Norquist Plan Failed - Time to Regroup

The 60 Minutes Grover Norquist segment Sunday evening and a little follow up research on the Web led me to the conclusion that Mr. Norquist might have had a pretty good idea, when he was a kid, when even liberals were fiscally conservative, and when federal spending deficits were very small, about applying political pressure to stop tax increases as a means of shrinking government.  However, the willingness of Congress to borrow excessively and spend recklessly and accumulate debt with no reasonable repayment plan has rendered his no tax pledge not just meaningless but destructive.  It is not excessive tax revenue but irresponsible spending that is destroying our economy.

This chart, which includes only (personal and corporate) income taxes (the pledge target) and not Social Security and Medicare taxes, illustrates the point.  (The small dotted line is total Federal Revenues.) Mr. Norquist and his pledge signers might have been feeling pretty good at the turn of the century when Messrs. Clinton, Dole, Gingrich, and Lott had reduced government spending even as the dot com boom had boosted income tax revenues without any increase in marginal rates, but should be suffering some indigestion now trying to swallow the growing national debt.

The Norquist idea of threatening well-funded primary opponents for any Republican congressman who fails to sign or signs and then violates a pledge to, “oppose any and all efforts to increase the marginal income tax rate for individuals and business; and to oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates," might have made sense for conservatives in an era of fiscal responsibility but the battle has been lost to big government liberals, Republicans and Democrats included, who have continued to make spending promises that cannot be kept and approve budgets that can never be balanced. 

The primary objective, after all, of Norquist and his backers was to shrink government “until it is small enough to drown in a bathtub.”  Stopping income tax increases was just a means, and that means has demonstrably and spectacularly failed to achieve the primary objective.  It is time to abandon that plan, and all that is required is for the 277 pledge signers to caucus and agree to offer to renounce it…as a negotiating tool.

I hasten to say that I have no doubt that aggressive compliance with the second half of the Norquist pledge, elimination of deductions and credits with equivalent reductions in tax rates, could, if spending were controlled, result in a significant boost to the economy, higher growth rates for GDP, higher federal government tax revenues, and long term reduction of debt as a percent of GDP.  Mr. Norquist is a very smart guy and has probably spent a lot more time thinking about such issues than most in Congress.  He understands the issues and does not have to worry about winning the next election.  But such a move, including elimination of the home mortgage and charitable contribution deductions and all other special treatment for small businesses, corporations, individuals, and farmers, would require simultaneous wise and courageous cooperative acts on the parts of both Democrats and Republicans.  That would be a miracle for sure.  It is much easier and better for their individual political careers, dependent on often clueless voters, for Democrats to demonize Republicans for the tax pledge and Republicans to demonize Democrats for big spending. 

So, given the complete failure of the original Norquist plan to shrink government, my suggestion to him is to regroup and call a meeting of all his pledge signers and tell them to put on the table a willingness to accept 5% higher personal and corporate tax total revenues if all the deductions and credits for individuals and corporations are eliminated and marginal tax rates are reduced.  Since foolish pledge signers have granted him all this power, maybe someone will sponsor a Norquist/Obama debate.  They are both Harvard graduates, after all and should be able to clearly explain and defend their positions.

If only Mr. Norquist had decided in the mid-1980’s to attack federal spending increases rather than federal tax increases…

Quality, System Dynamics, and Mr. Romney

I've had almost thirteen years since retirement from Eastman Chemical Co where I spent my last three years or so championing something called Total Quality Management (TQM), one of the least understood management concepts ever developed.  I first heard of it in the early 1980’s when big US companies were falling all over themselves trying to catch up to Japanese business models by paying big bucks to Drs. Juran and Deming and their disciples to teach the manufacturing folks how to quit making so many mistakes and creating so much waste.  Few were the senior management teams that realized it was often senior management causing the problems.

As a Sloan Fellow at MIT in 1989-90, I took an introductory course in System Dynamics, a discipline that focuses on modeling complex systems to show interactions and feedbacks to help decision makers avoid the sin of static thinking.  Examples of static thinking errors that can be avoided by use of System Dynamics are believing that raising tax rates by 10% will result in, and only in, a tax revenue increase of 10% or that welfare programs providing enough funding to reduce the poverty rate by 50% will move half the households in poverty into the middle class.  Neither erroneously expected result will occur because the systems are complex and there are feedback loops and people and prices and money behave differently after the changes are made than they did before.  And those different behaviors will also reverberate through the system.

