My Unfinished Essay on the Pending Collapse of the United States
Last Updated March 9, 2005

Bob Jensen at Trinity University

Looking ahead is difficult, especially when the future is concerned.
Old Chinese saying

Projected Population Growth (it's out of control) --- http://snipurl.com/9wu3

Question
What former Andersen partner, who watched the Andersen accounting firm implode alongside its client Enron, has been traveling for years around the United States warning that the United States economy will implode unless we totally come to our senses?
Hints:
David Walker is was the top accountant, Controller General, of the United States Government.
He was a featured plenary speaker a few years back at an annual meeting of the American Accounting Association.
See his "State of the Profession of Accountancy" piece in the October 2005 edition of the Journal of Accountancy.
Also see http://www.aicpa.org/pubs/jofa/jul2006/walker.htm

Videos About Off-Balance-Sheet Financing to an Unimaginable Degree
Truth in Accounting or Lack Thereof in the Federal Government (Former Congressman Chocola) --- http://www.youtube.com/watch?v=NWTCnMioaY0 
Part 2 (unfunded liabilities of $55 trillion plus) --- http://www.youtube.com/watch?v=1Edia5pBJxE
Part 3 (this is a non-partisan problem being ignored in election promises) --- http://www.youtube.com/watch?v=lG5WFGEIU0E

Watch the Video of the non-sustainability of the U.S. economy (CBS Sixty Minutes TV Show Video) ---
http://www.youtube.com/watch?v=OS2fI2p9iVs 
Also see "US Government Immorality Will Lead to Bankruptcy" in the CBS interview with David Walker --- http://www.youtube.com/watch?v=OS2fI2p9iVs
Also at Dirty Little Secret About Universal Health Care (David Walker) --- http://www.youtube.com/watch?v=KGpY2hw7ao8

Ernie Hanson (University of Wisconsin)  informed me that David Walker resigned as Controller General effective March 12, 2008 and now is president and CEO of The Peter G. Peterson Foundation.
Here's the rest of the story

"You Can't Take It With You," by Peter Peterson, Newsweek, April 7, 2008, Page 56 --- http://www.newsweek.com/id/129572

The turning point in my life came before I was born. It was the day in 1912 when my Greek immigrant father came to America. He came as a teenager, without a penny or a word of English, and with only a third-grade education.

He took a job as a railroad dishwasher. He worked, ate and slept in a steaming caboose and saved everything he made. With his savings he opened a restaurant, and kept it open 24 hours a day, seven days a week for 25 years in my hometown of Kearney, Neb. His hard work and thrift gave me extraordinary opportunities. Had I been born in a different country, at a different time, I would never have had the chances that gave me such good fortune.

I have lived the American Dream—I went to college, worked in the corporate world, served in government and became an investment banker. And that led to a second turning point, on June 21, 2007, at 9:30 a.m. That was the day the Blackstone Group—a private-equity, asset-management and financial-advisory firm that I cofounded—went public. In an hour I became an instant billionaire.

What to do with so much money? I have much more than enough, and there seems little prospect that I can take it with me. So again I turn to my father's example. When he had built a modest net worth, he gave generously to his old home in Greece and to the less fortunate in his beloved new home. Tears would come to his eyes when he sang "God Bless America." He so loved America for its possibilities.

I believe today that those possibilities are shrinking, endangering the American Dream. Personal myopia, political cowardice, fiscal fantasy and journalistic neglect are all at work. So I have chosen to put much of my wealth ($1 billion over the next several years and much of my remaining estate) into a new foundation, one that I hope will explain the undeniable, unsustainable and yet politically untouchable long-term challenges we face. Headed by The Honorable David M. Walker, who served as the comptroller general of the United States from 1998 to 2008, the foundation will propose workable solutions and build up the public will to put them into effect. I cannot think of anything more important than trying in this way to preserve the possibilities of the American Dream for my children's and grandchildren's generations, and generations yet to come.

Let me summarize three such challenges. First, as 78 million baby boomers reach retirement age, the costs of Social Security and Medicare will skyrocket, leaving us with unfunded promises of more than $44 trillion in today's dollars—equal to about three times our entire gross domestic product. Income taxes would have to double to pay for it—an unthinkable burden.

Second, our current-account deficits are unprecedented, fed by record trade deficits. Such dependence on foreign capital is dangerous. America as a country, and Americans as a people, must be persuaded to save more.

Third, our health-care costs are metastasizing. We already spend more than twice as much per capita as other developed nations, with no appreciable differences in health outcomes or longevity. These ballooning costs threaten the very competitiveness of American industry.

These challenges all require sacrifice. That means everyone. We fat cats will have to pay more taxes. The government will have to spend less. Everyone will have to save more. I'm not sure if we remember how to give up something for the long-term general good. Nor do we hear calls for sacrifice from our leaders. Our lawmakers are enablers, either joining us in the state of denial or trying to anesthetize us. But if we can learn to face the future realistically, everyone will benefit from a more robust, sustainable economy.

