Postal Woes Continue

In today's New York Times column, Joe Nocera reveals an absurdity in the current relationship between the Postal Service and the US Government.  The only thing more absurd than the situation he identifies is the solution he proposes.

When the US Postal Service was "spun off" as an independent agency in 1971, it was not given responsibility for the health and retiree benefits of its employees.  That responsibility remained with the federal government, and some formula was established for payment by the USPS to the government to fund those benefits.  A payment of $5.5B is due tomorrow, and the USPS does not have the money.

The absurdity revealed is that all the billions the USPS has paid into government coffers over the decades has been invested in US Treasury Securities and spent on other government programs, just as our Social Security taxes paid have been invested in government bonds and spent.  So, there is nothing in those so-called trust or escrow funds, neither Social Security nor USPS retirement and health care funds, but government debt, IOU's, that must be redeemed in cash in order for any benefits to be paid.  And the only way for the government to get that cash is to borrow it elsewhere.

Mr. Nocera's solution to the problem seems to be to just eliminate the requirement for payment by the USPS.  My solution would be to shift the burden of responsibility for health and retiree benefits to the USPS and let them follow the same funding requirements that private companies have to follow, investing such funding in a highly diversified basket of stocks and bonds.  Both Mr. Nocera and I would free the USPS from politically motivated government restrictions on its operations and allow it to operate as a business.  We are not holding our breaths.


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Defining and Preserving the Middle Class

During the 1959-60 school year at Maryville High School I was working on college plans. The University of Tennessee, 15 miles away in Knoxville, tuition of around $250 per academic year, was the default choice. Vanderbilt University, tuition about $900 a year I believe, was 200 miles of two lane road away in Nashville, and that was where I wanted to go. Mother had told me that if I got a tuition scholarship I could go to Vandy. If not, UT would be the choice.

I remember Daddy completing a financial statement as part of the needs-based scholarship application process. His income from the family furniture business was a bit more than $5000 a year, a solid middle class income, I suppose, for the time. Of course there were lots of things we didn’t have. No color TV, no cable TV, no cell phones, no air conditioning in the house or in the car, a 1953 Ford station wagon, bought used, no second car, no expensive vacations, no restaurant meals except on vacation, no computers. My parents were necessarily frugal, typical for middle class families of the time. They were solid tithing members of First Baptist Church but didn’t play golf or have any club memberships. Well, Daddy was a VFW member.

I was working at the furniture store one day when Mother called, offering sympathy and saying a letter had come from Vandy granting admission but without financial aid. I rushed home and called the admissions director, “long distance” no less (an extravagance at the time), to ask what had happened. He said my application was incomplete because my parents had not sent the financial statement. I told him we had completed it and mailed it in. He said he would look again and, after a few minutes, came back to the phone to say he had found it and that I would be getting the scholarship after all. Well, a little follow-up certainly paid off in that case.

At Vandy I learned that there was a big spread in personal incomes even in the 1960’s, long before disgraced presidential candidate John Edwards began his populist rant about “two Americas” and President Obama began talking about spreading wealth around. One undergraduate during my time there was son of the founder of Holiday Inn, and one was a relative of Winston Churchill. I recall a conversation with a fraternity brother, son of a physician, who said that his dad made about $75,000 a year. That seemed to me to be an awful lot of money, representing almost fifteen years of hard work by my dad.

But my time for easy living was coming, I thought. After four years at Vandy and a year at the University of Tennessee, proudly holding BE and MS degrees in Chemical Engineering, I started work at Eastman Chemical Company in Kingsport, TN, at a salary of $770 per month, a little less than $10,000 a year, and figured I was starting out in the middle class, whatever that meant. Still no color TV or new car or central air, etc. But I was going to earn back in one year the approximately $10,000 all-in cost of a Vanderbilt education.

I’m just thinking about this history because of the current uproar about rumored disappearance of the middle class as the rich are supposedly getting richer and the poor getting poorer. I’m thinking about Vice President Biden’s claim a few days ago that he is a middle class guy with his income last year of $379,000. Well, if that is what it takes to be middle class, it is a small group for sure. I’m wondering just what the heck the middle class is anyway? We have a clear government-generated, ever-changing, definition of the Poverty Line, so why can’t we get one for upper and lower limits on incomes for the Middle Class?

