Public pensions

There is a lot in the news these days about pension plans for government employees. Most of these people work with defined benefit pensions and that means they receive a pension based on their years of service and final salary. Each plan contains a pension factor that is normally between one and two percent so if your plan uses 1.5% and you have worked for 30 years you will retire at 45% of your final salary.

Economy

The US economy is mostly based on spending from three sources. First is consumer spending followed by business investment spending and finally government spending. Right now business investment has slowed and consumer spending is down so the argument is to increase government spending to get things going. There are experts on both sides of this issue and the question has now turned to what would Romney do since he is opposed to more government spending. The best guess is that he will attempt to free up the two trillion that businesses have overseas and the additional two trillion they have in savings. His plan is to change the tax law to encourage business to bring home their overseas money and to reform regulations to get business to invest. Right now business is unsure of the future and unwilling to take risk. Business leaders indicate that if they cancel Obama care and get rid of all the new regulations that have become law in the past three years they will feel comfortable moving ahead. If Romney is elected and able to get this four trillion into the economy many feel this will be enough to get things going. Which way the country goes will be determined by the election.

Dodd FDIC

Senator Dodd of Connecticut was chairman of the Banking Committee and when he suddenly decided not to seek reelection, I became curious. One of the things I discovered happened in 1991 when Dodd revised the FDIC rules that determined how the Federal Reserve made loans to banks. These were commercial banks the kind that most of us are familiar with and one of the main provisions is the government guarantee of each account up to $250,000. The purpose of the revisions, were to reduce the risk to the taxpayers if banks made bad decisions. Near the end of the hearings Dodd inserted a section in the bill without notice that allowed the government to bailout insurance companies and investment banks. Recall that investment banks are not like the commercial banks in your neighborhood but they are the big Wall Street banks. The net result was that instead of reducing the risk to taxpayers it greatly increased the risk. This is something that economist refer to as, “moral hazard”. It means that if the government is going to back up your mistakes then you are likely to take greater risk with your investments and of course this is exactly what happened. When the mortgage crisis hit the big banks like Bank of American and big insurance companies like AGI got billions from the taxpayers and this would not have happened without the Dodd amendment. Now some say this was not just an honest mistake on Dodd’s part but was a planned strategy since Connecticut is home to a number of large insurance companies. It has been suggested that Dodd retired knowing that as the mortgage fiasco was examined his change to the FDIC would come out.

Stimulus

In 2009 Obama passed stimulus one for 814 billion and it created 3.6 million jobs. The White House says the multiyear $814 billion stimulus program passed by Congress in 2009 boosted employment by 2.5 million to 3.6 million jobs and raised the nation's annual economic output by almost $400 billion. A recent study by two prominent economists generally agrees, crediting the pump-priming with averting "what could have been called Great Depression 2.0." Using the best figure of 3.6 million this is $240,000 per job While this was going on the Fed added 1,500 billion in QE1 and another 500 billion in QE 2 in an attempt to spur job growth so the cost per job was likely much higher since no one knows how quantitative easing (QE) affected jobs.

Irony

AN INTERESTING BUT SAD IRONY When President Johnson took over for Kennedy he proposed what has become known as the War on Poverty as part of his Great Society. I thought this was a good idea and voted for him when he ran in 1964. Now that I have 50 years of hind sight I have concluded that this was just one more idea based on good intentions that ended up with unexpected consequences. Over this time the federal government has spent 8 trillion dollars or if you’re a cynic the government has taken money from people who earned it and given it to people who have not earned it. In the 60’s we had 15% of the people living in poverty and today we have 15% living in poverty. The main impetus of the War was to help the inner city blacks. Let’s see how we have done. The drop-out rate in the inner city schools has doubled over the past 50 from 25% to 50%. The number of black babies born to unwed mothers has tripled from 25% to 75%. Today black males represent 40% of people in prison but only 12% of the population and this is double what it was in the 60’s. Today half of all homicides are blacks killing blacks and in the 60’s it was half of that. Now here is the irony. Since Roe v Wade in 1973 there have been 52 million recorded abortions and 40% of those were black women meaning that 20 million black babies have been aborted in the past 50 years. If they had lived they would have grown to 40 million which is the total number of blacks in the country today. In other words we have killed off half the black population. Since we have 900,000 blacks in prison we could reasonably assume that if these abortions had not happened we would have twice that many black males in prison. Instead of 8000 black on black murders last year we would have had 16,000. An interesting point is that at the height of slavery we had fewer black slaves than the number of black prisoners we have today. About 600,000 slaves were imported to the US and by 1860 when slavery ended there were about 4 million blacks in the US. That number represents only one fifth of the number of black babies that have been aborted in the past 50 years. This whole discussion reminds me of the people who point out that if it weren’t for smoking, social security would already be broke. I warned you about irony.