The "Greatest Generation" that lived through the Depression of the 1930s and World War II confronted, overcame and paid for challenges more sobering than those we face today. We can do it again. I refuse to believe that we have become so selfish and self-absorbed that we don't care about our children's future and America's leadership in the world.

How do we as a country, and Americans as a people, learn to save more and spend less? How do we educate the young about the crisis they will face if things aren't changed, and then move them to do something about it? Or will it take a real and very costly crisis to force us into action?

We need to go where the young people are: new media, bloggers, YouTube, Facebook, MySpace, MTV, and networks and Web sites that have not even been invented, and that is what my foundation will try to do. We will sponsor the production of films that educate people about the perils America faces (I have been impressed with what Al Gore accomplished with "An Inconvenient Truth"). We will have youth summits to get young leaders engaged in the process. Maybe someone should develop an AAYP, an American Association of Young People, to counteract the lobbying power of the American Association of Retired Persons. There are, of course, many other groups we must reach. How best do we energize the business community? Tom Friedman of The New York Times called us MIAs, "missing in action" on these daunting challenges. We have a huge stake in tomorrow's economy. How do we convince the media that the future is worth covering?

These challenges have hung over our economy for years. Others have tried to sound the alarm. I know that the odds of success are daunting. Yet given what is at stake and what I owe this remarkable country, I, and we, have no alternative but to try. As we move forward, we need to remind ourselves of the words of Dietrich Bonhoeffer, the German pastor who was instrumental in the resistance movement against Nazism. "The ultimate test of a moral society is the kind of world it leaves to its children," he said.

It is time we become moral and worthy ancestors.

I.O.U.S.A.:  A Fact-Filled Documentary That Makes the Sicko's Sicko Look Sicko
"Another Inconvenient Truth," The Economist, August 16, 2008, pp 69-69 --- http://www.economist.com/finance/displaystory.cfm?story_id=11921663

AMERICA’S infamous debt clock, near New York’s Times Square, was switched off in 2000 after the national burden started to fall thanks to several years of Clinton-era budget restraint. However, it was reactivated two years later as the politically motivated urge to splurge once again took over. The debt has since swollen to $9.5 trillion, with the value of unfunded public promises (if you include entitlements such as Social Security and Medicare) nudging $53 trillion—or $175,000 for every American—and rising. On current trends, these will amount to some 240% of GDP by 2040, up from a just-about-manageable 65% today.

David Walker, who until recently ran the Government Accountability Office, has made it his mission to get the nation to acknowledge and treat this “fiscal cancer”. His efforts form the core of a new documentary, “I.O.U.S.A.”, out on August 21st. The message is simple enough: America’s financial condition is a lot worse than advertised, and dumping it on future generations would be not only economically reckless but also immoral.

The biggest deficit of all, the film contends, is in leadership: politicians continue to duck hard choices. It hints at dark consequences. As America has become more reliant on foreign lenders, it warns, so it has become more vulnerable to “financial warfare”, of the sort America itself threatened to wage on Britain, a big debtor, during the Suez crisis. Warren Buffett, America’s investor-in-chief, pops up to warn of potential political instability.

The film is part of a broader effort to popularise the issue. In 2005 Mr Walker set off on a “fiscal wake-up tour” of town halls; sparsely attended at first, it now attracts hundreds to each meeting (though some may be turned off by the giant pie chart strapped to the side of his tour van). The young are being drawn in too, even forming campaign groups; Concerned Youth of America’s activists “crusade against our leveraged future” wearing prison suits. Mr Walker is talking to MTV, a music broadcaster, about a tie-up. His profile has been lifted by a segment on CBS’s “60 Minutes” and an appearance on “The Colbert Report”, a satirical TV show, which dubbed him the “Taxes Ranger”.

Promisingly, the new film was well received at the Sundance Film Festival. Some even wonder if it might do for the economy what Al Gore’s “An Inconvenient Truth” did for the environment—perhaps with this comparison in mind, Mr. Walker and his supporters talk of a “red-ink tsunami” and bulging “fiscal levees”. But, unlike the former vice-president, he is no heavy-hitter. And, even jazzed up with fancy graphics, punchy one-liners and a splash of humour, courtesy of Steve Martin, tales of fiscal folly are an acquired taste. Still, “I.O.U.S.A” is a bold attempt to highlight a potentially huge problem. “The Dark Knight” it may not be, but for those who care about economic reality as much as cinematic fantasy, it might just be the scariest release of the summer.

