with less developed nations. Well, there is that little problem of funding terrorism.
And we have clearly been on the wrong track in development of our tax and regulatory environment. Examples range from major items such as the ridiculous 35% tax on repatriated earnings of American corporations earning money in other countries, motivating them to reinvest the earnings there instead of here, and futile attempts to change the environment by restricting CO2 emissions, again encouraging investment in other countries rather than here, to trivialities such as a recent example in The State Newspaper of local Richland County zoning requirements that forced a company to build a $50,000 sidewalk along a public road but inside the company fence, a sidewalk from and to nowhere.
IF we are to maintain our leadership in the world and remain wealthy enough to have something to spread around, both at home and in developing nations, and to be able to fund research into such dreams as clean energy and high-speed rail and immortality through health care, we are going to have to focus on making things and doing things, providing goods and services, that are needed NOW around the world and doing a better job of it, at lower cost, than the competition. It’s a big "if" because I am afraid we are becoming more interested in the spreading than the generation of wealth, more interested in social networking than in business and productivity, more interested in administration and control than in execution and accomplishment, and those are sure signs of demise.
And if we fail to maintain our leadership position, who will pick up and carry the banners of freedom and democracy that are enshrined in our founding documents and under which we have operated for more than 200 years and which have made us the desired home for millions from all over the world? Will it be China or India? Is the Middle East ready?
I think we had better get to work.
At the other extreme is Saudi Arabia which owns the world’s largest oil reserves and doesn’t have to do any work at all or produce anything. The royal family just cuts deals with developed nations to exploit their oil reserves, hopefully by using some of it within the "Kingdom" to produce derivatives of the crude oil and perhaps create some jobs. Saudi’s two big challenges have been keeping minds and bodies meaningfully occupied and sharing the wealth of the country just enough to avoid rebellion. Perhaps the only thing that has grown faster than the national bank account is the royal family (Tens of thousands of members with several thousand entitled princes according to this article.), some of whom are probably lying awake nights now that civil unrest is being openly expressed in the Middle East. In the 911 attacks involving several young Saudi’s, we have seen ample evidence of the truth of that old saw about idle minds or hands and the Devil’s workshop.
In contrast to problems in Japan and Saudi Arabia, the United States has considerable energy resources and an adequate workforce. We have simply chosen to handicap ourselves through failure to develop and use our own energy resources, failure to educate our workforce and align it with some national purpose, and through implementation of a tax and regulatory environment that encourages even American companies to move their operations to lower cost parts of the world and to reinvest their foreign earnings in those countries.
The idea of conserving rather than using our own natural resources may be good, but, for our own security and success we should be exploring and developing and making ready for use every single proven resource (oil, coal, natural gas, and nuclear) we can identify. Even if we were to suddenly double our known oil reserves, we could and probably should continue to import oil just to conserve our own for later decades when the price per barrel is sure to be much higher. Besides, for now, it is a way for us to share our wealth with less developed nations. Well, there is that little problem of funding terrorism.
And we have clearly been on the wrong track in development of our tax and regulatory environment. Examples range from major items such as the ridiculous 35% tax on repatriated earnings of American corporations earning money in other countries, motivating them to reinvest the earnings there instead of here, and futile attempts to change the environment by restricting CO2 emissions, again encouraging investment in other countries rather than here, to trivialities such as a recent example in The State Newspaper of local Richland County zoning requirements that forced a company to build a $50,000 sidewalk along a public road but inside the company fence, a sidewalk from and to nowhere.
IF we are to maintain our leadership in the world and remain wealthy enough to have something to spread around, both at home and in developing nations, and to be able to fund research into such dreams as clean energy and high-speed rail and immortality through health care, we are going to have to focus on making things and doing things, providing goods and services, that are needed NOW around the world and doing a better job of it, at lower cost, than the competition. It’s a big "if" because I am afraid we are becoming more interested in the spreading than the generation of wealth, more interested in social networking than in business and productivity, more interested in administration and control than in execution and accomplishment, and those are sure signs of demise.