Words

Once again the conservatives have been outsmarted by liberals when it comes to words. Those in Europe who want lower government spending are for austerity and those who want more government spending are for growth. Growth is the new word to describe spending. What do you prefer austerity or growth? The same thing happens here, when taxes are called revenue and liberals are called progressives. Speaker Boehner has announced that he will not raise the debt ceiling unless cuts are made to offset the raise so the deficit will not go up. The first two times he tried this it was reported that he was trying to shut down the government and this will happen again. I guess he will never learn.

Glass-Steagall

Because of the recent billion dollar loss at JP Morgan Bank, the push to get the Volker rule passed is in the new once again. Here is what I wrote about this a few months past. In the past I have discussed the “China Wall”. I started in the finance business in the early 70’s and one of the first oddities I encountered was the China Wall. This mythical wall was the result of the Glass-Steagall Act of 1933. Many banks have a commercial side that uses savings from depositors to make loans. Most of these loans are for business inventory, cars and some home mortgages. Banks also have an investment side that evaluates companies and helps them to sell stocks and bonds. Now the rub comes in when the banks use the profits they made on the commercial side to invest in the investment side. Glass-Steagall said that the commercial side is separated from the investment side by the invisible China Wall meaning that the investment people would not discuss business with the commercial side. Let’s suppose that I work in the investment side and I am helping a company with a business plan so I have access to inside information. I see that they have just developed a new product which is going to make them a lot of money. I arrange a lunch meeting with the CEO and just by accident a member of the commercial side is sitting at the table next to us. This person overhears our conversation and then goes back to the bank and using profits from the commercial side purchases a large amount of stock in the company I am helping. The China Wall has been breached. This sort of thing was quite common so when Clinton did away with Glass-Steagall in 1999 it didn’t cause much of a stir to the people who really knew what was going on. Later this was blamed for the mortgage fiasco but in fact it had very little to do with it. In an attempt to look as if the government was doing something about this they brought in the Volker Rule which was somewhat similar to Glass. This is for show but can easily be by passed.

European economy

For those of you who keep abreast of current developments on the economic scene the argument has boiled down to two sides. One side says that we need to spend more and forget about the debt and the other side says spend less and bring down the debt. Paul Krugman, a liberal economist is for spending more. He wants to print up 600 billion and send that money back to the states to hire back all of the state employees, mostly teachers, who have been laid off. I feel he is partially correct that we need to get the economy growing and that is one way but there is another approach. Private companies have a trillion dollars overseas that they will not bring back until the tax laws change and they have another trillion dollars they are sitting on waiting for more stability in government. If President Obama is reelected we will go with the printing of money and hiring back teachers but if Romney is elected the path will be the other way. He will get rid of Obama care and most of the regulations that Obama has put on business and they will start to spend their savings. The tax laws will be changed to encourage business to bring home their overseas money. Europe is facing the same two choices. Germany and England prefer the spending reductions called austerity and the rest of Europe wants to print money and hire back government employees. England is a separate case since they have their own currency, the pound vs the Euro and they have chosen austerity and it is not working all that will just as we have chosen printing money and it also is not working that well. We are doing better than England as England just went into a double dip recession. The main disadvantage to following Obama is that once we get the economy growing we then have to tend to the debt but if we follow Romney we can get at both problems at once. After you remove the politics we still have economist on both sides of the issue which seems always to be the case with economist. Even if you are not an expert you can choose either side and have a whole passel of experts on your side. If I were running a presidential campaign I would much rather be on Obama sides since it is easier to tell the people that we are going to hire them today than to tell them we are going to wait for private companies to hire them since it will take time to undo what Obama has done but sending printed money to the states can be done overnight. I believe most people will go for the immediate solution since many of us, especially those under 65 have been raised on instant gratification.