In addition, the survey, conducted between June and October of 2007, found that a wide majority of Democratic (67%), Republican (66%), and Independent (70%) voters believe that health insurance costs should be shared by individuals, employers and the government. Further, a majority of the public was strongly or somewhat in favor of requiring individuals to have health insurance coverage—with government help for those who cannot afford it. Sixty-eight percent of Americans favor such a proposal, with 80 percent of Democrats in support, and more than half of Republicans (52%) and two-thirds of Independents (68%) in favor, according to a report on the survey findings, The Public’s Views on Health Care Reform in the 2008 Presidential Election. The Commonwealth Fund today also released a report that describes and evaluates the Presidential candidates’ health reform plans. The analysis found that both leading Democratic and Republican candidates seek to expand health coverage through the private insurance market, but the leading Democratic candidates would require employers to continue participating in the health insurance system either by providing coverage directly or contributing to the cost of their employees’ coverage, whereas the Republicans support changes in the tax code that have the potential to significantly reduce the role of employers in the provision and financing of health insurance. “In some ways, the Republican proposals seek bigger changes to the way most people currently obtain coverage,” said lead author Sara Collins, Assistant Vice President at The Commonwealth Fund. “Most of their plans propose a diminishing role for employers, whereas the leading Democrats favor keeping employers in the game.”
PhysOrg, January 15. 2008 --- http://physorg.com/news119627984.html
Jensen Comment
Two of the leading scholars in America (Gary Becker and Richard Posner) discuss the healthcare proposals of the leading U.S. Presidential candidates at
http://www.becker-posner-blog.com/  (January 13, 2008)
Nobel Laureate Gary Becker states the following:

As Posner indicates, American health care generally gets poor grades in international comparisons of health care systems. Although major reforms are needed in the American approach, international comparisons underrate American health care. This is partly because these comparisons give insufficient weight to the fact that most of the new drugs to treat major diseases originated in the US, along with many of the new surgical procedures, and insights about the importance of lifestyles in good health. This helps explain why many Canadians and those from other countries come to the US to treat serious diseases rather than visa versa. The US is also much more generous than other countries, such as Great Britain and France, in making expensive surgeries and drugs available to older persons through Medicare and private insurance. This too significantly raises the cost of health care. Moreover, the American health system is decentralized and "messy", and many health evaluators prefer a single payer (i.e., government) centralized approach to health care as opposed to any market-based approach.

This is not to deny that the American health care system has serious defects. If I were running for president, and allowed only four reforms, I would emphasize the following (assuming I do not worry about getting enough votes to be elected!):

1) Eliminate the link between employment and the tax advantage of private health insurance. Since much of the spending on health are investments in human capital, there is good reason to exempt these expenditures, along with other investments, from income taxes. However, this employment link is inequitable because it does not provide the same tax advantages to families without employment-based insurance. It also encourages expensive employer health plans that have significant consumption components since the government picks up much of the cost of such coverage. President Bush has proposed a reasonable alternative; give every family a flat $15,000 standard deduction (and half that amount for individuals), whether or not their health insurance is obtained through their employer. They would still get this deduction if they spend less on their insurance, so they have incentives to economize on their health care (but by my reform number 4, everyone would have to take out catastrophic coverage). Consumers would have to pay for any coverage in excess of $15,000, so they would only choose such coverage if they were willing to spend their own money, not taxpayers.

2) Encourage the spread of Health Savings Accounts (see my discussion on Feb. 5, 2006) that encourage consumers to economize on unnecessary medical expenditures. Present law allows tax-free contributions to these Accounts of up to about $2700 for individuals and double that amount to $5450 for families, as long as these contributions are not greater than the deductibles on their health insurance. Contributions to HSAs that are not spent in any year can be carried over to future years without any tax liabilities, and even into retirement income. So HSAs are an efficient way to save as well as to spend on non-catastrophic medical care. Health Savings Accounts have spread since they were introduced several years ago, but might need greater encouragement, such as higher limits.

3) Medicare spending amounts to about $350 billion a year, it constitutes about 12 percent of federal spending, and it is one of the most rapidly growing entitlements. It is projected to continue to grow as a fraction of GDP from its present 2.7 percent level to over 11 percent in 2080. The source of the growth is the continued aging of the population, and the increased per capita medical spending on older person as new medical technologies and drugs are developed. Projections made by Medicare Actuaries indicate that the Medicare HI Trust Fund will be exhausted by the year 2018-only a decade away.

Reform of Medicare is probably among the most challenging not only because of the elderly's political clout, but also because Americans have come to expect access to expensive medical treatments as they age. Still, the prescription drug coverage introduced into Medicare in 2003 was an important step in the right direction, despite the flaws in the program (see my discussion on February 3, 2005). Drugs are not only increasingly available to fight many diseases of old age, but drugs, once developed, are relatively cheap to extend to large numbers of users. Even when drugs provide only small benefits as they are extended to groups that can benefit less from the drugs, the costs are far less than would be required to provide expensive surgeries or hospitalizations to older persons with few years of life remaining. This is why I would greatly increase the generosity of Medicare drug coverage, and compensate for the additional expense by cutting down on allowances for lengthy hospital stays, and raising other co-pays.