And if we fail to maintain our leadership position, who will pick up and carry the banners of freedom and democracy that are enshrined in our founding documents and under which we have operated for more than 200 years and which have made us the desired home for millions from all over the world? Will it be China or India? Is the Middle East ready?
I think we had better get to work.
Wednesday, February 16, 2011
Where Can I Apply for Carbon Credits?
OK, I just gave up my Duracraft bass boat powered by a four stroke 60 HP Mercury outboard. I figure I drove the fifty miles round trip to Lake Murray 30 times a year and burned an average of 3 gallons of gas in the outboard each time. So, that is 1,500 car miles a year at 20 MPG or 75 gallons of gas plus the 90 gallons burned in the outboard for a total of 165 gallons of gas a year I won’t be burning. Do I have to get a grant writer to fill out the paperwork for my carbon credits? In the meantime, I will continue fishing the Congaree River, right in front of our house, for smallmouth bass and stripers from my kayak or my Achilles inflatable powered by a 1994 8 HP Mercury that hardly uses any gas at all.
Tuesday, February 15, 2011
National Debt a Moral Issue
Some folks like the idea of a smaller and less intrusive government, lots of dynamic and competitive private business activity, and individual citizens making choices in free and open markets about what to do with more of their money. Others like the idea of a larger and more intrusive government with lots of “partnerships” with business, revolving doors between business and government, and a larger portion of individual and corporate incomes being taken in taxes by the government so the money can be spent for the “common good” rather than on meeting individual needs and wants. I’m in the former group, but this particular choice is a cultural and practical and economic issue and is not a moral issue.
What is a moral issue is whether or not our senators and representatives and the president have the courage to match taxing with spending to avoid punishing levels of national debt and the resulting interest payments that are currently forecast to consume an ever expanding portion of our national resources thereby making less money available for either government or private spending.
I think our leaders believe correctly that it is not possible to significantly increase tax rates without dampening private business activity and increasing unemployment. I think they know that hundreds of special interest groups and industry groups will be beating down their doors if they propose any serious increases in tax rates or elimination of deductions, exemptions, exclusions and credits. And they know that an entirely different set of special interest groups will be beating down their doors if they try to significantly cut federal spending in any of the big areas, Social Security, Medicare, Defense, and Income Security. So what are they doing? They are tinkering with and arguing over trivial and meaningless cuts in that small portion of the federal budget known as “discretionary spending.” High-speed rail is probably in that category. Cut it!
Of course “WE the people” are to blame. WE are whining about OUR high taxes at all income levels, and WE wail in anguish anytime spending cuts that will affect US are mentioned. WE don’t mind increasing tax rates if they don’t affect US, and WE don’t mind cutting spending in areas that don’t affect US, but don’t mess with MY pocketbook or MY grant money.
And that is why we have a representative democracy instead of a direct democracy. Our elected leaders are supposed to be wiser and better informed than the general citizenry and able to look out, not for their constituents, but for the good of the country as a whole. They are therefore supposed to be able to make wise and informed decisions for our benefit. If they can’t do it because they are always raising money and worrying about the next election and checking out the opinion polls to see how to vote, then we might as well do without them and their humongous and expensive staffs and just vote directly on everything.
And don’t be fooled by anybody who wants to brag about “reducing the deficit.” It is the debt, not the deficit, that needs to be reduced. And that requires a few years of surpluses rather than reduced deficits.
____________________________________________________
Check out this excellent New York Times graphic which illustrates the components of the federal budget for 2010 and 2011.
Watch the “Net Interest” block at middle right while you flip back and forth between 2010 and 2011. It goes from $188B in 2010 to $251B in 2011, an increase of 33.5%. That is an increase of $63B which helps provide some perspective for current proposals to cut spending by $40B to $100B. And this interest expense is at a time of historically low interest rates, very likely to double in the next two or three years even as the level of the debt itself climbs.
What is a moral issue is whether or not our senators and representatives and the president have the courage to match taxing with spending to avoid punishing levels of national debt and the resulting interest payments that are currently forecast to consume an ever expanding portion of our national resources thereby making less money available for either government or private spending.
