Guns

In 1969 I was transferred to a small town in Indiana to start up a new plant to cut up and prepackage chicken for Kroger stores. Within a few months we were up and running and I attended a meeting with the managers of 75 stores in the Louisville area. At the meeting I was asked if there were any problems and I pointed out that the packages do not cool properly when stacked more than two high in the coolers. The big boss then stood up and told everyone not to stack more than two high and then turned to me and asked if there was anything else and I responded that there was not. I bring this up because it reminds me of government solutions to problems. Case in point is the uproar over gun control. About 20 something years ago there was a shooting and congress reacted by banning certain rifles. After a number of years the ban was lifted and statistics showed no change in gun violence associated with these rifles. In reaction to the recent school shootings the senate has introduced a bill to ban these same rifles. There is something about people in positions of authority who think that just by banning something they take care of the problem. I think they should ban sin and we could all live happily ever after.

Fracking

As the new fracking process gains momentum, the US will start down the road of being a net exporter of oil and gas. The price of gas is low and getting lower causing industries around the world which use gas to move production to the US. This includes not only industries that use gas for fuel but many chemicals use methane as a starting point. Add to this the weaker, (cheaper) dollar, increased productivity from US companies along with stagnate wage growth and exports become more competitive. The demand for our biggest exports of farm products has increased with growth in China and India and prices have risen accordingly. As these trends continue the trade deficits that have been a drag on the US economy will decline causing further growth in the economy.

60's

It is commonly agreed that hindsight yields a different view of events and as I look back to the 60’s that is definitely the case. While many things motivated change there were three that I think led the way. First was the war in Viet Nam, second the mistreatment of blacks and finally the lack of equality for women. I’d like to zero in on the third known as the women’s movement led by women called feminist. I suppose there are many ways to define feminism but I see it as a woman who feels that she doesn’t need a husband to have satisfying life. Understand that I grew up in the 40’s and 50’s and at that time a woman’s place was in the home. Girls graduated from high school and immediately set out to find a husband. Being a home maker was the dream of most young women and it was a cultural thing. Look at the TV shows in the 50’s and you will find Beaver and Father Knows Best. Mom stayed at home and took care of the family. When I went off to college in the 50’s there were four men for every woman and the joke was that they were their just to find a husband. There was a popular song at that time that describes how we felt about women. It was title, “The Girl That I Marry”. The girl that I marry will have to be As soft and as pink as a nursery The girl I call my own Will wear satin and laces and smell of cologne Her nails will be polished And in her hair she'll wear a gardenia And I'll be there Instead of flittin', I'll be sittin' Next to her I'm cheerful like a kitten A doll I can carry, The girl that I marry must be With the onset of the 60’s women came into their own and they made a serious miscalculation. Instead of wanting to be equal to men they chose to be like men. This led to what was called free love as women tried to prove that they were just as interested in multiple sexual partners as men. Young mothers purchased toy kitchen sets for their boys and Ken the doll partner to Barbie was introduced. These feminist believed that the differences between boys and girls was due to the environment. In the old argument between nature and nurture, nurture won out. These cultural changes were reinforced by the social changes caused by the Great Society where things like equal pay for equal work were introduced.

Gores book

Former Vice-President Al Gore, in his book entitled, “An Inconvenient Truth”, made 10 predictions that were deemed to be exaggerations. The book was made into a movie and shown in schools though out the world. Gore was given the Noble Peace Prize for his efforts. When asked about the distortion of facts to achieve an objective he replied: “Nobody is interested in solutions if they don’t think there’s a problem. Given that starting point, I believe it is appropriate to have an over-representation of factual presentations on how dangerous it is, as a predicate for opening up the audience to listen to what the solutions are, and how hopeful it is that we are going to solve this crisis.” ~Al Gore I offer one example to illustrate the point. In his movie while showing scenes of severe flooding, the narrator says that sea level could rise 20 feet in a short period of time. Since 1992 satellites have measured sea level to unprecedented accuracy and these measurements show a rise of 3 mm per year which would be a rise of one foot in 100 years.

Millionaires

More on millionaires and billionaires. Take the example of a very rich person. This person only pays 15% on income since most is from capital gains. That means they have invested their money in some type of risk taking adventure, like financing a new company or just buying stock in a company. Just what choices does a rich person have when it comes to their money? They can spend it and that of course helps the economy. The can invest it in some type of business and that helps the economy. The can put it in the bank and banks are allowed by law to loan out 9 dollars for every one dollar they have so the banks have more money to loan which means lower interest rates and that is good for the economy. So there is nothing economically wrong with rich people having lots of money, so what is the problem. The problem is that the rich are getting richer and the poor are getting poorer and people feel there is something inherently wrong with that. This feeling is exacerbated when people feel that there is an uneven playing field. They feel that the rich using insider information are gaming the system and there is good reason to feel that way, since there are many recent examples of illegal activities on the part of certain wealthy people. The main objection by groups like the Tea Party and the Occupy Wall Street is corruption in government and business. To talk about taxing these rich people more is a distraction from the real problem which is corruption. One thing that will have a profound effect on corruption is penalties. We have yet to see anyone go to jail on the recent fiasco of the home mortgage derivatives. Fines are no deterrent but jail time is and not just a couple of years in a country club prison.

Taliban

The President has proposed that we tax millionaires and billionaires to help balance the budget. He has not stated the specific tax rate. There are 80,000 Americans who earn more than 1 million and they average 4 million. If we take all of their money we would bring in 320 billion dollars. (80,000 x 4,000,000). That would reduce this year’s deficit from 1,270 billion to 950 billion. Taxing the rich is OK by me but we must tackle the entitlements. Social security, Medicare and Medicaid cost 1,600 billion dollars per year. We have to reduce spending as well as increase revenue something like the Boles/Simpson plan prepared last year but ignored. 1. The advantage of arguing over taxing the rich is that no one has to talk about entitlements. The President doesn’t want to talk about them neither do the Republican candidates. They all saw what happened when Paul Ryan came out with his plan which he reiterated today. He proposed changes in entitlements and got crucified. There is a tendency to blame elected officials for lack of courage but taking on entitlements is a sure way to get kicked out of office and for that you can blame the voters. It reminds me of what Pogo said about the government, “we have met the enemy and they is us”. Until we voters are willing to bite the bullet and reduce some of our benefits the politicians will continue down the path we are on.

Millionaires

The President has proposed that we tax millionaires and billionaires to help balance the budget. He has not stated the specific tax rate. There are 80,000 Americans who earn more than 1 million and they average 4 million. If we take all of their money we would bring in 320 billion dollars. (80,000 x 4,000,000). That would reduce this year’s deficit from 1,270 billion to 950 billion. Taxing the rich is OK by me but we must tackle the entitlements. Social security, Medicare and Medicaid cost 1,600 billion dollars per year. We have to reduce spending as well as increase revenue something like the Boles/Simpson plan prepared last year but ignored. 1. The advantage of arguing over taxing the rich is that no one has to talk about entitlements. The President doesn’t want to talk about them neither do the Republican candidates. They all saw what happened when Paul Ryan came out with his plan which he reiterated today. He proposed changes in entitlements and got crucified. There is a tendency to blame elected officials for lack of courage but taking on entitlements is a sure way to get kicked out of office and for that you can blame the voters. It reminds me of what Pogo said about the government, “we have met the enemy and they is us”. Until we voters are willing to bite the bullet and reduce some of our benefits the politicians will continue down the path we are on.

Apple jobs

Apple employs 47,000 direct jobs here in the US and 700,000 jobs overseas. Exxon Mobil employs 31,000 in the US and 52,000 overseas. In 2011 Apple had total sales of 108 billion and profit before tax of 28 billion and profit is 25% of sales. Exxon had total sales of 470 billion and profit of 32 billion and profit is 7% of sales. The way to increase your profit margin is to have more overseas employees and pay them less. Apple employees in China earn on average 51 cents per hour. Apple seems to get lots of favorable publicity while Exxon is the evil empire gouging us at the pump. What gives here?

CPI

The re-election of President Obama is resulting in some anticipated benefits. It was predicted by some experts that in a second term he could propose changes to entitlements since he would not be inhibited by another election. In the latest offer he suggested some changes in social security that would result in lower benefits to recipients both current and future. Since 1975 social security benefits have been indexed to the consumer price index but Obama has proposed a change in the method of calculating that will result in smaller increases. The current method is to just adjust each year based on the current inflation rate but the new method will be less. The new way called chained CPI reflects the change in buying habits. If the price of beef increases, people will eat more chicken and pork and thus the cost of their food, will not increase as rapidly. This small change will result in a savings of $125 billion over the next ten years, since the net effect is smaller increases in benefits. Just as only Nixon, a conservative, could open the door to China, only a liberal could reduce social security. This is a small first step that will lead to other changes in social security.