4) I do not believe the problem of the uninsured in the US is as serious as usually claimed since most of those without health insurance are young and do not have major medical expenses. When they do, they can use emergency room service at major hospitals, although studies show that they do not even use emergency room care more often than others. Still, it may be desirable to require that everyone must contract for private catastrophic health care since the uninsured tend to use taxpayer and philanthropic funded medical care facilities to pay for the costs of any major illnesses. Medicaid should be extended to cover anyone who cannot afford such catastrophic insurance. Compulsory coverage would integrate the 45 million or so uninsured Americans into an overall health care system while still preserving the desirable decentralized private system of health care.

The Medicare Disaster Before We Add Another 50 Million People to the Plan

"Drugs and the Cost of Medicare," by Nobel Laureate Gary Becker, The Becker-Posner Blog, March 30, 2008 --- http://www.becker-posner-blog.com/

If past growth in Medicare is a reasonable guide to future growth, and assuming that real GDP grows at an annual rate of two and one half percent, Medicare spending as a share of GDP will double by 2020, and increase some 3-4 times by 2050 to 10 percent or more of GDP. Dollar spending on Medicare patients would increase to over a trillion dollars by 2020. Less than half of the projected increase would be due to the further aging of the population, while the majority is the result of the expected continuing growth in spending on hospitalizations, surgeries, and drugs for the elderly of given ages.

Much of the increased spending would occur even with the most efficient health delivery system since senior citizens along with younger adults put a high value on living longer in reasonably good health. The value placed on longer life and good health generally rises as incomes grow; indeed, economic analysis and past experience indicates that the willingness to pay for better health will increase in the future at least as rapidly as incomes do.

. . .

This advantage of drugs in inefficient health delivery systems does not argue against the need for major reforms of Medicare to make it more efficient. It recognizes, however, the value of second-best solutions in a political environment where reforms of health care are likely to come slowly because they run up against many powerful vested interests.

Continued in article

"Drugs and the Cost of Medicare," by Richard Posner, The Becker-Posner Blog, March 30, 2008 --- http://www.becker-posner-blog.com/

Becker makes the ingenious suggestion that the effect of adding drug coverage to the Medicare program is to prevent spending on drugs from growing as rapidly as the number of persons covered by Medicare. The reason is that because the marginal cost of drugs tends to be very low; most of the costs of drugs are fixed costs of research and development. Hence the larger the number of persons eligible for Medicare drug benefits, the lower the average cost of drugs.

Nevertheless the net effect of the addition to drug coverage on total Medicare spending is likely to be a substantial expansion in the total cost of Medicare. As of January of this year, 25 million persons had enrolled in Medicare Part D (the drug part), and the total annual expense to Medicare is estimated to reach $36 billion this year. As the program is only two years old, further increases in enrollment and usage can be expected, irrespective of increases in the eligible population, since more than 40 million persons receive Medicare benefits.

The net addition to Medicare costs will be less than the cost of Medicare drug coverage if drugs are a net substitute for other covered treatments. But they may not be, because there is also a complementary relation between drugs and other forms of treatment, such as surgery; to the extent that drugs reduce the pain, discomfort, or disability of surgery, they may increase the demand for surgery by reducing its nonpecuniary costs, a cost reduction that though real will not be reflected in the Medicare cost figures.

In addition, by increasing the demand for drugs, Part D will increase the net expected profits from new drugs, and thus increase the incentive to create such drugs, with the heavy fixed costs that, as Becker points out, are entailed by the development of new drugs.

Still another problem with Medicare drug coverage is that people have less aversion to popping a pill than to being operated on or otherwise confined in a hospital. The cost of surgery, as it appears to most people, includes a significant nonpecuniary element that of course is not reimbursed by public or private health insurance. Taking drugs does not impose such costs unless a drug has serious side effects. Hence the Medicare drug subsidy should cause a greater percentage increase in demand than the traditional Medicare subsidies did.

Drugs also provide an attractive but costly substitute for life-style changes designed to improve one's health. If the choice is between giving up rich food and taking a pill paid for by Medicare, the latter may be preferred though the social cost may be higher; the subsidy confronts the consumer with false alternatives from an overall social perspective, just like monopoly pricing.

Continued in article

In the course of slightly over two centuries, the United States rose to spectacular height in terms of world leadership in business and military power that, in spite of leftist grumblings to the contrary, are not supremely powerful in the world.  

Consider first United Airlines.  While United Airlines rose to the top with a spectacular fleet of airplanes and the largest number of flight routes in the world was accompanied by entitlements in the form of pension funds that, instead of being fully funded each year, were built on promises to pay from future revenues.  In the greed for higher profits and salaries each year, executives of United Airlines perhaps knew of pending disaster in the distant future, but in their greed prevented them from curtailing exponential growth in unfunded entitlements.  