In the late 1990’s, having become a TRUE BELIEVER in TQM and having had that smattering of System Dynamics, I synthesized the two with the diagram below, my awkward explanations of which caused many eyes to glaze over.  It resulted in some being happy to see me retire and perhaps a small group of people being sad to see me go.  It was even the inspiration for the roast at my retirement party in late 1999.  Thanks, Wylie, for the roast.  I did enjoy it.  Click on the chart for a better look.

This diagram is targeted, of course, at businesses in competition with other businesses, the situation Eastman Chemical was in, and conveys the message that focusing on customer satisfaction and relentless reduction of defects and errors, cycle time, material usages, energy usage, unnecessary work, product variability, and wasted effort, via permanent fixes (thus the name of my blog), will result in greater capacity, greater customer demand, lower cost, lower inventories, higher competitiveness, more business, and, finally, higher value for the enterprise.  I called this diagram my QVC diagram and had been inspired to create it as I worked at home, the popular  QVC home shopping network on TV in the background. 

An essential element of both TQM and Systems Dynamics is the focus on process, whether a manufacturing process or a decision making process or a war fighting process or a poverty fighting process or a debt reduction process or a tax reform process.  In the chemical industry, everybody involved in chemical processes, having studied chemistry and/or chemical engineering unit operations, understands the complexities and interactions inherent in such processes and automatically assumes a Systems Dynamics approach to understanding and improving those processes. But many people in responsible positions have great difficulty understanding that the same principle applies to management and administrative and even government processes.  It even applies to medical and health care processes.  TQM and Systems Dynamics offer to those responsible for management, administrative, and government processes the same kind of discipline and understanding that chemical reaction kinetics and unit operations principles offer to people running chemical manufacturing processes.

And that is why I think Mitt Romney is an acceptable candidate for the presidency, not a savior, not a miracle worker, not a person to be worshiped, adored, glorified, or even cheered, but a serious and disciplined person who would look at my diagram above and say, “Of course!”  He would agree that this, a combination of TQM and System Dynamics thinking, is exactly the approach we need in the USA to rebuild the economy, to rebuild the economic strength of the middle class, to improve our education, to improve our health care system, to reduce our national debt as a percent of GDP, to remain the last great hope of disadvantaged people at home and around the globe, to be all that we can be.  He would understand that it is not possible to get there by a philosophy of spreading wealth, or throwing money, around because so doing only increases waste and diminishes the national wealth.  He would understand that continuous short-term tweaking of the system and application of band-aids and duct tape and other temporary fixes would not work and would, in fact, worsen the situation.  Now, whether he could help us overcome the current thirty year trend and downward momentum in national competitiveness and economic strength, whether he would have the political skills to make a difference, would remain to be seen.  But at least he would understand.

Tweet Follow @dkw2020

Battle of Budget Gurus, Stockman and Ryan: Food for Thought

During this calendar year Home Works of America volunteers have previewed or worked on about 90 Columbia, SC, homes of low-income senior adults living on Social Security and Medicare.  Absent from the lives of these folks are such luxuries as new cars or even good used cars, winters in Florida, trips to Myrtle Beach, Pigeon Forge, Yosemite, Las Vegas, and Branson, second homes, cruises, club memberships, restaurant meals, 529 College Savings accounts for their grandchildren, and bass boats.  Some don’t have central heat and air conditioning. Some of the homes are not insulated.  Many have leaking roofs.  Some of them have toilets that have sunk into rotten floors.  Some lack hot water.  These homeowners typically have incomes of about a thousand dollars a month. 

Those of us who were smarter, better educated, harder working, more frugal, or even just luckier have to pay their bills and help out as we can.  Even without "social justice" and moral considerations, very few of us want to live in a country with people dying on the streets, or in the woods, for lack of food, housing, and health care.  That is the justification for Social Security and Medicare.  And, a few years down the road, the poor will be the only people to receive such government assistance because that is all we will be able to afford. 

Social Security and Medicare were made almost universal for some reason I do not understand. I guess it was partly because most people were poor and life expectancy wasn't much more than 65. It was the beginning of Big Government, Social Security beginning during the Great Depression under Franklin Roosevelt and Medicare as part of Lyndon Johnson’s War on Poverty.  Maybe it was the beginning of the political correctness, nobody loses, everybody wins era.  Let’s not hurt anybody’s feelings by singling them out for government pensions or health care.  Let’s just put everybody on government pensions and health care.  Even folks such as Warren Buffett and Bill O’Reilly and Bill Gates and Darryl Williams…put them all on the government payroll.