Budget

When the President came out with his budget this week most of the news outlets complained that the Republican House would not pass it. They said it would be DOA (dead on arrival). What they fail to point out is that this is the fourth year that Obama has proposed budgets that the Democratic Senate is afraid to pass. Last year the senate voted against the President’s budget by a 97 to 0 margin. Senate leader Reed will not bring this year’s budget to a vote to prevent embarrassing the President once again. On top of that the senate which is required by law to present a budget has not done so for more than a thousand days and Senate leader Reed says they will not have a budget this year either. The senate is ashamed to propose budgets with trillion dollar deficits, something that does not seem to bother the President. Last year the US government spent 3.6 trillion and the President’s budget for this year is 3.8 trillion and since income to the government is only 2.5 trillion this is a 1.3 trillion dollar deficit. The debt was 10.6 trillion when Obama took office and this year it will top 16.2 trillion. When the President took office he promised he would cut the deficit in half by the end of his first term. This is big,” wrote White House director of new media Macon Phillips in a February 23, 2009 blog post, ”the President today promised that by the end of his first term, he will cut in half the massive federal deficit we’ve inherited. And we’ll do it in a new way: honestly and candidly.” Instead of the 5 trillion that Obama promised by cutting in half what he inherited, it is 16 trillion or three times more Once again this year the President is projecting that the deficit will be cut over his next term. This is easy to do since most of future spending and debt depends on what rate of growth is projected. If you want smaller deficits just predict a larger rate of growth. You don’t have to be an economist to understand this. For the first time in history, our deficit now exceeds our gross domestic product. We will not feel the full impact of all of this spending for a couple more elections and by that time the President will be retired and someone else like your children will have to deal with things. Just to aggravate the future situation will be the high inflation that always follows any country that prints money to pay debt.

Hedge fund

My daughter asked me some questions about Hedge Funds and I thought you might be interested in my response. A group of wealthy individuals combine their cash to use for investments. They like this approach because they are not inhibited by any government regulations, like they would be, if they were selling stock to get money. They are called venture capitalist because they invest in high risk ventures that banks will not finance. These can be existing businesses that are in trouble or new start-ups that find it difficult to get seed money. In either case they are high risk and so the venture capitalist charge high interest. The venture capitalists are paid on what is called the 2 and 20 system. They get an up-front fee of 2% and then 20% interest. Sometimes the investors just offer money but often times they offer advice and this has led to a controversy. If it is just money and there income is a return on investment it is taxed at 15% but if it is pay for advice they are taxed at 35%. This difference is resolved by calling the income, “carried interest” which is a special category taxed at 15%. Sometimes the investors help the company and they make money but sometimes the company fails and they lose money. I will illustrate how this works using General Motors as an example where the federal government serves as the hedge fund. GM was going broke and the government stepped in to help. They cut back on their product line, laid off thousands of employees, closed down thousands of dealerships, gave the union part ownership in return for the union covering much of the pension cost and paid off suppliers with discounted dollars. At the end the government lost 26 billion and the president touts this as a success. If a private firm had done this and lost that much it would have been a colossal failure and would have bankrupted most hedge funds. This can serve as an example to show the difference between private enterprise and government. The government is not restrained by the necessity of earning a profit.

Spain

We can no longer use the time honored method of determining the health of our economy by looking at the Gross Domestic Product, (GDP) since that includes government spending which has been exaggerated by Qualitative Easing. This is a euphemistic phrase used to describe the process by which the Federal Reserve, (The Fed), creates money. QE 1 started in November of 2008 and ended in April of 2010 and QE 2 which started in November of 2010 and ended in July of 2011 put 2.3 trillion dollars into the economy. QE 3 which started in September and has now added 85 billion per week for the last seven weeks for a total of 600 billion. Since these programs are adding about one trillion per year to the GDP and since the GDP is around 15 trillion this is a 6% boost to the GDP. The past three years the reported GDP has been less than 3% so without this government stimulus we would officially be in a recession which is what most people have figured out on their own. This process of creating money may eventually bring the economy around but how long it will take and how much in debt we will go is any bodies guess. The one thing for sure is that sometime in the future we will pay the piper with high inflation and that is a tax that primarily hurts the poor, the very people the government is trying to help. Just one more example of the unintended consequences of good intentions. By using that phrase I am giving the government the benefit of the doubt but many others are not so generous. Some say that the government knows full well the harm to the poor this will cause but it is just another use of kick the can down the road and let whoever is in office at that time worry about it.

GDP

We can no longer use the time honored method of determining the health of our economy by looking at the Gross Domestic Product, (GDP) since that includes government spending which has been exaggerated by Qualitative Easing. This is a euphemistic phrase used to describe the process by which the Federal Reserve, (The Fed), creates money. QE 1 started in November of 2008 and ended in April of 2010 and QE 2 which started in November of 2010 and ended in July of 2011 put 2.3 trillion dollars into the economy. QE 3 which started in September and has now added 85 billion per week for the last seven weeks for a total of 600 billion. Since these programs are adding about one trillion per year to the GDP and since the GDP is around 15 trillion this is a 6% boost to the GDP. The past three years the reported GDP has been less than 3% so without this government stimulus we would officially be in a recession which is what most people have figured out on their own. This process of creating money may eventually bring the economy around but how long it will take and how much in debt we will go is any bodies guess. The one thing for sure is that sometime in the future we will pay the piper with high inflation and that is a tax that primarily hurts the poor, the very people the government is trying to help. Just one more example of the unintended consequences of good intentions. By using that phrase I am giving the government the benefit of the doubt but many others are not so generous. Some say that the government knows full well the harm to the poor this will cause but it is just another use of kick the can down the road and let whoever is in office at that time worry about it.

Welfare

It was recently reported that we have more people in the wagon than we have pulling the wagon. The people on Medicare and social security are not counted as part of those in the wagon group since they have paid for those benefits. Those in the wagon are referred to as, “means tested”, which means that the benefits they receive are free and based on their income. Just how much these benefits are costing the tax payer may surprise many people. The 80 overlapping means tested programs cost about 750 billion dollars per year which makes them the single largest item in the budget, more than social security, Medicare or defense. These costs do not include an additional 250 billion from the states. 95% of these costs are in four categories, medical assistance, cash assistance, food assistance and housing assistance. If you divide the total cost by the number of households receiving benefits it comes to $168 per day as compared to the average working family income of $137. In addition these benefits are slated to increase by 30% over the next four years.

Fiscal cliff

As the country heads closer to the so called, “fiscal cliff”, I want to recap some of my recent emails on the subject. Currently the top tax rate is 35% and the president wants to raise that to 39.6% which is where it was before the Bush tax cuts. The president campaigned on the idea of tax fairness and used the phrase millionaires and billionaires when referring to those who are in the top rate. There is a big difference between a millionaire who owns a small business and a billionaire like Warren Buffett. Buffett famously said he pays only 15% in tax which is less than his secretary. He further stated that he should be paying twice that or 30%. Since the top rate is currently 35% why is he paying 15% and the answer is that he does not have income from wages but his income is from capital gains. This means that if the top rate is increased to 39.6% he will still be paying only 15%. If the objective is to have the rich like Buffett pay more, we should increase the capital gains tax from 15% to 30%. By doing this we do not adversely affect the rate that small business pays and this is where jobs are created. If the goal is to bring in more revenue we can increase the rate or we can cap deductions (loopholes). It is not necessary to tell people which deductions they should use but tell them they have a maximum of $40,000. The lowest 50% of wage earners do not itemize deductions so this has no effect on their taxes. Those who do itemize choose primarily between mortgage interest, charitable giving, state tax and property tax. Only a small percentage of those exceed the $40,000 limit so this will have no effect on them. It is estimated that placing a $40,000 limit on deductions will bring in the same amount of revenue as raising the top rate to 39.6% so the current argument between the president and congress is a political argument not an economic one. In addition neither has anything to do with the deficit since the president has already said he will spend the money on infrastructure (shovel ready jobs), education and grants to states. The deficit for this year is 1,100 billion so if we increase taxes by either method that will bring in 90 billion and lower the deficit to 1,010 billion. In other word to truly impact the deficit we must make changes in spending which means reforming Medicare, Medicaid and Social Security and these issues will not be discussed in a serious manner until this tax matter is resolved. Once again politics gets in the way.

Public pensions

My mother used to say that the rich get richer and the poor get poorer. She knew that and so did all of her friends. They were well aware that big government and big business were corrupted by money and power and that certain individuals benefitted greatly from this arrangement. They wanted to do something about it but they lacked power and organization. The past 50 years the rolls of unions have changed and private unions have lost membership while public unions have grown. Even a good liberal like FDR understood the danger in public unions as they would be bargaining with tax payer money. What FDR feared has come to pass. Teachers negotiate with the school board, city employees negotiate with the city council, county workers negotiate with the county commissioners and state employees negotiate with state representatives. In each of these cases the parties are bargaining with elected officials who are using tax payer money The Minneapolis school board members appoint negotiators to determine the wages and benefits of teachers in the district. The teachers are well organized and provide time and money to people they want to get elected. Their candidates have not lost an election in 20 years. Here is a list of the current board and a bit about each. Do they seem the liberal type to you. Alberto Monserrate immigrated to the US in 1984 and started a business revolving around Spanish TV. Jenny Arneson a social worker Richard Mammen outreach worker with the YMCA dealing with juvenile defendents. Hussein Samatar founder of the African Development Center a non profit Carla Bates Psychology Department at U of M Jill Davis is the Supervisor of Anoka Area Interagency Early Intervention, a service for families with children. Kim Ellison former wife of democratic congressman Kieth Ellison. Rebecca Gagnon has a broad range of experiences, including work as a school, church, and community volunteer. This past election, the public union people combined forces with people making less than $30,000 and under the leadership of President Obama and a very good campaign strategy, were able to win on the national stage. The result is that the president will continue his policy of tax and spend and this money will be used to help the states out of their debt problems and allow them to hire more public workers which means more votes.