Inflation

Back in my days as a financial planner I would talk to small business people about setting up a pension for their employees. They would often counter my reasons for having a pension, by pointing out that when they ask their employees, whether they would like to set money aside for future use in a pension or have a Christmas bonus they most often preferred the bonus. I would point out that when these employees got older and closer to retirement they would be upset that you did not set up a pension. They would say that the owner should have known that they did not have the self-discipline to save and forced them into a pension. We have a similar situation going on today regarding tax and spend vs save and invest. Most voters want the government to print more money and give them immediate benefits. In five years when inflation starts to really impact the poor they will demand to know why and the answer is when you just print money it will cause inflation. Then the voters will complain that no one told them about this and they will be right since the politicians don’t like to talk about bad things happening in the future. They only want to get elected today and not have worry about tomorrow. This is want they mean by kicking the can down the road. Many people alive today were not around when Jimmy Carter was President and they don’t know what 13% inflation can mean. In those days the stores still stamped the price on items and the consumers could see how prices were going up so fast that prices were over stamped.

European elections

With the elections in Europe yesterday we now have 9 of the 17 member nations getting new leaders in the past three years. The people have spoken and they want more benefits and printing money to pay for these benefits. They printed up 500 billion last year and are now set for a second stimulus. They still have a way to go to catch up with the US which has printed up about 2 trillion. The theory behind this is based on spending money to fire up the economy which will reduce unemployment and bring in more income from taxes. Then when the economy is booming use the increased taxes to reduce the debt. There is always a first time for everything but in the past we have always increased spending in a bad economy but when things turned around we didn’t use the new taxes to pay down debt but used it instead to start new programs and thus the debt keeps rising. If this idea works and we get back to full employment then inflation will come on like gang busters and many governments are counting on this so they can repay their debt with deflated money. They seem to forget that inflation is the cruelest tax of all and really hurts the poor and those on fixed incomes. Oh well most poor people don’t vote anyway.

Fairness

Social justice is term bandied about with reckless abandon these days. It seems it means different things to different people as is the case with many phrases. To most people the idea of giving everyone and equal opportunity is something to strive for, the so called “level playing field”. We see those words used to describe fair trade as we point out how China manipulates their currency and tax law to keep our imports at artificially high prices. We see it in the area of civil rights when we agree that people should not be discriminated against because of their skin color. Some say that Jesus championed the cause of social justice and there are many examples of this in the New Testament. Jesus spent His time preaching to and helping the poor and sick and His life is a testimony to the concept of social justice. "Jesus said to him, 'If you want to be perfect, go, sell what you have and give to the poor, and you will have treasure in heaven; and come, follow Me.'" (Matthew 19:21) When a term has such universal appealing meanings it is easy to broaden its definition to include areas, which standing alone would seem a bit much. This has been happening slowly over the past few years and has now reached the point of controversy. Advocates of social justice believe that the churches should petition the government to help the poor. They believe that we should elect public officials who feel that it is the government’s responsibility to help those in need and most people tend to agree. This is what we commonly refer to as a safety net. These trends have allowed the definition of social justice to expand the idea of equal opportunity to equal results. Why should some have so much more than others? This then leads to the concept of fairness and we hear a lot about that these days. The suggested remedy is the redistribution of income and wealth. This is not a new idea. It has been used so often we have assigned a name to it. It is called populism. Throughout our history it has been a very powerful force and it appeals to the masses. It has merit as witnessed by the change in pay for CEO’s over the past 30 years. In 1980 the pay was 40 times the hourly wage and today it is 500 times. This is considered unfair by fair minded people. It is the result of corrupting the free market system. The CEO of one company is on the board of a second and the CEO of the second is on the board of the first and the result is each one giving the other a raise. This kind of manipulation of market forces pushes people toward regulations which demand fairness. However the country can move to far in that direction and destroy initiative. The average family income in the United States is about $50,000. What could be more fair than having every family earn this amount. If we achieved this perfection of fairness what is the incentive to spend years in school to become a doctor, if you can drop out of high school and become a janitor and earn the same pay? While one group pushes for more government control of our economy the other side is resisting and hopefully we will arrive at some point in the middle where we do have equal opportunity and we will not have to use the force of law to insure equal results.