I’m thinking of this after reading former Reagan budget director David Stockman’s Op-Ed in today’s New York Times.  The title is “Paul Ryan’s Fairy Tale Budget Plan.”  One might think that Stockman is going to attack Ryan for being too aggressive, too conservative, or radical.  But no, he attacks him for not addressing the critical issues, arguing that it is a fairy tale that simple tax reform, cutting tax rates and eliminating deductions, without other major policy changes now, is going to stop the demise of our economy. 

Just ignoring Stockman’s criticism of Ryan and digging around for his positive recommendations for getting the economy going, here is what I found.

1. Major cuts in military spending, back to roughly the levels, inflation adjusted of course, of the Eisenhower administration when the major concern was nuclear war with Russia.
2. Break up of the big banks and restoration of Glass-Steagall to separate commercial and investment banking. 
3.  I can’t do this one justice with a paraphrase so here’s a quote: “sweeping housecleaning at the Federal Reserve and a thorough renunciation of its interest-rate fixing, bond buying and recurring bailouts of Wall Street speculators. The Greenspan-Bernanke campaigns to repress interest rates have crushed savers, mocked thrift and fueled enormous overconsumption and trade deficits.”
4. Replacement of “job-destroying payroll taxes” with a national sales tax. 
5. And, pertinent to my introductory paragraphs above, “a sweeping, income-based eligibility test, which would reduce or eliminate social insurance benefits for millions of affluent retirees.”

Now, he has quit preaching and gone to meddling!

But here is the thing.  Arguing that I have paid hundreds of thousands of dollars in Social Security and Medicare taxes during my working years and now have a right to the benefits may be satisfying and logical and true, but the facts are that all that money was spent, our national spending and debt are out of control, and the only way we can continue to enjoy such benefits is by borrowing the money or confiscating it from the pay checks of our children.  It would be nice if we could send Congress to prison for stealing the money, but that's not going to happen.  So, Stockman’s number five above is a sure thing.  It is not a matter of if, but of when.  And the longer the delay in items one through four, plus meaningful tax reform, the sooner number five will happen (and the more severe eligibility testing will have to be).

But back to the Home Works visits and repairs, in many of which I have been personally involved.  I love doing this.  I have met so many sweet and friendly and out-going elderly poor, people of faith, people who are happy, people who are thankful for any assistance they can get.  (No, they are not all like that.  Some can be a bit demanding.)  We owe them our support, and we unfortunately also owe life style boosts to the comfortably retired and pocket change spending money to the wealthy.  I expect we will have to default on the second and third debts, but we must pay the first.

_________________________________

Note: I think almost nobody even suggests changes in Social Security and Medicare benefits to anyone retired or close to retirement.  Ryan proposes a different Medicare plan for younger people.  Many Democrats say they will not support any changes at all.  I believe most affluent retirees ($100k or more in non Social Security income?), while strongly objecting to paying any additional taxes to prop up the dying system we have, would get behind a mandated long-term plan that truly puts us on a path to much lower debt as a percent of GDP.  It would be a patriotic thing to do and would be good for our grandchildren.  

Romney's and My Real Estate Investments

Friday's NYTimes included a story that gives some insight about Mitt Romney's history and his financial dealings.  Before he found his niche with Bain Capital, he and I had similar experiences with early 1980's, government-subsidized, real estate investments that were wrecked by President Reagan's 1986 Income Tax reforms.  I guess omission of impact of the Reagan tax reforms represents at least subtle bias in the NYT article. You can read Mitt's story here, and mine is in an earlier posting on this blog.   (Even if you aren't interested in the real estate angle, take a look at the chart in the blog posting which shows that federal tax revenue continued robust growth in spite of Reagan's cut in the top tax bracket from 50% to 28%.)

There are some interesting similarities between Mitt's story and mine:

1. Neither of us had much money, Mitt having given away his inheritance and I never having had one.
2. We were both interested in providing for our families, their five sons and our two.
3. We were both interested in minimizing our income tax bills as much as was legally possible.
4. We were both interested in low risk and responsible investments.
5. We both were future oriented, interested in living frugally at the time.
6. We both sought out "expert" investment advice.

But the similarities end there.  I abandoned my investment as soon as possible and was eventually served papers for an overdue mortgage when the buyer defaulted, but Mitt stuck with his, eventually loaning a family money to buy one of his houses which they had been renting.  They are still making mortgage payments on it today but had no idea who "Willard M. Romney" was until the presidential campaign heated up.