I think our leaders believe correctly that it is not possible to significantly increase tax rates without dampening private business activity and increasing unemployment. I think they know that hundreds of special interest groups and industry groups will be beating down their doors if they propose any serious increases in tax rates or elimination of deductions, exemptions, exclusions and credits. And they know that an entirely different set of special interest groups will be beating down their doors if they try to significantly cut federal spending in any of the big areas, Social Security, Medicare, Defense, and Income Security. So what are they doing? They are tinkering with and arguing over trivial and meaningless cuts in that small portion of the federal budget known as “discretionary spending.” High-speed rail is probably in that category. Cut it!
Of course “WE the people” are to blame. WE are whining about OUR high taxes at all income levels, and WE wail in anguish anytime spending cuts that will affect US are mentioned. WE don’t mind increasing tax rates if they don’t affect US, and WE don’t mind cutting spending in areas that don’t affect US, but don’t mess with MY pocketbook or MY grant money.
And that is why we have a representative democracy instead of a direct democracy. Our elected leaders are supposed to be wiser and better informed than the general citizenry and able to look out, not for their constituents, but for the good of the country as a whole. They are therefore supposed to be able to make wise and informed decisions for our benefit. If they can’t do it because they are always raising money and worrying about the next election and checking out the opinion polls to see how to vote, then we might as well do without them and their humongous and expensive staffs and just vote directly on everything.
And don’t be fooled by anybody who wants to brag about “reducing the deficit.” It is the debt, not the deficit, that needs to be reduced. And that requires a few years of surpluses rather than reduced deficits.
____________________________________________________
Check out this excellent New York Times graphic which illustrates the components of the federal budget for 2010 and 2011.
Watch the “Net Interest” block at middle right while you flip back and forth between 2010 and 2011. It goes from $188B in 2010 to $251B in 2011, an increase of 33.5%. That is an increase of $63B which helps provide some perspective for current proposals to cut spending by $40B to $100B. And this interest expense is at a time of historically low interest rates, very likely to double in the next two or three years even as the level of the debt itself climbs.
Tuesday, February 8, 2011
Teachable Moment Flubbed
President Obama spoke to the American Chamber of Commerce yesterday and promised to do a number of things, nineteen I think, to improve business in the USA. Here they are in the order he mentioned them:
1. Invest in biotechnology
2. Invest in information technology
3. Invest in clean energy technology
4. Reform the patent system
5. Directly assist entrepreneurs (See this posting.)
6. Increase and make permanent R&D tax credit
7. Put people to work building roads and bridges
8. Connect 80% of the country with high speed rail
9. Get high speed internet to virtually all Americans
10. Reform K-12 education
11. Train 100,000 new math and science teachers
12. Make college more affordable
13. Revitalize community colleges
14. Freeze domestic spending for five years
15. Take additional steps to put nation on sounder financial footing
16. Merge, consolidate, reorganize the government
17. Open new export markets
18. Lower corporate tax rate and eliminate loopholes
19. Remove outdated and unnecessary regulations
Some of those look pretty good (4, 14, 15, 16, 17, 18, and 19), some are questionable at best (8, 9, 10, 12, and 13), and some seem to me to be good ideas but outside the scope of the federal government (1, 2, 3, 5, 7, 11, 12, and 13). So, it's a very ambitious list which is what we should expect from somebody running for office. But then he asked for something from business in return for all those favors:
"If we're fighting to reform the tax code and increase exports, the benefits cannot just translate into greater profits and bonuses for those at the top. They have to be shared by American workers, who need to know that opening markets will lift their standard of living as well as your bottom line." (Read the whole speech here.)
I don't like the structure of that first sentence because it implies that profits are for "those at the top" and that nobody except "those at the top" gets either profits or bonuses. I know the president knows that profits are paid out as dividends to the owners or are invested in the business and do not go to "those at the top" except possibly in their ownership positions. I think he also knows that profits can't be "shared by American workers," because such distribution would be a before profit charge and would result in lower profits and lower taxes for the corporation and less money for dividends and reinvestment. And I think he knows that bonuses are spread widely, sometimes to almost all employees in a company. And then there is that class war-expanding implication that American owners and American managers are not American workers.