Chicago politics

In 1981 there was a law sponsored by Illinois Assemblyman John D’Arco which would allow members who had left the General Assembly but then worked for other state agencies could rejoin the Assemblymen’s pension group as long as they did so before 1992. In 1980 Mayor Daley left the Assembly and took the job of Cook County States Attorney. He had 8 years of service and purchased an addition 2 years by paying $6,000 into the fund giving him ten years of service in the pension plan. He paid in that money one month after the new law went into effect. One month after Daley was elected to his first term as mayor he used D’Arco’s law to rejoin the Legislators pension plan for one month and that allowed him to transfer his pension credits from his city jobs to the legislative pension fund. The normal procedure would be to pay up front for all those years to make the pension whole but the law allowed him to gain those years and avoid the $400,000 up front payment. Instead he simply transferred the $128,000 he had accumulated in the city fund to the legislative pension and avoided the $400,000 payment. The legislative pension now pays Daley $118,000 per year and the city plan pays him $66,000. In case this is all too complicated realize that Daley paid the legislative pension plan a total of $128,000 and collects $118,000 per year for life. This pension, known as the GARS plan, is underfunded by $235 million dollars. Daley is only one among many who have taken advantage of the D’Arco rule and this may explain why the pension fund is unable to meet its commitments.

General Motors

When GM filed for Chapter 11 Bankruptcy it did not follow the normal procedure whereby bond holders and preferred stock holders would be given preference on remaining assets. Instead the federal government intervened with cash and demanded certain changes in the regular court process. The most significant was giving the union a 17% ownership in the company in lieu of payments to bondholders. While I personally would be more concerned about the employees than the bondholders this does not bode well for future GM bond sales. Another unreported difference in this filing was how past losses will affect future profits. In a normal situation companies are allowed to carry forward past loses and apply those to future profits thus reducing taxes owed. When a company files Chapter 11 they lose this right but an exception was made for GM and they will be allowed to carry forward losses for 20 years which means they will likely pay no tax for the next 20 years. It is not possible to figure the loss to taxpayers since no one knows how successful GM will be but we do know that much of their profits come from operations outside of the US. We do know that GM made 7.6 billion in profits for 2011 and owed zero tax because of the carryover exception. They actually got a 110 million dollar refund and was able to pay a $7,000 bonus to each employee. Just where does GM stand at this point/ As of February 2012 General Motors has only paid back Uncle Sam $26-billion of the $49.5-billion in bailout money they received. They also accumulated $13-billion in stock losses and reported record profits of $7.6-billion in 2011. This means that for every $1 of profit, the U.S. government paid $4. Taxpayers also spent another $27-billion to buy General Motors stock and currently own about 30% of the company in stock. 47,500 blue-collar workers will be receiving profit sharing checks of up to $7,000. Jack

Tax the rich

You are correct when you say that the gap between the rich and poor is getting wider and if they want to tax the rich more that is OK by me but here is how the tax is currently distributed. The top 1% of wage earners pay 21.6% of all income tax collected The top 5% pay 60.6% of all income tax collected. The bottom 50% pay no income tax. Understand that everyone pays payroll tax (social security and Medicare) and that is no small amount at it equals about 90% of what income tax collects. If we tax the millionaires at 30%, as Obama , that will bring in an additional 5 billion dollars and that would reduce this year’s deficit from 1,300 billion to 1,295 billion. If you want the rich to pay more you can’t get it from income tax you must get it from capital gains. The reason the rich pay less is that most of their income comes from capital gains which are currently taxed at 15%. The reason capital gains are taxed at a lower rate is that the money these people invest has already been taxed as ordinary income and when they invest this after tax money they are taxed again on the profits so the rate is lower to encourage investment.

Drug babies

Last year about 350,000 babies were born to drug addicted mothers. About 5% were prescription drugs. The remaining mothers were low income and medical expenses were paid by Medicaid. The cost was $20,000 per baby for a total cost of 7 billion dollars. This does not include future problems faced by these babies, things like reading and language problems and a multitude of other health related problems. This also does not include the number of addicted moms who chose abortion.