Now it comes as no surprise that United Airlines told its bankruptcy court that it no longer can compete with airlines not encumbered with entitlements.   If United Airlines had to continue paying pensions of retired employees, United Airlines would crash and burn.  Only one of two things saved United Airlines:

1. United Airlines forced the Federal Government to take over United's pension obligations.
   
   
2. The FAA restored oligopoly powers to United Airlines and the other major carriers similarly burdened with unfunded entitlements.  This was done either with both government subsidies or government restrictions that take newer airlines out of the competition.
   

The point here is that there were expensive taxpayer alternatives to save United Airlines from its sins of creating unfunded entitlements.  None of the alternatives were equitable to consumers and taxpayers, but United Airlines survived by leaning on its friends in the courts and halls of Congress.

There are no such hopes for the United States economy.  The United States is similarly encumbered with unfunded Social Security, Medicare, Medicaid, military/government retirement benefits, and various other non-discretionary entitlements that far exceed discretionary items in our trillion dollar federal and state budgets.

Social Security is currently in the limelight and, if this were the only problematic entitlement, our Social Security problem could be solved albeit at great sacrifice under any alternative to keep the U.S. economy at the top of the world.  But Social Security entitlements pale in the face of the real ship sinkers --- Medicare and Medicaid.   We can actuarially predict and deal with Social Security entitlements.  It is impossible to predict or deal with Medicare and Medicaid entitlements.  Costs of medical care have and will continue to soar well above inflation rates until the U.S. economy nears collapse and hyper inflation sets in to pay the entitlements.  

The United States will be able to continue to send out checks to pay its entitlements even when the economy hits a point of collapse.  Unlike United Airlines, the United States government can print money.  But printing money in this manner to pay off debts leads to hyper inflation and hyper inflation leads to collapse of the economy into a Third World status.  The United States is not a Third World (underdeveloped) economy.  But it will become one as soon as hyper inflation sets in with no other alternative to pay entitlement obligations.  A $4,500 per month Social Security check will not mean much when the price of day-old bread becomes $340 per loaf and the U.S. can no longer adjust Social Security (and Medicare) benefits for inflation.  Milton Friedman said:  "Inflation is the one form of taxation that can be imposed without legislation."

United Airlines could not compete with other carriers not encumbered with entitlements.  The United States will soon not be able to compete with other nations not encumbered with entitlements, other nations like China, Brazil, India, and Russia --- the "BRICs."

Why don't the "BRICs" have the same entitlement problems as US, Japan, and Europe?  The answer for China, Brazil, and India is overpopulation that makes serious entitlements for health care, pensions, etc. infeasible.  I guess that's a cynical way of saying its the power of overcrowding saves their economies.  People are forced to work long hours and save for health care and retirements of themselves and their families.   The answer for Russia is that it had a huge entitlement system for health care and sustenance of a large number of people who did not work very hard for a living.  In the 1980s the entitlement system blew apart and will most likely not be restored in an emerged Russia.

I'm a firm believer that economics is a dismal science, especially when world population growth is factored into the equation. Economics is becoming more dismal as far as the EU and U.S. are concerned. But it is becoming an Ode to Joy for China, Brazil, India, and (believe it or not) Russia.

On the dark side of things, Europe reached a barrier in economic development. The U.S. is approaching that barrier. The barrier is called "Concrete System of Entitlements." Twenty five years ago in his excellent PBS series called "Free to Choose," Nobel economist Milton Friedman call unfunded entitlements the most dangerous mistake economies can make for entitlements that are a drag rather than a boost to economic development. At the time he viewed entitlements as a crossroad, but we took the wrong path by adding more entitlements.  Now only a barrier lies ahead.

I remember the cold war in the 1950s and 1960s where the biggest fear in the Western world was that Mao and/or the Soviet Union was going to paint the planet red in military takeover. Their militaries and economies failed their leaders. It is ironic that, in my viewpoint, their new economies are now going to "take over" the world with emerging capitalism. We have no weapons against capitalism except for suicide pills called tariffs.

This begs the question of how did the United States create such a problem for itself.  The biggest problem has been an irresponsible House of Representatives and the legislatures of all fifty states who cannot and will not be fiscally responsible for the long run survival of the U.S. economy.  The next biggest problem is the President of the United States and the 50 governors who have laid down their veto pens that might, in some instances, significantly cut the pork.  Another problem is failure of political campaign reform and related softness toward white collar, including government leadership, crime --- http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays 

There is a better solution to the nation's old and poor which our government turned a deaf ear to, possibly because it was so simple and involved smaller government --- I prefer Milton Friedman's negative income tax solution for the poor (as long as there are heavy fraud controls) --- http://www.econlib.org/library/Enc/NegativeIncomeTax.html  

If there's a better practical solution to a negative income tax in advanced countries like the U.S. I'd like to learn about it. As I've repeatedly stated, post modern critics are very articulate in fault/guilt finding, but they always come up short with respect to practical solutions to maintain economic growth needed to accompany population growth.

To any destructionist I ask the question:  "What is your solution to sustain the "poor" people in society who are either unable (due to health or lack of jobs) or unwilling to work in the lowest form of jobs that only immigrants are willing to fill?