Hoping to answer those questions, I dug out some historical income distribution data from the Census bureau. I shows how family incomes, in constant 2010 dollars, have changed over the past few decades, for the lowest, second lowest, middle, second highest, and highest quintiles of earners in the USA. The Y axis is an exponential scale so a straight line represents a constant percent growth rate.  Click on the chart for a high resolution view.

Note the long term trends of increasing real incomes for everybody but the bottom 20% until 2000. Since 2000, incomes have been static, probably the major reason for today’s class envy. These data do not include food stamps and housing subsidies (see note at bottom) so such payments, if included, would certainly result in a significant boost in the bottom quintile data.

I don’t see any evidence here of a vanishing middle class but do see good support for defining the Middle Class as families with incomes greater than the mean of the Lower Middle Quintile, $37,066, and less than the mean of the Higher Middle Quintile, $91,991. Such a definition would enable us to talk intelligently about the size and living standards of the Middle Class, determine who has a right to claim to be Middle Class, and also would assure that the Middle Class, like the Poor, would never disappear. If that were to be accomplished, we could quit worrying about Middle Class vanishing acts and start focusing on the national economy rather than class warfare.

And, as far as the cost and value of college educations go, I see that today the cost of four years at Vandy is about $250,000 and Chemical Engineers are starting out at about $60,000 a year, often with a load of student loan debt. Something is definitely gone out of whack there since my Vandy days, and I am guessing it has to do with ever increasing availability of government grants and loans pumping up demand and prices over the decades.


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Information about and source of data:

Census money income is defined as income received on a regular basis (exclusive of certain money receipts such as capital gains) before payments for personal income taxes, social security, union dues, medicare deductions, etc. Therefore, money income does not reflect the fact that some families receive part of their income in the form of noncash benefits, such as food stamps, health benefits, subsidized housing, and goods produced and consumed on the farm. In addition, money income does not reflect the fact that noncash benefits are also received by some nonfarm residents which may take the form of the use of business transportation and facilities, full or partial payments by business for retirement programs, medical and educational expenses, etc. Data users should consider these elements when comparing income levels. Moreover, users should be aware that for many different reasons there is a tendency in household surveys for respondents to underreport their income. Based on an analysis of independently derived income estimates, the Census Bureau determined that respondents report income earned from wages or salaries much better than other sources of income and that the reported wage and salary income is nearly equal to independent estimates of aggregate income.

http://www.census.gov/hhes/www/income/about/index.html

Golf: What's the Point?

A WSJ article this morning documents the suffering of some golf enthusiasts and investors over the past few years.  Having been a semi-serious golfer in my early retirement years, taking some lessons, practicing regularly, playing a couple of times a week at least, and carefully entering my scores in the computer at The Windermere Club at Longcreek Plantation, promising myself a new set of clubs when my handicap dropped into the teens, as I was certain it eventually would, I feel qualified to comment with some authority on this issue.

Here is the bottom line on the game of golf: Unless a person is a natural athlete or plans on bending the rules, he or she should not plan on handicap improving with age or even with experience.  The fascinating and habit forming thing about golf is that of the 90 to 100 shots the average amateur makes during an 18 hole round of golf, a dozen or so will have outcomes as good as Tiger Woods would have obtained.  There will be that long tee shot up the middle, that approach shot that stops six feet from the pin, and that 20 foot putt that rolls right up to the hole, hesitates briefly, and then drops in.  And those few good shots, representing no more than random statistical variation, are enough to convince the poor golfer that the potential for excellence is there.  But the gap between 10% of shots having excellent outcomes and 95% having excellent outcomes is like the gap between a Waffle House cook and the finest chefs of the world.

And, of course the thing that enables duffers like me to indulge those fantasies of success is the handicap system that allows us to play with golfers of all levels.  We don’t see klutzes on the tennis courts because there is no way to design a handicap system that would work in a one-on-one face off that requires all participants to be able to successfully return serves.  But on golf courses, klutzes abound.

The WSJ article focused, not on handicaps and skill levels, but on the financial bottom line, the money side of golf, the widespread failure of private residential golf courses, the money lost by investors in them, and the abundant opportunities created by those problems to get in now and make up for lost time, or to lose more.  A big part of the problem stems from the fact that purchase of golf course lots on private and exclusive courses designed by big names commanded top dollar during the dot com and real estate booms, even as golfing popularity was fading, and usually included an ongoing commitment to payment of membership dues.  Maybe that kind of slavery is the reason so many had the word “Plantation” included in their names.  Now sellers are often willing to accept pennies on the dollar just to escape the ongoing membership fees.  Some examples cited are in South Carolina, Belfair Plantation, Colleton River Plantation, and Berkeley Hall near Bluffton and The Cliffs near Spartanburg.  Near Bluffton, according to the article, lots that originally sold for $150,000 are now available for $1, and such a sale earns the selling agent a $5,000 bonus.  At The Cliffs, where the minimum lot price was $200,000, there was a recent resale at $10,000.