Income tax

For those of you who do not remember the first Bush presidency, I remind you that during the campaign he said, “read my lips, no new taxes”. Then when he was president he raised taxes with a promise from the Democrats who controlled both the house and senate to cut spending. Instead of spending cuts he got spending increases and the deficits continued to rise. Yesterday the president came out with his plan to raise taxes saying that spending cuts would follow next year. The president was elected to tax and spend and that is what he plans to do. His plan released yesterday came as a big surprise to the national press and that surprises me. The Republicans will fight this for a while but they will cave. Kind of reminds me of Lucy taking the football away from Charlie Brown. The President suggest 1.6 billion in tax increases over the next ten years and I believe he would like to use that money as grants to states to help pay off their debt in particular to states like California, New York and Illinois. In addition to paying off debt this would allow states to expand state government which means hiring more state employees like teachers, police and firemen. It will not go unnoticed that most of these new hires will be democratic voters. Public employees through their unions have been voting themselves benefits for years and now with the help of this president they have gained influence in the national arena. As long as the press is talking about taxes they are not talking about spending and the debt will continue to rise. The only way out and I believe this will eventually happen, is through economic growth. The great American machine powered by innovation and a solid work force will overcome the shortcomings of government. Call me an optimist.

Tax rich

The current argument over income tax has an obvious contradiction which must be cleared up before any further action is taken. One group says that based on fairness the rich should pay more and they want to raise the top rate from the current 35% to what is was before the Bush tax cuts, 39.6%. This same group says the rich only pay 15% since most of their income is unearned, that is, it comes from capital gains. Logic tells me that if your goal is to have the rich pay more you would raise the capital gains rate which is currently at a low of 15%.

Fiscal cliff

As I listen to the talk about the pending fiscal cliff, I am nothing but amused. The Democrats say they want to raise the top tax rate from 35% to 39.6% and that will raise $90 billion per year from the rich. The Republicans say they want to keep the tax rate at 35% but cap the deductions at $40,000 and that will raise $90 billion from the rich since only rich people have more than $40,000 in deductions. If you are rich you can decide how you take your deductions. For example you can choose to deduct mortgage interest on your million dollar home or you can give money to charity and deduct that. The Republicans should agree to raise $90 billion by either method but first there must be cuts in spending. In the past congress has agreed to raise taxes and cut spending and they did raise taxes but they did not cut spending. The spending cuts have to come first or at the same time as tax increases. The only advantage in talking about taxes is avoiding talking about entitlements and everyone knows that something has to be done about social security, Medicare and Medicaid.

Brain as an organ

Back in my college days the brain was considered an organ and not a gland. The difference is that a gland produces chemicals, things like hormones. In the 60’s it was discovered that the brain does in fact produce chemicals and since that time the list of chemicals has grown into many thousands. Recent developments have expanded on this process and now it is known that many of these chemical have a direct influence on the cells throughout the body. Many of the chemicals manufactured in the brain are small groups of amino acids called peptides. These peptides circulate through the blood stream and attach themselves to cells. On the surface of the cell there are receptors where these peptides attach and when they do they affect the internal structure of the cell. They cause the cell to change according to the message from the peptide. Later when the cell divides into sister or daughter cells these new cells carry with them the changes activated by the peptide. In other words the change becomes a permanent part of the new you. If these chemicals can change who we are, then it behooves us to find out just how we can control the type of chemicals the brain makes so we can control the person we are becoming. As it turns out the chemical production can be determined from inside or outside of the brain. If you are asleep and you have a sad dream then the brain begins to produce sad chemicals and you awake feeling sad. If you are watching a sad movie the brain does the same thing. If you spend a lot of time being sad you will soon find that is your natural state. You become the person you think about. In 1937, the year I was born, Nepoleon Hill wrote a book called, “Think and Grow Rich”, in which he said that what the mind can conceive and believe it can achieve. Since that time science has given a logical explanation to this idea. We now have evidence that shows what who you think you are, will become who you are. The mind pays close attention to the words we speak and so some modern day TV preachers tell us that the two most powerful words in the English language are the words, I am, for whatever follows those two words is what I am or what I am becoming.

Car insurance

I just came across an example of how technology is making me obsolete. When I was in the insurance business it was well knows that the company took a loss in the first year of a policy primarily because of agent commissions. I had been watching these car insurance companies encouraging people to change plans and I personally have been changing on a regular basis based on cost. What I didn’t realize is that with the onset of computer insurance there is no longer any need for an agent and thus no commissions. I recently discovered that All State, the second largest insurer, now has an online company called Esurance and their rates are lower. I think this spells the end of car insurance agents as more and more people switch every year for lower cost.

Pensions

There are two types of pension plans. The first is called defined benefit and the money for these plans is held with the company and that company agrees to pay retirees a calculated amount at retirement. These plans have come under fire in recent years since many companies did not have enough money set aside to pay the pensioners. These plans are being phased out and being replaced with the second type of plan called defined contribution. The money for these plans is kept in the employees account and cannot be touched by the company. These plans have many names but the most popular is 401K. There is currently 18 trillion dollars in these defined contribution plans and the government is looking for ways to federalize this money. This means the government would like to take over these accounts and put that money into a national pension plan owned by the government. This way they can redistribute the income according to what they consider fair. The net result will be what we currently have with social security. If you earned an average of $50,000 per year during your career and you are now 62 and retire you would get $1,000 per month from social security. If you earned an average of $10,000 per year over your lifetime and you are now 62 you will get $400 per month. You have paid in 5 times more and you get 2.5 times the benefit. Social security benefits are by design weighted against higher earners. In addition there is a good possibility that the higher earner will be tax on part of the benefit which is double taxation since social security is taken from your check after taxes.

Increase wages

Most people who pay attention to such things understand that the gap between the rich and poor is widening and many think we should narrow this through tax policy. While that will help a little the better way is to pay higher wages to low income earners. If wages increase, how does this affect prices and will we go into a wage-price spiral inflation that will offset any increase in wages. Let’s examine two retail businesses to see what happens. In a fast food place like McDonalds the cost breakdown is one-third for labor, one-third for material and one-third for expenses. A regular hamburger sells for one dollar meaning the labor cost is 33 cents. If the average wage of $8 per hours is raised to $16 then the cost of the hamburger will increase to $1.33. Would most people be willing to pay that knowing that the employees will benefit? If Walmart increased its employee pay from $8 to $16 it would cost the company 6.5 billion dollars but the average shopper would pay an extra $25 per year to shop at Walmart. Would this increase cause customers to shop elsewhere? That 6.5 billion represents 2% of the annual 320 billion in sales so on a $1,000 TV the customer would pay $1,020. Would people pay that extra knowing that it was increasing the wages of the workers? There is another factor in that Walmart has about high turnover and training of a new employee cost about $2,500 so higher wages would reduce turnover which would lower labor cost. Personally, I don’t eat fast food but I do shop at Walmart and I don’t believe I would notice a 2% increase in prices. I would be happy to pay 4% more and increase salaries to $32 per hour and I doubt that this would have much effect on the rich since they likely don’t shop at Walmart. I don’t know where wages should be but it is something to look into instead of automatically looking to the tax code to close the gap.

Teen girls

There comes a time in the lives of most teen girls where they rebel against their moms and the problem is usually resolved when mom says as long as you live under my roof you will do as I say. As a part of President Johnsons Great Society many benefits for single moms were made a part of the law. The single moms were entitled to a free apartment, free health care (Medicare for mom and CHIP for the children), WIC (Women’s Infants and Children) providing food supplements, free or reduced food items, and food stamps. Now the next time a teen got into spat with mom she could resolve the whole thing by having a baby. This was particularly devastating in the black community. The number of single moms increased from 25% in the 1960’s to the current 75%. Experts were offering more and more education on contraception not realizing that many of these young women wanted to have a baby. The young men who used to be needed for financial support found themselves replaced by a government program. This left them out of the loop and resentful. They responded by disrespecting women. It became a popular sport to “Dis” your woman. Violence against women increased as the self-esteem of young men decreased. More and more of these young men turned to street gangs to try and increase their feelings of self-worth. This led to increased drop-out rates, drug use and drug sales and crimes of various kinds. The education gap between blacks and whites continued to widen. The number of young black men growing up in homes without a male role model increased and they were not taught to respect authority and this led to problems authority figures like teaches, coaches and law officers. As often happens with government programs, this whole scenario represents just one more example of the unintended consequences of good intentions. The cost of these programs in money (trillions) is not as damaging as the disruption in the lives of millions of young people. Will we as a society learn from this experiment?