The NYT story is generally favorable, painting Mr. Romney as a disciplined, responsible, forward-looking, persistent, and financially astute individual which, in my opinion, would be positive traits in our president.  But the reactions to the story clearly show the divide in the USA between those who have a sense of entitlement and those who have a sense of responsibility.

Many of the comments are in agreement with my position, but the entitlement group tends to argue that since Romney has so much more money than the family living in the home, he should just write off the remaining $50,500 balance on the mortgage, free them from the $600 per month payments, and give the house to them.  One even suggests he could take a charitable deduction for it which clearly shows lack of experience in charitable giving since, unless the family home happens to qualify as a 501(c)(3) charity, such a deduction would be illegal.

It is easy to tell which group Mr. and Mrs. Stamps, the home owners, fall in.  They are not whining, asking for the rich Mr. Romney to write off the loan and give them the house.  They are thankful for the way he helped them out when they needed help buying a home, unable to get a loan from a traditional financial institution, and are quite happy sticking to the deal.  I'm pretty sure they would feel patronized and insulted if Mr. Romney were to offer to forgive the loan.  They apparently have a sense of responsibility.  I bet they will vote for Romney.

Democrats 0, Republicans 0, USA 0

Most of the campaign for the presidency seems like a schoolyard brawl with lots of name calling and taunting and dares.  Nobody seems to have an idea any better than to accuse his opponent of idiocy or criminal activity or intent to destroy America.  And Congress joins the battle with gusto,  pushing and shoving and whining like sixth graders.  And the media cheer and encourage, always looking for some sensational accusation to publish or announce.  And, in the meantime, significant portions of the populace think President Obama is not a citizen, cannot say who the Vice President is, or have never heard of Mitt Romney.  And all this amid campaigns to get everybody to vote.  We don’t need anybody to destroy America.  We are doing it ourselves.

The political game has always been rough, but there have been rules and there have been positive messages and plans and proposals and ideas.  Here are some data that may explain the widening gap between left and right, disappearance of the political middle, and the increasingly toxic political environment.  Click on the chart for a higher resolution view.  (Note: A friend just pointed out an error in the original chart.  Republicans controlled the Senate 1981-1987 during the Reagan administration.  I had the numbers transposed.  Corrected graph below.)

From 1960 until 1995 Democrats were in control of both houses of congress (Correction: except for the Senate during six years of the Reagan administration), holding about 60% of the seats vs. 40% for the Republicans.  In that environment, partisanship was muted because it was not necessary for the Democrats to all stick together in order to pass legislation and there was no need for Republicans to stick together.  There were conservative Democrats interested in fiscal responsibility and liberal Republicans focused on social issues.  But that all changed in the 1994 mid-term elections after which, for 12 years, Republicans had a slight edge, and party solidarity became the prime concern.  Reaching across the aisle was immediately classified as politically incorrect.

For the first six of those years, Democrat President Clinton and the Republican Congress cooperated with the growing tax revenues resulting from the false prosperity of the dot com boom to generate budget surpluses and begin reducing a national debt that, compared to the economic mess we now have, seems trivial.  During the last six of those years, Republican President Bush and the Republican Congress began rebuilding the deficit with tax cuts, unfunded wars, and an expensive Medicare prescription drug plan.  Their folly was muted by the growing tax revenues resulting from the real estate bubble, but that came to an end along with President Bush’s second term.

The 2008 elections, in the midst of the financial crisis, swept in President Obama with comfortable Democrat majorities in both houses and allowed the trio of Obama-Reid-Pelosi to ram through an undefined and open ended Affordable Care Act with zero support from Republicans.  And the animosity index soared.  The expected reaction, a major swing back in the Republican direction, occurred in the 2010 mid-term elections with Republicans regaining their majority in the House but falling slightly short in the Senate.  And, as we approach the November 2012 elections, ego protection and defense trump the national interest in every case.

If you come up with a solution to this mess, let me know.  But in the meantime, let’s try to resist blaming all our problems on the recent strength of the Republican Party.  The seeds of all our economic difficulties, establishment and expansion of unfunded liabilities in the form of social entitlements, were sown in the fifty years 1935 to 1985, usually with bipartisan support and with both Democrat and Republican presidents.  And now we are reaping what has been sown.

So, just the fact that Congress was better behaved in earlier decades doesn't mean it was doing a better job.