Redistribution is necessary in any type of humane society.

What redistribution plan actually will work the best for adequate distribution from skilled and unskilled workers to the non-workers? We could begin (with pangs of destructionists' guilt over how the rich and middle class exploited the poor) by confiscating all wealth above the poverty line, but that wouldn't last long or go very far. And it would most certainly put the brakes on economic growth.

It seems to me that a negative income tax is a practical solution and can be enforced if cash transacting is eliminated from societies. How far it lifts the poor out of poverty of course depends upon where the negative flows kick in and how those who pay taxes can be sustained at high enough earnings to pay sufficient taxes.

Obviously, there also has to be sufficiently equitable law enforcement and contract enforcement. Many of the world's most impoverished countries could not make a negative income tax system work because as long as excessively greedy criminals own a successful army, poverty can never be helped very much.

In the past few decades, the world has made enormous advances in reducing poverty. The distribution problem worldwide may be unsolvable in a tribal world that has never been free of war, competition, and crime that generally exploits the poor in one way or another.

We most certainly will see massive economic re-distributions from the U.S. and Europe to Russia, China, India, Brazil, etc. Perhaps this is as it should be --- http://www.trinity.edu/rjensen/entitlements.htm 

But these re-distributions are made possible because the soaring countries like China and India do not have large entitlements to help their sickly poor and elderly that Sister Mary Teresa tried so to help. They are building these re-distributions on the backs of the working poor and middle class. On a relative scale, the poorest people may advance with economic growth just like the lowest of the poor did in Europe and the U.S. But poverty has not been eliminated in our most advanced countries that do not have disproportionate resources (Qatar, Norway, Kuwait, and a few others). Poverty will not be eliminated in our newest and biggest emerging capitalist nations any more than it has been eliminated in our poorest two cities of Detroit and Cleveland or some of our even worse off rural pockets.

"There is, to be sure, much poverty and starvation in the world, but nothing could be further from the truth than the idea that poverty is increasing."
The Industrial Revolution Past and Future --- http://www.minneapolisfed.org/pubs/region/04-05/essay.cfm 
Robert E. Lucas Jr. John Dewey Distinguished Service Professor of Economics,
University of Chicago
1995 Nobel Prize Economist
This paper is quoted more extensively below.

The last responsible president who drained the ink using his veto pen is Ronald Regan.  The left side of the world hated Regan because, when it came to a capped budget spit between guns and butter, Regan was a big iron man in favor of guns.  But the fact of the matter is he did repeatedly veto pork.  The Bush dynasty and Bill Clinton became fiscally irresponsible when they laid down their veto pens in appropriations bills laden with pork.   Legislators since Regan have had a feeding frenzy on pork and irresponsible  entitlements.  

The topper was the prescription drug plan proposed by George W. Bush that passed into legislation.  This added pain to misery in terms of the younger generations of the U.S. workforce.  It brought closer the inevitable collapse of the United States into a Third World nation status.

But there is  good news for our present legislators and living ex-presidents.  They, along with me, will probably all be dead before the bubble bursts for the U.S. economy.   They will, however, be able to watch United Airlines and some European economies crash and burn.  

The economies of Europe will probably crash and burn earlier than the economy of the United States, because Europe has an even bigger entitlement problem coupled with more militant labor unions resisting technologies that could forestall the collapse of their economies.  The U.S. seems more readily able to adapt to newer labor saving technologies, but this is only a band aid over the mortal wounds of entitlements --- those gorings of our greedy forefathers.

The first economist, an early  Nobel Prize Winning economist, to raise the alarm of entitlements in my head was Milton Friedman.  He has written extensively about the lurking dangers of entitlements.  I highly recommend his fantastic "Free to Choose" series of PBS videos where his "Welfare of Entitlements" warning becomes his principle concern for the future of the Untied States 25 years ago --- http://www.ideachannel.com/FreeToChoose.htm 

Our legislators did not heed his early warnings, and now we are no longer "free to choose."   

But all is not lost for Americans.  Those with technology skills who are willing to work for less than minimum wage might find outsourcing work from companies in India.  Those who learn the Portuguese language will have a chance at finding work in Brazil.

With ease, you can find a vast literature on the entitlements problem by simply searching the Web.  I suggest you down a Prozac pill and then go to a search engine.

Bob Jensen

Medicare Meltdown
The inconvenient truth is that Social Security and health care could consume the entire federal budget.

"Medicare Meltdown," by Thomas R. Saving, The Wall Street Journal, May 9, 2007; Page A17 --- http://online.wsj.com/article/SB117867132495096646.html?mod=opinion&ojcontent=otep 

What's going to happen when the money runs out for Medicare? A recently released report by the program's trustees found that within seven years Medicare taxes will fall short of Medicare expenses by more than 45%. What's more, Medicare and Social Security combined are on track to eat up the entire federal budget.