Thoughts from Croatia

I have a friend who lives in Croatia and she is well educated and well informed and she asked me for my thoughts on the election and I thought you might be interested in the view of what I think is a smart middle class European. First I will show you what I sent her and then her answer. When I was growing up my mother used to say that the rich get richer and the poor get poorer. It was obvious to her and others like her that the government in cahoots with big business was funneling money and favors to the rich. In an ideal situation the poor people would have risen up and demanded that this favoritism come to a stop. The less rich had this idea in their hearts but they were unable to change the system, so they decided to try a new approach. Instead of fighting the corruption, they decided to demand their fair share of the government largess and with the election of President Obama they got the opening they needed. His main theme was the redistribution of the wealth based on the concept of fairness and this is a euphemistic way of saying he would take money from those who have a lot and give it to those who have little. With the re-election of Obama this plan was approved by the American people and we have now cemented the path we have been on for the past 50 years but at an accelerated pace. The people have realized that they can get gifts from the government just like the rich and powerful have been getting and this trend will continue and the demographics of the continued growth of minorities will add to the momentum. The problem with this is that there are too many non-rich and there is not enough money to go around. This is what a number of famous people meant when they said something to the equivalent of: A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits with the result the democracy collapses. With this past election the majority has discovered it can vote itself benefits and the phrase loose fiscal policy means going in debt to pay out the benefits to get more votes. This has been going on for most of my life and will now continue at a faster rate. The national debt has been slowly rising since our founding in 1787 from zero to 8 trillion in 2005. The past seven years it has grown to 16 trillion. This means that in seven years we have added to the debt as much as we ran up in the first 221 years. Experts tell us that you can’t keep spending more than you earn but I have been hearing that for 50 plus years and we just keep on going so who knows if this will ever reach the breaking point. I have an idea this point will be tested sometime in the next ten years. I see two possible ways out of this mess. The first and by far the best is to grow the economy through innovation and the second is inflation. Maybe there is a third way that I am unaware of and time will tell. Jack Hello jack thanx for ur thoughts on election. I am glad that u recognise the problem of social unequality whic now can be , again, adressed in marxist term of gaps between two social classes, the ruling class of owners of productional means and the class of producers (the rest of population which is not rich and existentially depends on opportunity to produce eg. will of the ruling class to give them job and exploit their productional resources for social and economical unjust fee). I am also glad that you recognised Obama's effort for social redistribution of wealth which is neccessary and would not get his attention and support if he wasn't aware of painful unlimited concentration of wealth in hands of small amounts of people that started to hurt economy in scale that we didnt witness in modern histiry of mankind since fall of feudalism and slavery. They endager economy by blocking circulation neccesary level of their profit so that economies would survive. They squeezed all the money and resources in hands of one small minority to such extent of greed that economies won't survive unlese something is done and done quickly. In my opinion first neccessary step is redistribution of social wealth e.g. sucking some of that money back for neesds of economies and with this guaranting them to survive. Another step is, i agree, boosting up investments and invetions but we may disagree in way how to do that. If i understood you well you support more friedmann's and hayek's model, which, in my opinion, leade exacly where we stand now - into sucking more and more money to small group of people which were supposed to inject extra profits back to economy and open new jobs but are instead keeping all the profits for themselves. Since this is exactly what caused world economical crysis i say the only way to save our economies is to limit that flow of money from private pockets and inject it back to economy to open new jobs with it. That' exactly the model whicg france stands for and i believe that thist model will be histirically proven as correct one. Of course, "everybody" opposes but who are those "everybody" really? They are exactly the same minority who caused the problem and refuses to share even minimum necessary for economies to survive. Popolation has grown to such extent that they stopped carrying how to feed labour force in order to keep them in condition to produce; they now have comfort to close and not pay millions of jobs in usa and europe and simply move production to other part of world and circulate it around without paying minimal share to labour force as long as pool of labour force that can be exploited around the globe is full and ready for their needs. In more misery they push people, for lower price they are willing to produce and if this destroys economies around the world, which already happened, they dont care as long as they make profits. And they wont stop unless they are forced to. I believe this is exactly what obama tries to do - stopping more damage. I doubt that he can be succesful because that minority is so powerful that it can decide who will lead national states and what national and global laws will be on force; but i think he can be successful with help from within that small group because even some of the richest men on earth have recognised that current situation puts us all in grave. I am reffering, for example, to words of american multimillionare warren buffet (i hope that i remember his name correctly) who have publicly asked for more taxes for the rich and through this for redistribution of social wealth in order to keep economis circulating and enable them to survive.

Obama on taxes

Here is a quote from President Obama’s speech given on Thrusday. I will not ask students or seniors or middle-class families to pay down the entire deficit while people making over $250,000 aren’t asked to pay a dime more in taxes Does this mean that he plans to pay down the debt with taxes? The CBO estimates that allowing the Bush tax cuts to lapse on those earning more than $250,000 per year would bring in about $90 billion. No small amount but let’s be real. The debt is currently $16,000 billion. This may take a while. If you allow the Bush tax cuts to expire completely this will bring in about $250 billion which is better but still not enough. The point is that to get rid of the deficit we need growth. Assuming that revenue will be 20% of GDP a 1% increase in GDP will bring in $140 billion. Since WW 11 the average GDP has been 3.3% so this would bring in $462 billion. Other things being equal this would eliminate the 16 trillion debt in 34 years. This does not take into account that with this growth rate the unemployment rate would decrease and that would add more revenue. Now add to that the expected inflation coming due to the vast spending by government and if we have 6% inflation that adds about $300 billion. Now let’s do it all, eliminate all of the Bush tax cuts (250 billion), GDP at 3.3% (462 billion), inflation ($300 billion) for a total of $1,012 billion which is almost enough to cover this years deficit of 1,100 billion. The bottom line of all this mumbo jumbo is that we must reduce spending on entitlement, things like social security, Medicare and Medicaid. It is time to tackle these important issues. Is the leadership up to the challenge? Stay tuned!

Rich and poor

When I was growing up my mother used to say that the rich get richer and the poor get poorer. It was obvious to her and others like her that the government in cahoots with big business was funneling money and favors to the rich. In an ideal situation the poor people would have risen up and demanded that this favoritism come to a stop. The less rich had this idea in their hearts but they were unable to change the system, so they decided to try a new approach. They would demand their fair share of the government largess and with the election of President Obama they got the opening they needed. His main theme was the redistribution of the wealth based on the concept of fairness and this is a euphemistic way of saying he would take money from those who have a lot and give it to those who have little. With the re-election of Obama this plan was approved by the American people and we have now cemented the path we have been on for the past 50 years but at an accelerated pace. The people have realized that they can get gifts from the government just like the rich and powerful have been getting and this trend will continue and the demographics of the continued growth of minorities will add to the momentum. The problem with this is that there are too many non-rich and there is not enough money to go around. This is what a number of famous people meant when they said something to the equivalent of: A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits with the result the democracy collapses. With this past election the majority has discovered it can vote itself benefits and the phrase loose fiscal policy means going in debt to pay out the benefits to get more votes. This has been going on for most of my life and will now continue at a faster rate. The national debt has been slowly rising since our founding in 1787 from zero to 8 trillion in 2005. The past seven years it has grown to 16 trillion. This means that in seven years we have added to the debt as much as we ran up in the first 221 years. Experts tell us that you can’t keep spending more than you earn but I have been hearing that for 50 plus years and we just keep on going so who knows if this will ever reach the breaking point. I have an idea this point will be tested sometime in the next ten years. I see two possible ways out of this mess. The first and by far the best is to grow the economy through innovation and the second is inflation. Maybe there is a third way that I am unaware of and time will tell.