Of course most of the folks who made those risky investments with visions of soaring values and plummeting or at least steady handicaps are wealthy and are able to stand the losses without risking their primary homes or their access to health care or having to apply for Food Stamps.  And, not all the developments are failing, and many investors, even in the ones that are failing, are quite happy with beautiful homes and golf courses and a bunch of friends they enjoy playing golf with whether their handicaps improve or not.  So we don’t need to shed any tears.

But these stories might make us think twice about how we want to spend that precious discretionary time we have in retirement and how we want to invest and spend the money we have saved.  In my case, the handicap got stuck at 20, six or seven years ago, and I never got the new set of clubs which, I am certain, would have resulted in shaving of a few more strokes.  Oh well, now I can just imagine, and that will require a very active imagination because I am down to playing maybe two or three times a year and always breaking 100, on the high side that is.  Just for the record, my best Windermere score ever, and I still have the scorecard, was 83.  In spite of my training in statistics and variation I saw no reason at the time, basking in the glow of that win, that I couldn’t repeat it on a regular basis. 

I hasten to say that some of the luckiest retirees in the world are those who have groups of good friends with whom they gather regularly for rounds of golf and just chatting and keeping up with each other.  Also lucky are retired couples who enjoy golf together.  Golf can be a great social activity, and that, rather than low handicaps, competition, or financial gain, is the secret to golf success for most of us.

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Personal Responsibility, Humility, and Making Things Happen

I've been a little worried about what a second term for President Obama might look like but feel better now that I know that Jerry Springer favors his reelection. I would have totally discounted Springer's opinion because of that raunchy, humiliating, disgusting, show he came up with but now know that I can't hold Springer responsible for it because he didn't really do it. It was some teacher he had or some highway that was built or maybe the government funded internet that resulted in The Jerry Springer Show. 


I guess the point that President Obama was trying to make in his claim that, "If you've got a business, you did not build that - somebody else made that happen," is that we all stand on the shoulders of our predecessors. Well, that is true.  Henry Ford would have been seriously hampered if the wheel had never been invented, and Ben Franklin's experiments with electricity certainly paved the way for Edison's development of applications for electricity and even for that internet that the government developed. 


But the president is absolutely wrong with the "somebody else made that happen" part of his statement because that is exactly what moves us forward, individual people making things happen.  Ben Franklin and Thomas Edison and a long string of energetic and creative people involved in development of the internet all invested their time and talents to make things happen, and thousands of others, founders and scientists at Microsoft and Apple and Intel and hundreds of other companies have invested their time and talents and money to make things happen. 


And because of all those people, someone now can start an internet business selling hot sauce or tee shirts or some other thing he or she has invented or a book written or a song recorded or a social network.  But if such a person starts such a business, we can be sure that person has "made it happen," and can confidently give that person credit for having done so.  And, if it turns out to be a bad business or a bad product, like The Jerry Springer Show, we can confidently and comfortably blame the person who made it happen. 


Personal responsibility is essential, and, if we all agree to own up to our mistakes when things don't turn out well and just express a little humility when they do, we will be stronger and happier.  And, if we choose not to try to make anything happen, to just adopt a philosophy of total dependence, we need to recognize that there are personal consequences to that as well.

Home Works of America Needs Your Vote - Today

Since June, 2006, I have been helping Home Works of America repair homes of elderly, low-income homeowners.  It has been extremely satisfying, and I don't know any possible way that an organization could get more bang for the donated buck than Home Works does.

We use donated warehouse space and trucks and trailers to move supplies and tools to and from the homes we are working on.  Here is a shot of me driving a 1987 Dodge truck that we still use, as a last resort.

Toyota is giving away one vehicle per day for 100 days, on Face Book, to charitable organizations.  500 organizations were approved to compete, and five of them are in the running on each of the 100 days.  TODAY is the day for Home Works.  If you have a Facebook account, please log in at this link and cast your vote for Home Works.  Voting is allowed until midnight.  After voting, you will get a report on the current status of the race.