Healthcare

As we approach the day when the Supreme Court rules on Obama care, the question has come up as to what Plan B is, in case Obama care is ruled unconstitutional. No one has put forward a plan so I will step up to the plate. Back three years ago before Obama care we faced a situation with two main problems. 85% of people were insured primarily through their employer and poll showed they were satisfied with their coverage but were concerned about the rising cost and that was problem number one. The second was the 15% (48 million) who were uninsured. Let’s tackle the uninsured first. They fall into four about even groups. The first 12 million are illegal aliens and they will continue to use the emergency rooms, until such time as we solve the immigration situation. The second group is young people who could buy insurance but refuse because they are indestructible. The third group is people eligible for Medicaid but don’t sign up because there are no preexisting conditions, so they wait until the get sick and then sign up. The forth group of 12 million are people who need health care but cannot afford it and this is the group we will attempt to help. Before we lay out how we will help them, we first have to solve the problem of cost. The main reason that health care cost increase at twice the inflation rate can be explained with three words, “third party payer”. The best way to explain this is to use the metaphor of food insurance. Suppose you could purchase a food insurance plan. You would pay a monthly premium to the insurance company and then when you bought food you would present your food insurance card to the clerk and the bill would be forwarded to the food insurance company. As time passed, you would become more and more concerned with the quality of the food and the location of the store and less concerned with the cost and this is just what has happened with health cost. Have you heard someone joke, while looking at their hospital bill, about two dollar cotton balls and four dollar aspirin? Now let’s look at the 85% who are insured and I will use 3M as a typical company to explain their health insurance. It cost the company about $15,000 per year for a family plan and the plans typically have a deductible, a co-pay and a stop loss provision. You would pay a $200 family annual deductible and 20% co-insurance and when your out of pocket expenses for the year reached $2,000 the company would pay the rest. This year the company comes to you and says our new plan will ask you to pay the first $5,000 of your health care cost for the year but the will put $5,000 of tax free money into a special account in your name. They can buy such a plan, called Major Medical, for about $5,000 per year. This leaves the excess $5,000 as savings for the company. How with this effect how you handle your health care cost. You realize that any money in your medical account that you don’t spend, will accumulate for you to use at retirement, so you will start shopping for health care the way you shop for other items. If your family doctor says your child needs a tonsillectomy you shop around to find the best deal considering cost and quality. In other words the way you shop for other things. This in itself will bring cost down. Look at what happened to Lasik surgery which is not covered by most insurance. Twenty years ago the cost was $2,500 per eye and today it is one tenth of that or $250. This is because more people were demanding the service and more doctors got into the business which led to competition which led to lower prices. This is the way the free market works. Everything we buy today cost less as a percent of our income than in the past. My first car was a new 1958 Buick and it cost me $3,500 and that was my earnings for the year. Today I can buy a new Buick for $30,000 which would be half my earnings. Using this approach we can get health care cost in line with the cost of other items but where does the savings come in? Health care cost, which represent 16% of the GDP, come to 2.4 trillion dollars per year and 27% of that cost or $648 billion is for administration which is a euphemism for paper work. When we remove the handling of all claims under $5,000 we eliminate 90% of the paper work and this saves 583 billion dollars per year. If we set up the same plan for the uninsured this cost $10,000 per year for each of the 12 million uninsured or 120 billion dollars. We have now solved both the problems we started out with, the first being the uninsured and the second the cost. We now have everyone insured with no need for pre-existing conditions and the cost is under control. No one need worry about reaching the limit of their coverage and no one will be cancelled. Do the doctors like getting paid up front instead of having one or two people in the office filing claims and waiting months to get paid? How about the clinics and hospitals that have a whole rooms full of people working on claims. Now what is the downside? We have essentially eliminated 12 million jobs in the insurance industry. Their average salary is $50,000 and this times 12 million is the $600 billion in savings. What is to become of these people? First off, they are mostly high school graduates with many having college degrees and most are computer literate. In addition they are productive citizens who know how to get and maintain a job. They will be absorbed into the system. The first year they can have their health insurance paid for out of the savings. Jack