How to solve the problem with entitlements

PROPOSITION: That politics is the reason that the government cannot solve today’s problems. I propose that the main reason we cannot solve the major domestic problems of our time, which include social security, Medicare, Medicaid and health care, is that politics gets in the way. I will prove my statement by offering simple solutions to these problems in a way that is understandable and feasible. Let’s begins with social security since it is the most expensive and with the onslaught of the baby boomers approaching retirement the most pressing. It requires four steps each of which can be implemented immediately. First, raise the age for full retirement benefits to 75. This does not mean that you cannot retire at age 62 but it means that your benefit will be less. Second, require that benefits paid to individuals with more than $100,000 be phased out and all benefits cease as the income reaches $150,000. For couples these income limits would be $200,000 and $250,000. Third, begin withholding social security tax on all income not just the first $106,000. This is currently done with Medicaid. Forth, consider all benefits as taxable income. The history of social security is replete with reductions in benefits but most people are not aware since most people have no idea what the benefits are to begin with and therefore cannot recognize a reduction. Back in the 60’s the government begin tightening up on the definition of disability and the number of applicants who were declined increased dramatically but social security didn’t change the law for those already receiving benefits and instigated a procedure that they use in all cases known as grand fathering. This means that those receiving benefits under a given program are not affected by changes. Survivor benefits used to be paid to children of the deceased until their ages 22 but that was changed to 18 and once again those getting benefits were grand fathered in. The mother used to get benefits until the youngest child was 18 and that has been lowered to 16. The retirement age for full benefits used to be 65 but now for all people born after 1937 that is raised up to 67. Once again no one noticed since you can still get benefits at 62 but they are less. Since no one knew what they were supposed to be, no one knew they were less. Social security benefits based on other income have been taxed since 1984, which means double taxation since money paid into social security was already taxed when received. Medicare and Medicaid have the same solution and it requires that we ration benefits. We have done this for years but no one talks about it. We cannot afford to offer all procedures to everyone and things like quality of life and cost/benefit ratios must be taken into account. For example, for many years there were not enough dialysis machines and a committee was set up in most cities to determine who got to use the time on the machine. We have the same set up today with various organ transplants. On a subtler basis, people have been advised for years by hospital staff on less expensive ways to achieve acceptable results. Does this mean that very wealthy people will get more expensive care? Yes it does but that is the case throughout our society, the most obvious cases being in the court system where the best lawyers get the best results and cost the most money. We must be mature enough to recognize that we cannot risk destroying the entire system in the name of fairness, if fairness means spending unlimited amounts of money on each case. We live in a world of limited resources and we must act accordingly. We must face the fact that death panels have been around for a long time. An example of how you instigate rationing is ask the question, should a 94 year old man with a bad heart get a liver transplant. If you agree that is not the best way to spend limited resources then ask the same question about a 93 year old and so. Use the same approach on other problems. Reform of the health care system is the hot item in the news and it is easy to see how politics has distorted the issue. Since 85% of the people are currently insured and polls show the majority of those are satisfied, let us leave them alone and focus on the 15% who are not insured. Who are those 45 million people? They fall into three categories not counting illegal aliens. One third are people who are eligible for Medicaid and SCHIP who have not signed up. The reason they are not signed up is that it cost a modest fee and since there are no pre-existing conditions people just wait until they need help and then they sign up. Another one-third are young working people who can afford health care but choose not to buy it. And finally one-third who need help. The first two groups can be forced by persuasion or by law to sign up for health care. The third group can receive government aid based on their income. A formula can be devised based on percent above poverty level to help this group. It is estimated that this will cost about $50 billion per year and much of this cost can be offset with tort reform and allowing everyone to purchase insurance across state lines which will increase competition and lower premium cost. Once everyone is insured the pre-existing condition clause can be eliminated. Illegal aliens will continue to use the emergency rooms until such time as they are removed from the country or made legal and this will put pressure on congress to take up this problem instead of just talking about it. This is just the first step in health care reform and should be followed up with the elimination of the third party payer concept, which is the basic cause of the high cost of health care. To understand this concept, consider the purchase of a food insurance policy. With this policy you go to the super market and purchase your food items and present the clerk with your food insurance card. The bill is then forwarded to your insurance company and they pay. As long as you continue to pay your monthly premium the insurance remains in force. As time passes you will become more concerned with the quality of the food and the location of the store and less concerned with the price of food. This in turn will cause the price of food to rise at a higher rate than other items since you will no longer be price shopping. Everyone is familiar with the hospital bill that shows two dollars for a cotton ball or four dollars for an aspirin. People actually laugh about this since those cost are borne by the insurance company. The door was opened in 2003 with the passage of the Medicare drug bill. A part of this bill allowed for the idea of the health savings account. If you work for a major company your group health care cost them about $14,000 per year for a family plan with the standard deductible, co-pay and stop loss. They can purchase a plan for you with an annual family deductible of $10,000 for about $5,000 per year. When they do this they agree to put $5,000 per year into a pretax account in your name. You agree to cover all medical expenses up to $10,000 per year out of your own pocket. Now you will begin to purchase health care the same way you purchase other items, that being, you will shop around. In doing so you introduce competition into the market, which will lower cost dramatically. A recent example is the cost of Lasik eye care which is not covered by most insurance. The cost of that has come down by half in just a few years. But the real cost savings will be in paper work or what is called administrative cost. Under our current system health care the annual cost is $2.2 trillion, and 25 to 30 percent of that is for paper work. Since 95% of all claims are less than $10,000, once you start the pay as you go system you eliminate 95% of all claims and thus save about $500 billion per year. This is ten times the cost of insuring the poor as mentioned above. The doctors will love this since they no longer have to have a full time insurance person on their staff and they get paid up front with cash or your credit card, the way you pay for other items. What this means for you is that any money you save by being a wise shopper belongs to you. Let’s take the worst-case scenario. The very first year you have a $100,000 medical bill but your insurance only pays everything over $10,000. Now your company only put $5,000 in your account so where are you going to get the other $5,000. Well you go to the hospital and show them your plan and ask for a monthly payment plan and in a couple of years you have them paid. Now look at a more likely case. Each year your medical expenses are less than $5,000 and the savings in your account continues to grow on a tax-deferred basis. Any money that is in this account when you retire is yours to keep. Recent legislation has been introduced to allow you to withdraw this money tax free after retirement even if it is not used for medical expenses. Now when you go to the doctor you first shop around to check out the prices of service and the reputation of the doctor like you do with other purchases. Does the doctor like getting paid by check or credit card verses have a person on staff to fill out insurance forms and waiting two months for payment? Does the clinic like getting paid today and eliminating a whole room full of people filling out forms. The down side to this plan is the elimination of about 10 million jobs in the insurance industry. This is where the aforementioned 500 billion in savings comes from. These people are mostly high school or college graduates with computer skills and will be absorb by the economy over time but it will be difficult for them at first. You will never see a solution to the health care problem that points out where the money will come from but here you do. You would keep one company, most likely Blue Cross to administer the claims over $10,000. Each person would keep track of their annual insurance expense paid as they now do for income tax and if and when the exceed $10,000 they turn them in for a refund. One final misunderstanding I would like to correct. Many people feel that pretesting and early detection will save money and that is not the way it works. It is very beneficial for anyone when a problem is discovered early and it can help them greatly but on mass it is not cost effective. The cost of checking everyone for some possible illness far exceeds the savings applied to the small number who are uncovered. I think it is amazing that someone sitting on the sidelines like myself can come up with a solution to these major domestic problems while experts sitting in Washington seemed completely baffled. The difference is politics. I am not running for office and unlike our elected officials I put country ahead of party.

The democtic dilemma

THE GREAT DEMOCRATIC DILEMMA It starts with FDR and The New Deal and in particular social security. During the depression days of the 30’s people suffered from various economic difficulties including not having enough money to live on after retirement. Families took care of each other but some people were alone and needed help. The government responded by starting social security and over the years it has become the most effective and most expensive of all government programs. While the economic benefits to seniors were significant the political benefits to Democrats were spectacular. They became known as the party of the poor and they were rewarded with control of the congress that lasted sixty years. This reputation for helping the poor was reinforced when LBJ introduced The Great Society and government health insurance for seniors called Medicare. While participants paid in to these programs the cost eventually exceeded the fees and the difference was picked up by the government. As time passed more programs were introduced and many of these were paid for in total by the government. Some common programs are public assistance, food stamps, Women’s and Infants Children’s benefits, low income housing, senior housing and health care called Medicaid. Politicians who promoted these types of programs did so under the idea of helping those in need which over time morphed into the concept of fairness. Unspoken in this way of thinking was the basic premise that some people are unable or unwilling to care for themselves. From this it was concluded that it is the government’s responsibility to take money from those who have more and give it to those who have less. The interpretation of more and less would be determined by government officials. In a capitalistic free market economy it is always easy to point out inequities and politicians quickly jumped on those to reinforce their concept of fairness. Of course there is a limit to their idea of fairness. Since the average family income in the United States is $50,000 what could be fairer than having all families earn $50,000. Politicians begin to have second thoughts when any change might adversely affect them. So we have now arrived at a point where millions of people are dependent on the government for their very survival and thus dependent on those politicians who purport to help them and here is where the dilemma comes to the surface. Elected liberals must continue to help those in need but they cannot ever admit that people cannot care for themselves as this would be viewed as condescending. This puts them in the position of living a lie. One of the reasons that liberal talk shows are not popular is that it is impossible for a liberal to talk for an hour without revealing his belief that the poor cannot take care of themselves. It slips out in between the words and since people don’t want to hear that they turn to another station. G

Retirement

Recently I started a new career and because of my age a number of people asked me why I haven’t retired. This is not a new subject for me since I spent many years as a financial planner specializing in retirement planning. I was reminded of a young friend of my who started working for the railroad and when he was about 25, I asked him how he liked his job. He said the job was OK but they have great retirement plan. He was a guy with 40 years of work ahead of him and he spends his time thinking about retirement. While this is an unusual case, I have encountered many people in their 40’s and 50’s who think about retirement in this way. What they have forgotten is that it is the journey not the destination that matters. Many times we discover that planning for a vacation turns out to be the most fun. While it makes sense to have a retirement plan it also makes sense to live each day as it comes along. These people often tell me about all of the activities they will be involved with when they retire as if each day is going to be one exciting event after another. People who are working know that some days they really don’t feel like going to work but they go anyway. After retirement when these days come up most people just take it easy that day. That means more TV and more snacks. As time passes these days increase in number and so does the waistline. Within five years of retirement it is not unusual to see a 10 to 20 percent increase in weight. This means it takes more energy to be active and the take it easy days increase in number. Most people need the discipline of work to keep them active. Enjoy planning and thinking about retirement as it is ok to build castles in the sky but it’s not to live in them. Don’t be surprised if it is not as great as you thought it would be. Life is full of surprises.