While the bulk of Medicare dollars comes from payroll taxes and beneficiary premiums, a large and growing share of Medicare expenses is borne by general taxpayers. And although the same law that created the new Medicare drug benefit also requires the president to propose remedial legislation, Congress is not required to actually do anything.

The trustees' wake-up call comes none too soon. But what is needed are not minor adjustments. A major overhaul is in order.

The projected cash flow deficits in these two programs are staggering. For Social Security, the trustees estimate the 75-year burden on general revenues at $6.7 trillion. For Medicare the comparable burden on general revenues is $24.2 trillion, even after allowing the current transfers to grow with the economy. Thus the total burden these programs will impose on federal finances over the next 75 years is $31.9 trillion, more than six times the current outstanding federal debt. Looking beyond 75 years into the indefinite future, the combined long-run funding gap for Social Security and Medicare is $74.8 trillion in today's dollars.

Members of Congress will not have to wait long to experience the practical effects of all of this. Until a few years ago, Social Security and Medicare were taking in more than they spent, on the whole. Thus they provided revenue for other federal programs. That situation is now reversed, and last year the combined deficits in the two programs claimed 5.3% of federal income tax revenues. In 15 years these two programs will require more than a fourth of income tax revenues: In other words, in just 15 years the federal government will have to stop spending one out of every four non-entitlement dollars in order to balance the budget and keep its promises to the elderly.

As more and more baby boomers reach retirement, the financial picture will deteriorate rapidly. By 2030, about the midpoint of the baby boomer retirement years, these two programs will require almost one out of every two federal income tax dollars. By 2040, they will require nearly two out of every three federal income tax dollars. Eventually, the deficits in these two programs will absorb the entire federal budget.

Could we force the elderly to pay for future deficits with higher Medicare premiums? Monthly premiums in constant dollars would more than quadruple by 2020, and be almost 30 times their current level by 2080. At that point, the required monthly premiums would consume more than the entire Social Security benefit (from which they are automatically deducted) for average-wage earners.

Using taxation to fund the projected Medicare shortfalls is equally unpalatable. We would need a 10% increase in all nonpayroll taxes by 2020 and a 50% increase by 2080, the close of the trustees' 75-year projection period.

So what else can be done? In general, no reform should be taken very seriously unless it is specifically designed to slow the rate of growth of health-care spending. On the demand side, someone must choose between health care and other uses of money. That is, someone must decide that the next MRI scan or the next knee replacement, for example, is not worth the cost. Such decisions could be made by seniors themselves, by the government (as it is in other countries), or by private insurers operating under government rationing rules. On the supply side, the way health care is produced must fundamentally be changed, replacing cost-increasing innovations with cost-reducing ones.

To examine consequences of beneficiaries making their own rationing decisions, my colleague Andrew Rettenmaier and I estimated the effects of creating reformed Medicare based on a $5,000-deductible Health Savings Account (HSA), beginning with the baby boomer retirees. The size of the deductible and the HSA would grow through time (as health costs grow), and since deposits would be made with after-tax dollars, withdrawals for any purpose would be tax free. In this way, beneficiaries would be encouraged to make their own tradeoffs between health care and every other good or service. We estimate the effects would result in a reduction in Medicare's unfunded liability by between 25% and 40%.

We did not attempt to estimate the impact of this reform on the supply side of Medicare. However, there is ample evidence that when people spend their own money on health services, supply side responses are considerable. This implies that a properly designed HSA could help us get off of the current spending course in two ways. First, it could allow the elderly to reallocate health-care dollars to goods and services they value more. Secondly, it could spur providers to deliver care more efficiently.

Even with these reforms, however, we must still address the problem of pay-as-you-go financing. Today every dollar in Medicare payroll taxes is immediately spent. Nothing is saved. Nothing is invested. The payroll taxes contributed by today's workers pay the medical benefits of today's retirees. However, when today's workers retire, their benefits will be paid only if the next generation of workers agrees to pay even higher taxes.

The alternative is to move to a funded system in which each generation saves and invests in order to pay for its own benefits. Yet to take advantage of this potential, we need to act quickly. We must introduce reforms that capture the earning potential of the baby-boom generation before they escape into retirement and leave the young with a burden that will be increasingly burdensome. Unless we increase our level of saving now, we will leave our children and grandchildren strapped with escalating tax rates.

If nothing is done, Social Security and Medicare deficits will engulf the entire federal budget. If our policy makers wait to address the growing deficits until they are out of control, the solutions will be drastic and painful. Let us hope that the current wake-up call is not ignored.

Mr. Saving is a public trustee of the Social Security and Medicare system, director of the Private Enterprise Research Center at Texas A&M University, and a senior fellow at the National Center for Policy Analysis.