President Obama likes to talk about “teachable moments,” but I think he flubbed a good one here with that misleading statement. Unfortunately, far too many Americans are anti-business and have little or no business education and might think the statement makes perfect sense and even be inclined to vote for the president because of it.
It’s almost as economically illiterate as the lead sentence by reporter Adam Beam in today’s The State Newspaper story about the Drew Wellness Center, a pool and exercise facility built by the City of Columbia, SC, in a lower income neighborhood. According to Mr. Beam, “Columbia’s Charles R. Drew Wellness Center earns $400,000 every year while spending $1 million.” Well, the Drew Wellness center may have revenues of $400,000 a year but it doesn’t "earn" a dime. It loses $600,000 a year. Could the results be improved if the $400,000 it "earns" were shared with the lifeguards at the pool?
Mr. Obama could have said, “…the benefits cannot just translate into greater bonuses for those at the top and higher profits for the corporations.” That is a statement I can agree with 100% because, if profits increase, the result should be increased investment resulting in more business and more successful businesses and increased levels of employment, though not necessarily more pay for individual employees.
There is one sure way for employees to share in the profits of corporations and that is to become owners of shares. Of course that may lead to sharing in losses as well, and most folks on the lower scale of incomes seem to tend to prefer some protection of their pay even when the company is losing money. The problem is that “profit sharing” has to be balanced with “loss sharing.”
Many large companies have had “profit sharing” for decades, Eastman Kodak and Procter and Gamble being two of the pioneers, but the term is actually a euphemism for variable pay, pay that increases when the company is more successful and decreases when the company is less successful. It’s a good strategy because it motivates employees to focus on company results, provides a cushion for the total enterprise, and protects jobs during recessions and other difficult times. The way it worked in my company was that we were paid during the year at an official target salary minus a certain percentage depending on level of management. Then, if all was well and goals had been met at the end of the year, we could receive bonuses that would take our compensation up to a maximum of the official target salary plus that same percentage. Bonuses varied!
I just wish our well-educated president could help out with some elementary education in important business principles rather than play to his base with misleading statements. We can’t afford to miss those teachable moments.
And yes, I know that executive pay is out of whack and is based on a corrupt system, but that is a different problem best addressed with reforms in corporate governance and compensation systems and not by jacking everybody else’s pay up. Somehow executives seem to have gotten the idea they should be paid like entertainers, athletes, coaches, and news anchors.
1. Invest in biotechnology
2. Invest in information technology
3. Invest in clean energy technology
4. Reform the patent system
5. Directly assist entrepreneurs (See this posting.)
6. Increase and make permanent R&D tax credit
7. Put people to work building roads and bridges
8. Connect 80% of the country with high speed rail
9. Get high speed internet to virtually all Americans
10. Reform K-12 education
11. Train 100,000 new math and science teachers
12. Make college more affordable
13. Revitalize community colleges
14. Freeze domestic spending for five years
15. Take additional steps to put nation on sounder financial footing
16. Merge, consolidate, reorganize the government
17. Open new export markets
18. Lower corporate tax rate and eliminate loopholes
19. Remove outdated and unnecessary regulations
Some of those look pretty good (4, 14, 15, 16, 17, 18, and 19), some are questionable at best (8, 9, 10, 12, and 13), and some seem to me to be good ideas but outside the scope of the federal government (1, 2, 3, 5, 7, 11, 12, and 13). So, it's a very ambitious list which is what we should expect from somebody running for office. But then he asked for something from business in return for all those favors:
"If we're fighting to reform the tax code and increase exports, the benefits cannot just translate into greater profits and bonuses for those at the top. They have to be shared by American workers, who need to know that opening markets will lift their standard of living as well as your bottom line." (Read the whole speech here.)