Tax the rich

The idea of taxing the rich may be a political winner but it doesn’t do much to reduce the debt. The President’s plan to tax those making more than one million would bring in about 40 billion per year and if you lower that to those with family income above $250,000 that would bring in a total of 70 billion per year. This year’s deficit is 1.1 trillion so the new tax would lower the deficit from 1,100 billion to 1,030 billion. The President has said this new money would not go toward deficit reduction but to other things like hiring more teachers. Everyone knows that if you want to make a significant dent in the deficit you must look at social security, Medicare and Medicaid, but they are all afraid to say it out loud except for Ryan and he is taking a lot of heat for his plan.

Sunday talk show

On one of the Sunday talk shows today a politician referred to the way the big oil companies are gouging us at the pump and his remark went unchallenged by the host. I have gone over this before but it bears repeating. In 1998 oil was $10 per barrel and gas was one dollar per gallon. A barrel of oil contains 42 gallons of which about 20 gallons is gasoline. If you purchased a barrel of oil for $10 and sold the gas for one dollar per gallon you would make ten bucks. Fast forward to 2008 when oil was $140 per barrel and gas was selling for $4 per gallon. Now you buy a barrel of oil for $140 and sell the gas for $80 and you lose $60. Would you rather make $10 a barrel or lose $80? The oil companies do not make money by selling gas. They make money by taking oil out of the ground at little cost and selling it for $140 per barrel. Further more, the oil companies only own 6% of all gas stations and they are trying to sell those. If I hear one more idiot say the oil companies are gouging us at the pump, I will scream. How is the price at the pump determined? It is based on the world market price which is largely dependent on supply and demand. The US is currently exporting gasoline because we have supply over and above our demand. Some suggest that the oil companies dump their excess on the US market to over-supply and lower the price but why would they sell their gas here at a price below the world market as this would just further increase the world price. The other factor that impacts the price of gasoline is refinery capacity which is restricted since no new refineries have been built in many years. We here in the US have improved the efficiency of our refineries to the point where we can exceed our needs but the rest of the world suffers from low refinery output. A typical example is Iran who has more oil than they could ever use but imports gasoline because they have only a few refineries that are old and inefficient.

Voters

Yesterday, I heard a Talking Head say that people who are uninformed should not vote. When I hear an elitist statement like that I always want to look further into the background and in doing so I made some interesting discoveries. It seems that about a hundred years ago some sociologist was interested in group think and conducted some experiments. In one of these he was at a county carnival and there was a contest to guess the weight of an Ox and the winner would receive a prize. There were 829 entries and when the contest ended he asked if he could have the raw data. Upon analyzing the results he took an average of all the guesses and it came to 1,187 pounds and the actual weight was 1,186 pounds. He then got an expert, a man who spent his life buying and selling Oxen to guess that weight and his guess was 1,080 pounds. This experiment led to many others and in college classrooms across the county such experiments are conducted. Typically a lecture hall full of students will be shown a jar of jelly beans and asked to estimate the number. The typical result is that the average of all the guesses is very close to the actual number. What this tells me is that when millions of voters go to the polls, many of whom know very little about the issues, the average will come closer than the experts. I think this is what is meant when you hear a politician say that the American people know what’s best for the country. The statement that the uninformed should not vote assumes that the informed will make a better decision. In other words the experts know best. We have a large group of experts pushing one of these candidates and another large group pushing the other so I believe that if a voter uses their God given common sense and their life’s experiences they can come up with a vote that is just as valid and just as good as any expert The problem is not necessarily with the voters but with the choice of candidates. That is why when one candidate gets 55% of the vote it is considered a landslide victory. When you only have a choice of two then you have a 50/50 chance of winning and thus the phrase, I chose the lesser of two evils.

Qualitative easing

In normal times the Central Bank (Federal Reserve) buys and sells short term government bonds to raise and lower interest rates and to keep inflation/deflation in check. It works like this. The government sells bonds and banks and other buyers pay cash for these bonds which takes cash out of the economy which leads to higher loan rates since supply and demand dictates that when you have less cash to lend you can charge a higher rate. When the government buys bonds it pays cash and puts more cash into the economy and lowers interest rates. The same procedure is used to control inflation since the classic definition of inflation is too many dollars (cash) chasing too few goods. Recently the economy has been so bad that the Federal Reserve has lowered interest rates to zero and can do no more in that area to stimulate the economy so they have chosen something called, “Quantitative Easing”. To understand this first realize that the government has promised they would not just print money and hand it out so instead they have printed money and loaned it to banks at zero interest. The banks in turn use that money to purchase government bonds that pay 2 or 3 percent interest. Now this may not sound like much but understand that all during the 50’s, 60’s and much of the 70’s the banks operated successfully with a one percent margin. They were happy to make loans at one percent over their cost of money. Today they operate at margins of 2 or 3 percent. The question arises as to why the banks aren’t making business and consumer loans which was the intent of giving them free money. The answer is, why should they take the risk associated with private loans, when they can get a guaranteed return from the government at no risk. In Quantitative Easing number one, “QE1” The Fed doled out to the banks 2.1 trillion and in QE2 another 600 billion and this week they are expected to announce QE3. This is where the stimulus money came from. The government borrowed 780 billion from the Fed. The Fed got it by selling bonds to the banks. The government then borrowed 780 billion from the Fed and sent that money out to consumers in the form of tax breaks and various spending programs like solar energy and gimmicks to sell cars by offering good deals for people to get rid of their old cars, “cash for clunkers”. Some say the stimulus didn’t help the economy as it was supposed to do since unemployment remained high but others say that if we hadn’t done it things would be worse. Of course there is no way to determine if that is true or not.

Chicago teachers strike

The current teachers strike in Chicago is illustrative of the problem that cities and states across the country face and that involves the payment for public employee’s pensions and health care or what are called legacy benefits. It is the same problem that brought down General Motors and is breaking municipalities and counties. They all start with sweetheart deals arranged by people who were put in office to negotiate with those that put them in office. It is why FDR said public unions should not be permitted and they were not until the late 50’s. Since that time the public sector unions figured out that money for increased salaries was hard to come by but getting legacy benefits was easy. When the teachers union figured out that they could use their vote to put into office people who were favorable to their positions, they were on their way. Over the past 30 years legacy benefits were increased, most of the time by sacrificing salary increases and today the payments for these funds are underfunded. Most of the cost of running a school district is not in salaries or buildings but in pension and health care cost. The past couple of years Chicago has exacerbated the problem by covering current expenses by cutting back contributions to the teacher’s pension fund. This merely postpones the debt, similar to the federal governments, kicking the can down the road. It is not just the teacher’s fund that is in trouble as city, state and county employees face the same situation. This is not the fault of the employees since they were legally getting the best deal they could get. It is the fault of the system that allows people to vote into office those with whom they will later negotiate with and this goes back to FDR’s concern about public unions. He knew this would eventually happen.

Entitlements

Early reports suggest that my predictions about the upcoming election may be incorrect. I am referring to polls that suggest people may no longer be swayed by threats that social security and Medicare will be destroyed if anyone wants to change them. When Paul Ryan came out with his plan to make changes to entitlements, I felt that it guaranteed the re-election of President Obama. I based this on past experiences where anyone tried to change these programs was crucified with ads like the famous push grandma off the cliff. Something has apparently changed in this regard and that would renew my faith in human nature. It remains to be seen if this will actually happen but at least someone started talking about the biggest economic problem of our future, that being, the rising cost of entitlements. It may not come to fruition this election but at least it sets the stage for future elections. If people get the connection between what entitlements are doing to our country and the things that are happening in many European countries along with many states and cities here, perhaps governments will be forced to change. For 50 years the policies of borrow and spend in order to push the debt further down the road has allowed politicians to get re-elected and just maybe this is the beginning of the end of such behavior. We shall see.

Energy

There are currently 1.4 million active military in the US and another half million in the National Guard for a total of just under 2 million. The defense budget is 700 billion and employs 4 million for a total of 6 million jobs associated with the defense of the country. These are skilled people and would easily find jobs in the energy field and with the recent new process of fracking the supplies of natural gas have made the US the leading supplier. Natural gas can be used not only as fuel to produce usable energy but is a boon to the chemical industry, another field of opportunity for skilled people. I the US is willing to expand the fossil fuel industry, which includes fracking for oil and clean coal along with the new safe nuclear processes, this opens the door to moving people from the defense industry to the energy field and will allow the US to become energy independent and no president will have to bow to a Saudi King. On a national scale the US will become the largest exported of energy in the world and our balance of payment problems will be resolved. The new jobs will be high paying technical type jobs and will re-ignite the manufacturing base which is strongly energy dependent. As we bring the troops home from locations around the world while simultaneously grow the energy industry we make the transfer that I call the next industrial revolution. These new facilities will be constructed using modern technologies to keep them clean, meaning free of chemicals like sulfur and nitrogen compounds. There are several ways to sequester carbon dioxide and we can have a new source of clean energy. The only question that remains is, what are we waiting for?