If you don't have a Facebook account, please forward the email to someone who does.  

Please excuse this unusual request.  I appreciate your interest in my blog and will not normally be asking readers to do anything except read, but this seemed to be a special case, and the race is very close.

Volunteers Robbing People of Jobs

It was just a casual conversation at a birthday party, but one particular comment from a person I had just met got my attention and caught me a bit off balance.  Several of us who were at the party are volunteers for Home Works of America, a local charitable organization that was the conversation topic. The gist of the disturbing comment was that any volunteer activity robs somebody of a paying job and swells the unemployment ranks.

Maybe the speaker was trying to be funny, but he wasn’t smiling.  He was a retired government employee and, in subsequent conversation, opined that the primary beneficiaries of government welfare programs are not the people receiving the benefits but the employees hired to administer the programs.  The welfare recipients, he argued, get a little assistance in their day to day living but the employees who administer and distribute those benefits make comfortable livings and get generous retirement benefits.

What reminded me of this conversation was the McGurn column in today’s WSJ about Chicago activities of Catholic Charities, a charitable organization currently under pressure by the Obama Administration to abandon its principles and fundamental teachings on marriage and family by offering free contraceptives as part of its health insurance under the new Patient Protection and Affordable Care Act.

According to McGurn, Chicago Catholic Charities has 2,700 employees and 17,000 volunteers.  The unfortunate thing is that the bulk of funding for Chicago Catholic Charities comes from the federal government, strings attached.  Of course a primary reason that Chicago Catholic Charities has traditionally received federal grants is that 92 cents of every dollar of funding goes directly to needy recipients and only 8 cents to overhead such as salaries.

A specific example, cited by McGurn, of Catholic Charities’ volunteer-rich activities is its program to help the elderly stay in their own homes by providing day care, delivered meals, and house cleaning services at a cost of about $12,000 per year per person thereby avoiding the Medicare expense of $43,000 a year to keep an elderly person in a nursing home. 

Other major Chicago Catholic Charities activities included, in 2011 alone, provision of 21.5 million meals and 458,000 nights of shelter for the homeless. 

Rev. Michael Boland, CEO of the organization, is quoted in the article as saying he has no idea what percentage of the people they assist are Catholic because that is a question they never ask.  He does know that 80% of the people they serve are women and children so is a bit disturbed at being accused of declaring war on women. 

However this controversy plays out, there will be an upside.  If Catholic Charities prevails and is able to continue to receive federal funds to provide services to the poor in Chicago without compromising its principles, millions will be served at very low cost, and tens of thousands of employees and volunteers will be given the opportunity to serve selflessly in an efficient and effective organization.

If the government prevails, and Catholic Charities has to cease and desist all federally funded activities, the government can hire thousands, or contract with organizations that will do so, to replace all those volunteers and thereby create some paying jobs.  Of course a lot less than 92 cents of the dollars spent will go directly to the poor, but who are the primary beneficiaries supposed to be anyway?  Maybe that is what the Big Government folks are thinking.

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New Governing System In Place?

There is a report today in the NYTimes about waivers being granted by the Obama Administration to allow states to bypass requirements of the No Child Left Behind legislation.  I'm no fan of NCLB, but is this to be the pattern of the future...Congress passing complex and onerous legislation and the current and future administrations deciding what if anything in the legislation to enforce?  The current administration has already granted hundreds of waivers for its own signature health care legislation, and if a Republican president is elected this fall, the number will certainly accelerate.  It is too much power for the Executive Branch I believe though I am also concerned about the ability of our legislature to pass meaningful, workable, efficient, and effective legislation.  Somebody is going to have to quit campaigning and fund raising, take some basic courses on the Constitution, law, and economics, start listening to the citizens, and get back to work.  I hope the health care law is the last one we "have to pass so we can see what is in it."