I don't like the structure of that first sentence because it implies that profits are for "those at the top" and that nobody except "those at the top" gets either profits or bonuses. I know the president knows that profits are paid out as dividends to the owners or are invested in the business and do not go to "those at the top" except possibly in their ownership positions. I think he also knows that profits can't be "shared by American workers," because such distribution would be a before profit charge and would result in lower profits and lower taxes for the corporation and less money for dividends and reinvestment. And I think he knows that bonuses are spread widely, sometimes to almost all employees in a company. And then there is that class war-expanding implication that American owners and American managers are not American workers.
President Obama likes to talk about “teachable moments,” but I think he flubbed a good one here with that misleading statement. Unfortunately, far too many Americans are anti-business and have little or no business education and might think the statement makes perfect sense and even be inclined to vote for the president because of it.
It’s almost as economically illiterate as the lead sentence by reporter Adam Beam in today’s The State Newspaper story about the Drew Wellness Center, a pool and exercise facility built by the City of Columbia, SC, in a lower income neighborhood. According to Mr. Beam, “Columbia’s Charles R. Drew Wellness Center earns $400,000 every year while spending $1 million.” Well, the Drew Wellness center may have revenues of $400,000 a year but it doesn’t "earn" a dime. It loses $600,000 a year. Could the results be improved if the $400,000 it "earns" were shared with the lifeguards at the pool?
Mr. Obama could have said, “…the benefits cannot just translate into greater bonuses for those at the top and higher profits for the corporations.” That is a statement I can agree with 100% because, if profits increase, the result should be increased investment resulting in more business and more successful businesses and increased levels of employment, though not necessarily more pay for individual employees.
There is one sure way for employees to share in the profits of corporations and that is to become owners of shares. Of course that may lead to sharing in losses as well, and most folks on the lower scale of incomes seem to tend to prefer some protection of their pay even when the company is losing money. The problem is that “profit sharing” has to be balanced with “loss sharing.”
Many large companies have had “profit sharing” for decades, Eastman Kodak and Procter and Gamble being two of the pioneers, but the term is actually a euphemism for variable pay, pay that increases when the company is more successful and decreases when the company is less successful. It’s a good strategy because it motivates employees to focus on company results, provides a cushion for the total enterprise, and protects jobs during recessions and other difficult times. The way it worked in my company was that we were paid during the year at an official target salary minus a certain percentage depending on level of management. Then, if all was well and goals had been met at the end of the year, we could receive bonuses that would take our compensation up to a maximum of the official target salary plus that same percentage. Bonuses varied!
I just wish our well-educated president could help out with some elementary education in important business principles rather than play to his base with misleading statements. We can’t afford to miss those teachable moments.
And yes, I know that executive pay is out of whack and is based on a corrupt system, but that is a different problem best addressed with reforms in corporate governance and compensation systems and not by jacking everybody else’s pay up. Somehow executives seem to have gotten the idea they should be paid like entertainers, athletes, coaches, and news anchors.
Friday, February 4, 2011
Government Barriers, Government Bridges
This is an unintentionally humorous presentation by a very talented guy explaining that, while it is true that the government has constructed many barriers to successful entrepreneurism, mostly in the form of high corporate and personal marginal tax rates and complicated regulations, the same organization is now going to begin construction of bridges, for select participants, over those barriers.
A more honest graphic would have shown those barriers as stumbling blocks in place of, or perhaps surrounding, the "Valley of Death." And a far more democratic solution to the problem would be reduction of the barriers for all with lower marginal tax rates, fewer deductions, exemptions, exclusions, and credits, and simpler and less intrusive regulations.
To steal and modify President Reagan's line, "Sometimes our left hand doesn't know what our far left hand is doing."
A more honest graphic would have shown those barriers as stumbling blocks in place of, or perhaps surrounding, the "Valley of Death." And a far more democratic solution to the problem would be reduction of the barriers for all with lower marginal tax rates, fewer deductions, exemptions, exclusions, and credits, and simpler and less intrusive regulations.
To steal and modify President Reagan's line, "Sometimes our left hand doesn't know what our far left hand is doing."