Welfare reform

The AFDC (aid to families with dependent children) program under the Clinton administration became the welfare reform program TANF (temporary assistance to needy families), and is referred to as welfare reform. Clinton promised reform when he said in campaign mode that “welfare should be a helping hand and not a way of life”. This was the reason that I and many others voted for Clinton and so it took on added importance. After he was elected he began to edge on his promise but the Republican congress forced him to follow up and thus the bill was signed into law. It basically said a person could only stay on welfare for five years. Many predicted that single moms would be left to starve but that didn’t happen. What did happen was many went back to work with the help of grandma’s baby-sitting but many others just started getting along with the help of family and local charities. The number of people on welfare shrank and the program was deemed a success but with the current downturn the numbers on welfare increased and pressure was on to ease the work requirements. Some states, understanding the political consequences of changing the law, began to ask for new regulations that would make it easier to administrate the law and this is where the confusion begins. The Obama administration sent a memo to the states saying they would entertain new ways of getting welfare recipients back to work and this caused concern. Some said this was opening the door for states to make it easier to stay on welfare. This in fact did not do that but people understand that the government often times makes major changes in programs by starting with minor changes. It is feared by some that the states will slowly move in the direction of allowing people to remain on welfare past the five year period by adjusting work requirements. They feel that they must object now or as the program grows the incremental changes will be hard to stop. Based on other government programs this is likely the case. I point all this out just to illustrate why it is so difficult to understand why separate groups seem to have a completely different understanding of an issue. How is the average person who has to concentrate on paying the light bill supposed to take the time to figure all this stuff out? They don’t and thus they don’t trust what politicians say. They believe they will distort any issue to get elected.

Jobs

Many of the talking heads on TV say that this election is about the economy or more specifically about jobs, jobs and jobs. I believe there is some misunderstanding about jobs. Some from the liberal side seem to feel that a government job is the same as a private sector job. Some conservatives say that the government cannot create jobs. In my way of thinking they are both wrong. The main difference between the two types of jobs is that while it is true that both can create jobs only the private sector creates wealth. The government uses the wealth created by the private sector to finance government projects and pay the salaries of government employees. There is one exception to this rule and that is when the government spends tax payer money on research and development. The government should invest in areas like the National Institute of Health, NASA and the military. They can also be instrumental in helping to finance large interstate projects like highways. In my opinion the government oversteps its bounds when it tries to tell the private companies how to use the results of its research. For example the government can research various types of solar panels and make that research available to private industry and if the private sector sees a potential for profit they will proceed to develop the industry. When research indicated the use of corn to make fuel some private companies looked into it and decided it was not a good investment. The government then stepped forward and announced a monetary incentive to encourage development of ethanol from corn and the result is a financial debacle. The same thing is happening in the electric car concept. When the government decided that poor people should have a shot at the American dream of home ownership they put forth incentives to get people into their own home and this turned into another debacle. Our history is replete with examples of the government good intentions leading to unintended consequences. The latest is the student loan program. There is direct correlation between the rise in availability of student loans and rise of tuition. This would not be unexpected by anyone in private banking but it came as a surprise to government. There is a proper place for government and it can be used for the common good but it can also be misused and that seems to be happening more frequently these days.

Romney Ryan

Now that Romney has chosen Ryan, the discussion will shift from menial things like Obama’s grades and Romney’s tax return to Medicare and Medicaid. This means we will be deciding the future of the country in a meaningful way. Everyone knows that Entitlements (Medicare, Medicaid and Social Security), represent the real crux of the huge deficit we now have and one that will blow up in our face in the near future, if we do not take action, to control the growth of these entitlements. It is a courageous act to take on this problem openly and honestly but will likely result in the re-election of Obama. I say this because you generally cannot educate people during a campaign. If people really understood the danger in not taking on entitlements, Romney would win going away but they do not understand and the Obama campaign will do everything possible, to muddy the waters by saying that the Ryan plan will throw Grandma off the cliff. Just what is the Ryan plan for Medicare and Medicaid? 1. Starting in 2022 all people born after 1956 will move from the current Medicare program to new plan called a voucher plan. 2. Starting in 2022 the age for starting Medicare will increase by 2 months per year ending at age 67 in 2033. 3. Medicare beneficiaries will receive money from the government (vouchers) to purchase insurance from private companies. The initial payment will be $8,000 per person per year which is the current cost to government. Each year the voucher amount would increase based on the cost of living. The richest 2% will receive only $2,400 per year and the next richest 6% will receive $4,000 and the remaining 92% will get the full $8,000. 4. Nothing changes for all people who are currently 56 or older. Medicaid. Starting in 2013 all current federal money spent on Medicaid will be block granted to the states and will increase based on population and cost of living. Starting in 2022 money will no longer be allocated for acute care services for elderly Medicaid beneficiaries, the so call death panels. These death panels have been around for years but no one has ever talked publically about them as this plan does. Another reason why Obama will win re-election. The reason why spending on entitlements has spiraled out of control is that no elected official has demonstrated the courage to take them on, that is, until now and the American people will likely punish Romney for trying to tackle this issue. If that happens then we will just continue spending until the coming disaster strikes and then the cure will be much more painful. It will be felt by my grandchildren. In other words we will get the government we deserve. It reminds me of the old comic strip, “Pogo” when he said regarding the government, “We have met the enemy and they is us”.

Worse than slavery

In the early days of our country (1550 to 1850) about 650,000 Africans were brought to the US as slaves. These eventually grew into about 4.5 million. In 1865 slavery was abolished as a result of the civil war. To put this into perspective since Row v Wade in 1973 made abortion legal there have been 52 million abortions and 40% of those were African American. This means that over 20 million potential black babies were aborted which is 4 times the number of black slaves at the peak.

Retirement

Since I started my new career, I have been thinking more about the way others look at retirement and since I see 85 as the new 65, my view is somewhat different than many others. I spent 25 years helping people plan their retirement years and they all had one thing in common. They all wanted to plan around their needs. I watched many of these people retire and I came to understand that while they met their goals, many were not as satisfied as they thought they would be. The inner peace and contentment they assumed would be theirs was missing. Things were alright but just not right. As I look back, using the wisdom of hindsight, I realize what was missing. I now understand that a complete retirement plan must be centered around others. The plan should be designed to use a person’s talents, experience and knowledge in ways that can help others. A lifetime of accomplishments can be expanded to improve the lives of people within their sphere of influence. The skills honed in the ups and downs of life can be used to make things better for others. Sharing what was learned in the school of hard knocks can ease the way for others. Get ready, the world is changing

Big issues

The big financial issues of the day are the economies of the US and Europe and both are facing similar decisions. Will they print more money or cut spending. Right now print more is winning in both places. Europe was the first to choose the clever words of “austerity” for cut spending and “growth” for print more and now the US has adopted those terms. Can you imagine a poll question asking would you rather we cut your benefits or grow the economy. So it appears that both will set up plans to spend themselves into prosperity, which sounds like an oxymoron to some people. When you hear about absurdities like this you can bet that it is driven by politics and you would be right. In modern day USA, politics trumps county, so we will play a game of chicken as both parties refuse to compromise. The first test comes at the end of this year when the country will face the largest tax increase in history and the largest spending cuts in history. This coming in the face of a slowing economy will cause serious problems and both parties know this but they are betting that the other side will get the blame and once again party trumps country. Next year as the country goes from bad to worse, the winners will say it was the other guys fault and most Americans will believe them and possible solutions to the problems will be lost in the fog of blame. This happens frequently and I call it the “teenage syndrome”. Mom everyone is doing it. A politician from one party gets caught in some unscrupulous activity and the first thing that happens is they point out how someone else in the other party did the same thing and that makes everything OK. In this coming presidential election we will decide if we want to continue down the path toward European style Democratic Socialism or do we want to reverse the 50 year trend and go for reining in government. Right now one third of all households receive government benefits not counting Social Security and Medicare. If these people vote we will continue with more government. Alexis de Tocqueville said: Alexis de Tocqueville.A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits with the result the democracy collapses because of the loose fiscal policy ensuing, always to be followed by a dictatorship, then a monarchy. The president wants to keep the Bush tax cuts on families earning less than $250,000 and this will bring in 70 billion a year from those earning more than $250,000. This money will not be used to offset the deficit as Obama has already said he would use it to hire more state employees including teachers and these union groups mostly vote democrat. Even if Obama wanted to use the money to offset the deficit it would reduce this year’s deficit from 1,350 billion to 1,280 billion. Hardly a significant change. Everyone knows that the only way to face up to the deficit is to tackle entitlements and Obama will demagogue the Republicans to death on Ryan’s plan to take on Medicare.