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History of Federal Debt in the USA - An Issue for Patriots

I have done several posts on our federal debt crisis but never one that covered almost our entire history.  Here are some of the earlier ones:

US Subprime Debt Set to Explode, January 20, 2010, pointed out that the unfunded liabilities for Social Security and Medicare dwarf the already depressing accumulated debt totals and that we are in for big problems when interest rates return to more normal levels.
Reduced Deficit = Increased Debt, July 5, 2011, pointed out that even budget hawks are talking only about reducing deficits and not about reducing debt which would require running surpluses as we had at the end of the Clinton administration.
National Debt a Moral Issue, February 15, 2011, suggested that big government vs. small government is not a moral issue and that reasonable people may differ on that issue but that bankrupting the country by funding big government on borrowed funds is immoral.
Total Government Spending and Debt as a Percent of GDP, March 29, 2010, took a look at the record just since 1970.
Our National Debt and the Lenders We Owe, February 16, 2010, showed estimated US debt holdings by country with Japan in first place, China second, and the UK third.
Oh What a Debt We Owe..., January 23, 2010, highlighted the Social Security and Medicare obligations and included an attempt to predict the future.
OK, Maybe I'm Wrong Again (About the National Debt), March 7, 2010, is an attempted debunking of Time Magazine's In Defense of Debt.
What Are Your Assumptions, February 16, 2012, included an explanation of how vulnerable we are now to the almost inevitable increase in interest rates.
Post WWII Economic History in a Nutshell, January 28, 2012, was an attempt to identify the first oil crisis in 1974 as a major turning point in our ability to spend without increasing debt.
Even Warren Buffett Can Think Fuzzily; Maybe Keynes Also, August 21, 2011, showed that there is a mathematical relationship between economic growth, interest rates, and acceptable levels of debt.

Perhaps I am in a bit of a rut and tending to repeat myself, but only ten postings on debt out of more than 400 total is not too bad.  One reason I surveyed these previous posts was to make sure I hadn't already presented a chart like the one below,debt as a percent of GDP with some notations all the way back to the late 1700's when we were paying off Revolutionary War debts.

Don't take any comfort in the fact that our debt as a percent of GDP is still lower than at the end of WWII, a national crisis that threatened our very existence and demanded the total attention and resources of the entire country for four years.  It was very different from the wars we are now involved in, sending our soldiers off to foreign lands to fight while the rest of us just keep on with the good life, borrowing money to pay for our indulgences.

It is clear that the debt is getting dangerously high by historical standards, and that there are some new and different problems we must face:

• Discretionary spending is an ever decreasing part of the budget while social entitlements are growing exponentially.
• The unfunded liabilities dwarf even the published debt figures.
• International competition is tougher and increasing, resulting in stifled domestic economic growth.
• We are getting by now because of historically low interest rates.  That is not going to last forever.

Click on the chart for a more readable view.

It looks like we may have to get back to work and beef up our national competitiveness if we really want all that security the federal government is promising.

After all, it is Independence Day, 2012.



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Looking for a Goldilocks Government...Just the Right Size

Size of government as a percent of GDP is one important variable.  Whether a nation's leadership has the courage to collect the taxes to pay the bills it votes to incur or chooses to run deficits and build debt leading eventually to taxation through inflation is another issue entirely.  The data in this posting focus only on the size question.  (Click on the charts for high resolution versions.)

Total government in the United States, federal, state, and local, has grown from around 20% of GDP to more than 35% over 65 years.  Major influences are pointed out in the yellow boxes.

Size of government in most Western European countries is commonly around 50% of GDP, about 20% higher than in the US.  Most developing and dynamic economies are more like the US was in the dynamic 1950's, government consuming less than 30% of GDP.  The chart below shows the numbers for selected countries from Heritage Foundation data.  Their calculation must be different in some way since I can't account for the 42.2% they report for the USA, but I assume their numbers are calculated the same way for all nations and allow fairly accurate comparisons.  The chart clearly shows why big government folks say, "Don't worry," and why folks who argue that success lies with more of the wealth in the private sector say, "Worry!"  Right now the Big Government folks have the upper hand.  I'm not interested in shutting down the government, but I'd like to see a little of that 1990's restraint come into play to swing the pendulum a bit in the direction of fiscal conservatism.

I'd also like to see us tighten our belts a bit and start paying the bills as we go.  Inflation will be a killer if we don't.

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Federal Social Insurance Tax and Benefits Update

The chart above (Click on it for a high resolution version.) is fairly self-explanatory and may serve as a baseline for comparison with data a few years down the road after the Patient Protection and Affordable Care Act has fully kicked in.  I'm guessing that today's numbers may qualify as part of the "The Good Old Days" by then.  Of course this is one reason the private insurance companies get criticized.  They haven't figured out a way to pay out in benefits more than they take in in premiums.

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