OK, I Was Wrong, Partly (About Health Insurance)
During the health care debates of 2010, I was thinking that the idea of mandatory insurance was a good one and said so in a blog posting last April. I wasn’t even thinking about the question of constitutionality. I was just thinking that when anybody is injured or gets sick and has big health care expenses, somebody is going to have to pay for it and that somebody should be the person incurring the costs and that the best way for such persons to cover the expense, unless they are fairly wealthy, is with insurance. I saw it as a matter of personal responsibility.
But, now that I have heard the arguments, pro and con, about the constitutionality of the federal government mandating that citizens purchase a product from a private company, it seems to me not to meet the test. If it did, there are lots of things we could mandate such as, for example, getting a job. Everybody who is not financially self sufficient could be required to get a job, and companies could be required to hire them regardless of pre-existing conditions such as criminal records, unwillingness to work, or lack of any recognizable skills. There could even be a public option as a last resort or for those who simply prefer to work for the government! Well, I think it’s easy to see that letting the federal government mandate private economic activity goes much further than letting the government regulate already occurring economic activity and opens up a very ugly and tangled and probably decomposing can of worms.
That is not to say that I think the Patient Protection and Affordable Care Act is dead. Just as baseball umpire Bill Klem, when challenged about delay in calling a pitch, declared, “Sonny, it ain’t nothing till I call it,” the High Court has a similar position about the health care act constitutionality question and will eventually give us the answer with a 5-4 ruling. And even if The Supreme Court rules the current legislation unconstitutional, it is clear from 45 years of precedence with Medicare that the government does have the power to tax us and use the money to buy something for us which is, of course, the health care system many wanted in the first place. I think that a Great Britain National Health Service type of health care would be terrible but maybe not as bad as the mess that has been created with the Patient Protection and Affordable Care Act.
So, although I was wrong about mandatory insurance, I still believe I was right with my proposal for two parallel systems, one operated by the government and available to anyone on an income adjusted fee basis, and one private system, available to anyone at competitive market rates with complete price transparency. That April 23, 2010, post, Just In Case You Are Happy (With the Health Care Legislation, contained a bit more detail and got several favorable comments.
Here is a summary statement from that posting: So, under this simple plan I am suggesting, there would be two systems, one “public” and one “private” operating in parallel, similar to food stamp and public housing programs, with every single person having access to health care. Lots of folks wanted a “public option” insurance plan, so surely this public option health care without worrying about the third party would be pleasing to them. And those who object to increased government involvement would be happy because they would have additional freedom to source their health care from a continuously improving, competitive, private, free-enterprise network of doctors and hospitals.
I also suggested, and still believe, in Universal Food Stamps: Next Big Thing, that “Universal Health Care” makes about as much sense as “Universal Food Stamps” or “Universal Housing.” And that’s very little.
The most worrisome recent development in the health care insurance saga is SC Senator Lindsey Graham’s proposal to allow individual states to opt out of the plan as currently designed. We need more choice, not less, and I certainly don’t want the folks in the South Carolina State House deciding what our health care options are or whether or not we have access to any federal plan. That is a “states right” I obstinately oppose. That would just lead to South Carolina funding the plan for beneficiaries in other states. We cannot afford that!
The most encouraging recent development is the granting, so far, of waivers to 733 businesses and non-profits allowing them to delay implementation of certain provisions, and the roll-back of some new tax-reporting requirements in the law. These provide ample evidence of weaknesses in the Patient Protection and Affordable Care Act.
But, now that I have heard the arguments, pro and con, about the constitutionality of the federal government mandating that citizens purchase a product from a private company, it seems to me not to meet the test. If it did, there are lots of things we could mandate such as, for example, getting a job. Everybody who is not financially self sufficient could be required to get a job, and companies could be required to hire them regardless of pre-existing conditions such as criminal records, unwillingness to work, or lack of any recognizable skills. There could even be a public option as a last resort or for those who simply prefer to work for the government! Well, I think it’s easy to see that letting the federal government mandate private economic activity goes much further than letting the government regulate already occurring economic activity and opens up a very ugly and tangled and probably decomposing can of worms.