Mr Smith

Mr. Smith a teacher earns $60,000 in salary. He pays $8,394 federal tax, $2,310 state tax, $4,590 in payroll tax (social security and Medicare) and $1,200 in pension (2%) and he nets $43,500. This is filing as a single man to simplify things but filing jointly with a wife who earns the same would work out to the same result. He started to work at age 28 and is now 62 and decides to retire after 34 years. He gets 2% of $60,000 times 34 years or $40,800 per year pension. His social security is $13,600 per year so his gross income is $54,400. He pays $6,781 in federal tax, $2,090 in state tax so his net income is $45,529. Since this is $2,000 more than his current net pay he decides to retire. If he cannot live on his current salary he can work past 62 and then retire at more than his net. Also if he enjoys his work and is in good health he can keep on working and will retire at more than net a few years down the road.

Cities going broke

I have mentioned several times in the recent past that government groups are in financial trouble because of the way they negotiated with public unions. I pointed out that in too many cases the negotiators were elected by the unions and then sat across the table from each other to discuss benefits. Stockton, CA recently filed for bankruptcy and much of their problem can be traced to such union negotiations. Police officers are allowed to retire at age 50 with a 3% factor pension plan. This means they receive 3% of their final wages for each year they worked which means if you had 30 years service you could retire at 90% of salary. When you take into account that after retirement you no longer have to pay payroll tax or contribute to your pension these people earned more after retirement than they did before. Other employees were allowed to retire at age 55 and had a 2% pension factor. If you had 35 years of service you retired at 70% of your salary. Remove the cost of payroll tax and pension contributions and your at 80%. All employees were also guaranteed free health care for life after they retired and the city paid the full cost of the health care premiums. Finally the wages of city employees were much higher than equivalent jobs in the private sector. Here is a run down. Summary of Personnel Costs General Fund All Funds Base Pay $66,200,500 50.40% $112,605,522 52.52% Additional Pay $8,809,527 6.71% $11,020,547 5.14% Retirement $27,246,636 20.74% $40,118,476 18.71% Health/Dental Benefits $22,885,726 17.42% $40,717,520 18.99% Other $6,208,555 4.73% $9,926,203 4.63% Total Personnel Costs $131,350,944 100.00% $214,388,268 100.00% Stockton is only the beginning as cities, counties and state employee programs across the county are in similar straights. FDR said that public unions should not be allowed because they would end up negotiating with the same people they elected and he was right. Cities

Speak out

I often make jokes about political correctness but it can lead to serious problems. In the case of the Fort Hood killer, a Muslim doctor who showed signs of instability but things were glossed over because he was Muslim. This of course led to the murder of 13 military people and the injury of many more. When we refuse to talk about matters like this it just makes things worse. I know it is uncomfortable to point that the people are mostly black when a huge mob invades Walmart for a shoe sale or when another mob enters a store and starts shoplifting. We have to face up to the fact that 60 % of AIDS cases are in the gay community. If we ever want to get past these feelings we have to start talking about things as they are and not as we wish they were. As long as we accuse anyone talking about these things of being religious bigots or racist or homophobes we will keep our heads in the sand. I may not agree with how you feel about these issues but I still want to hear your thoughts. Freedom of speech is threatened whenever we ridicule someone for offering their opinion.

Rights

The Presidents recent remarks concerning his views on why some people achieve success, caused me to think back to my youth and how I felt about individuals. I was very liberal and would often defend unsavory people, by pointing out the deficiencies in their upbringing, as the cause of their crimes. If you told me of a man who robbed and beat someone, I would tell you about his fatherless home and his mother who was a prostituted and then say that if you had been raised that way, you would most likely be just like him. I got so good at this type of defense that I finally got to the point where no one was responsible for anything. As time passed and I became aware of more and more people who overcame tremendous obstacles to achieve high levels of success, I changed my views. The President’s comments about people not being responsible for their own success combined with my earlier view of people not being responsible for their failures can now be combined to minimize the effect of the individual and this leads me to my main point. When we say that it is society as a whole not the individual that determines success or failure, we are describing the view of many socialist. It is their view that the state is more important than the individual and that the state can decide what is best for the country. While this may be the view in other countries, our constitution was specially designed to limit the power of the state and it clearly defines the powers given to the individual. We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights that among these are Life, Liberty and the Pursuit of Happiness. In our country we believe that we get our rights from the Creator, not the government.

Medicare

Before 2007 all Medicare recipients paid the same premium but a law passed in 2003 that took effect in 2007 changed that. The new law said higher income people (couples with incomes of $170,000 or more) would pay higher Part B Medicare premiums ranging from $154 t0 $354 per month. The income level of $170,000 was indexed to inflation but Obama care stopped that so these higher income people will pay more for Medicare premiums but it did not affect the average person. For some individuals who are close to the $170,000 point their premiums will go up and could be as high as $354. By freezing the limit at $170,000 slowly more and more people will move into that bracket. Currently 2.4 million people fall into the higher income group and it is estimate that by 2019 that number will grow to 7.8 million. Again this will not affect most people. Obama care also does this same thing to Part D prescription drug and higher income people will see their premiums rise in this area.

Teachers and unions

This is some information on unions that might be of interest to you since teachers are under attack in several states. General Motors is in the news because it has taken government money to survive and is now owned by the government and the union but GM is in some ways typical of other large corporations in that they all have large legacy cost. Legacy costs are the commitments made to employees in the form of retirement benefits which include among other things pensions and health insurance. Today GM has unfunded legacy costs of about 200 billion and the 600 million shares of outstanding stock can be purchased for 1.5 billion dollars. This is the culmination of 50 years of mismanagement. Many years ago the company president had a long term plan usually 10 to 20 years and his strategy was developed on that basis but in the early 60's things begin to change. The president's horizon shortened and over the next ten years it dwindled to planning for the next quarterly dividend. The pressure on CEO's mounted and they had to show a good dividend to keep investors happy. If the value of the dividend fell then investors looked for other vehicles in which to place their capital and the CEO's job was in jeopardy. This was highlighted when it came time to negotiate a new contract with the union and the result was to pacify the union members with increased benefits instead of increased salaries. This allowed the CEO's to avoid a strike and pushed off payment into the future and thus preserving the current dividend. By the time payments came due this CEO was on his way to either a higher paying position or to retirement. So here we are today with a company that has committed payments to its retirees that are worth 130 times more than the entire company is worth. What idiot would ever purchase a company in that position? Only the federal government could be that stupid. In the Minneapolis School District there are 3,300 teachers and 6,700 support staff. 1,500 of the support staff are members of the teachers union. If the teachers select a candidate who will negotiate contracts that are favorable to teachers and then work to get them elected, they have a very good chance of winning. If each teacher and spouse vote for a particular candidate that is 9000 votes. Now if they get their parents to vote that is another 18,000. Next if they have coffee parties and invite the neighbors plus make a small campaign contribution they can just about guarantee a win for their candidate. The proof of this is that No DFL-endorsed candidate for the board has lost in at least 20 years. Here are the results from the last school board election and it is easy to see why someone with a 27,000 vote head start will be the likely winner and you can be assured that all the teachers do vote. 3 seats 131 of 131 precincts (100%) Lydia Lee * 61,623 Jill Davis 58,998 Carla Bates 54,691 Sharon Henry-Blythe * 39,476 Kari Reed 33,118 Doug Mann 28,416 This is why it is necessary for there to be a disinterested third party to negotiate contracts. Some thing similar to arbitration

Education

In the news today a study shows that 30% of students with loans are dropping out and end up with no degree and lots of debt. Here is an essay I wrote a few months back on this topic. When I hear people say that they cannot afford to go to college I just flat out do not believe them. What they may be saying is that they cannot afford to go to the college of their choice and that I can believe. In today’s America there is a college within driving distance of almost every town and kids can stay at home and go to a local school. Their parents can continue to supply room and board as they have and the child can work summers and part time and earn enough to provide for their books, tuition and fees along with enough to pay for their transportation cost. Tuition and fees run about $5,000 per year here in Minnesota. Upkeep, gas and insurance cost about $2,500 per year. Working at a fast food or equivalent place earning $8 per hour this $7,500 can be earned in about 1,000 hours. A kid can work 100 hours per week for ten weeks in the summer. I lived in Springfield, IL when I was growing up and I graduated from high school in June of 1955. At that time there was no college in the state capital of Illinois and so I had to go away to school. I worked full time and went to school part time at Miami University of Ohio and after nine years I graduated with a BS in Chemistry. There were no student loans and I was not smart enough to get a scholarship so I paid my own way, something that I am very proud of to this day. When I graduated I had a job with nine years work experience and money in the bank. Today with the student loan programs the kids graduate in four or five years but have no work experience, lots of debt and often no job. I believe these student loan programs are just one more example of the unintended consequences of good intentions. Those who believe in the government taking care of the citizens will defend this program but they often times are more interested in maintaining control over people than helping people help themselves. These loan programs were started along with many other government programs in the Great Society and as soon as they were available most colleges started to increase tuition to accommodate for the excess cash that would be forthcoming from the government. Most informed elected officials know all of this but they are not interested in changing it because it was power and control they were after and that is what this program gives them. Recent proposed changes to move these loans from the private to the public sector further increases their control.