That is not to say that I think the Patient Protection and Affordable Care Act is dead. Just as baseball umpire Bill Klem, when challenged about delay in calling a pitch, declared, “Sonny, it ain’t nothing till I call it,” the High Court has a similar position about the health care act constitutionality question and will eventually give us the answer with a 5-4 ruling. And even if The Supreme Court rules the current legislation unconstitutional, it is clear from 45 years of precedence with Medicare that the government does have the power to tax us and use the money to buy something for us which is, of course, the health care system many wanted in the first place. I think that a Great Britain National Health Service type of health care would be terrible but maybe not as bad as the mess that has been created with the Patient Protection and Affordable Care Act.
So, although I was wrong about mandatory insurance, I still believe I was right with my proposal for two parallel systems, one operated by the government and available to anyone on an income adjusted fee basis, and one private system, available to anyone at competitive market rates with complete price transparency. That April 23, 2010, post, Just In Case You Are Happy (With the Health Care Legislation, contained a bit more detail and got several favorable comments.
Here is a summary statement from that posting: So, under this simple plan I am suggesting, there would be two systems, one “public” and one “private” operating in parallel, similar to food stamp and public housing programs, with every single person having access to health care. Lots of folks wanted a “public option” insurance plan, so surely this public option health care without worrying about the third party would be pleasing to them. And those who object to increased government involvement would be happy because they would have additional freedom to source their health care from a continuously improving, competitive, private, free-enterprise network of doctors and hospitals.
I also suggested, and still believe, in Universal Food Stamps: Next Big Thing, that “Universal Health Care” makes about as much sense as “Universal Food Stamps” or “Universal Housing.” And that’s very little.
The most worrisome recent development in the health care insurance saga is SC Senator Lindsey Graham’s proposal to allow individual states to opt out of the plan as currently designed. We need more choice, not less, and I certainly don’t want the folks in the South Carolina State House deciding what our health care options are or whether or not we have access to any federal plan. That is a “states right” I obstinately oppose. That would just lead to South Carolina funding the plan for beneficiaries in other states. We cannot afford that!
The most encouraging recent development is the granting, so far, of waivers to 733 businesses and non-profits allowing them to delay implementation of certain provisions, and the roll-back of some new tax-reporting requirements in the law. These provide ample evidence of weaknesses in the Patient Protection and Affordable Care Act.
Wednesday, February 2, 2011
High-Speed Rail - Coming to America!
“Within 25 years, our goal is to give 80% of Americans access to high-speed rail, which could allow you go places in half the time it takes to travel by car.” – President Barack Obama, 2011 State of the Union Address
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We loved living in Japan from 1992 to 1995, and one of the joys was the extensive public transportation system. High-speed rail connects all the major cities, and hundreds of conventional trains and subways connect smaller towns with the high-speed rail stations. A very high percentage of the population lives within easy walking distance of a train or subway station. That extensive rail system, combined with the ultra clean, propane-burning, taxis lined up at train stations awaiting customers, made driving totally unnecessary. And it was a good thing, because the traffic congestion was bad.
Why does the United States not have such a rail system? There is a simple answer: Japan has 40% as many people as we have, all jammed in an area about the size of California. So, their population density is approximately 15 times as high as ours. And Europe’s population density is about six times ours.
It may well be possible to “give 80% of Americans access to high-speed rail,” depending on what the meaning of “access” is, but I suspect few of them will buy the expensive tickets and take the long rides when air travel is certain to be so much faster and cheaper and better suited to our long distances and sparse populations. A much better plan would be to focus on improved airports, better security procedures, and high-tech air traffic control systems. Author Greg Lindsay makes the case for air travel very well in a 2/1/2011 New York Times Op Ed. Did you know our air traffic control system doesn’t even use GPS technology? I didn’t.
A single high-speed line from Boston to Washington might be a good idea, but building extensive high-speed rail around the country with air travel already in place would be as foolish as a developing nation running telephone wires all over the country with cellular service already available.
Here are some simple exhibits that illustrate the difficulties with rail connectivity in the US vs. Europe and Japan.
I got the population density figures here.
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