Looming Economic Disaster and Recommendations for Better Accounting of the Titanic's Deck Chairs

"GAO Chief Warns Economic Disaster Looms,"  by Matt Crenson, SmartPros, October 30, 2006 --- http://accounting.smartpros.com/x55312.xml

David M. Walker sure talks like he's running for office. "This is about the future of our country, our kids and grandkids," the comptroller general of the United States warns a packed hall at Austin's historic Driskill Hotel. "We the people have to rise up to make sure things get changed."

But Walker doesn't want, or need, your vote this November. He already has a job as head of the Government Accountability Office, an investigative arm of Congress that audits and evaluates the performance of the federal government.

Basically, that makes Walker the nation's accountant-in-chief. And the accountant-in-chief's professional opinion is that the American public needs to tell Washington it's time to steer the nation off the path to financial ruin.

From the hustings and the airwaves this campaign season, America's political class can be heard debating Capitol Hill sex scandals, the wisdom of the war in Iraq and which party is tougher on terror. Democrats and Republicans talk of cutting taxes to make life easier for the American people.

What they don't talk about is a dirty little secret everyone in Washington knows, or at least should. The vast majority of economists and budget analysts agree: The ship of state is on a disastrous course, and will founder on the reefs of economic disaster if nothing is done to correct it.

There's a good reason politicians don't like to talk about the nation's long-term fiscal prospects. The subject is short on political theatrics and long on complicated economics, scary graphs and very big numbers. It reveals serious problems and offers no easy solutions. Anybody who wanted to deal with it seriously would have to talk about raising taxes and cutting benefits, nasty nostrums that might doom any candidate who prescribed them.

"There's no sexiness to it," laments Leita Hart-Fanta, an accountant who has just heard Walker's pitch. She suggests recruiting a trusted celebrity - maybe Oprah - to sell fiscal responsibility to the American people.

Walker doesn't want to make balancing the federal government's books sexy - he just wants to make it politically palatable. He has committed to touring the nation through the 2008 elections, talking to anybody who will listen about the fiscal black hole Washington has dug itself, the "demographic tsunami" that will come when the baby boom generation begins retiring and the recklessness of borrowing money from foreign lenders to pay for the operation of the U.S. government.

"He can speak forthrightly and independently because his job is not in jeopardy if he tells the truth," said Isabel V. Sawhill, a senior fellow in economic studies at the Brookings Institution.

Walker can talk in public about the nation's impending fiscal crisis because he has one of the most secure jobs in Washington. As comptroller general of the United States - basically, the government's chief accountant - he is serving a 15-year term that runs through 2013.

This year Walker has spoken to the Union League Club of Chicago and the Rotary Club of Atlanta, the Sons of the American Revolution and the World Future Society. But the backbone of his campaign has been the Fiscal Wake-up Tour, a traveling roadshow of economists and budget analysts who share Walker's concern for the nation's budgetary future.

"You can't solve a problem until the majority of the people believe you have a problem that needs to be solved," Walker says.

Polls suggest that Americans have only a vague sense of their government's long-term fiscal prospects. When pollsters ask Americans to name the most important problem facing America today - as a CBS News/New York Times poll of 1,131 Americans did in September - issues such as the war in Iraq, terrorism, jobs and the economy are most frequently mentioned. The deficit doesn't even crack the top 10.

Yet on the rare occasions that pollsters ask directly about the deficit, at least some people appear to recognize it as a problem. In a survey of 807 Americans last year by the Pew Center for the People and the Press, 42 percent of respondents said reducing the deficit should be a top priority; another 38 percent said it was important but a lower priority.

So the majority of the public appears to agree with Walker that the deficit is a serious problem, but only when they're made to think about it. Walker's challenge is to get people not just to think about it, but to pressure politicians to make the hard choices that are needed to keep the situation from spiraling out of control.

To show that the looming fiscal crisis is not a partisan issue, he brings along economists and budget analysts from across the political spectrum. In Austin, he's accompanied by Diane Lim Rogers, a liberal economist from the Brookings Institution, and Alison Acosta Fraser, director of the Roe Institute for Economic Policy Studies at the Heritage Foundation, a conservative think tank.

"We all agree on what the choices are and what the numbers are," Fraser says.

Their basic message is this: If the United States government conducts business as usual over the next few decades, a national debt that is already $8.5 trillion could reach $46 trillion or more, adjusted for inflation. That's almost as much as the total net worth of every person in America - Bill Gates, Warren Buffett and those Google guys included.

A hole that big could paralyze the U.S. economy; according to some projections, just the interest payments on a debt that big would be as much as all the taxes the government collects today.

And every year that nothing is done about it, Walker says, the problem grows by $2 trillion to $3 trillion.

People who remember Ross Perot's rants in the 1992 presidential election may think of the federal debt as a problem of the past. But it never really went away after Perot made it an issue, it only took a breather. The federal government actually produced a surplus for a few years during the 1990s, thanks to a booming economy and fiscal restraint imposed by laws that were passed early in the decade. And though the federal debt has grown in dollar terms since 2001, it hasn't grown dramatically relative to the size of the economy.

But that's about to change, thanks to the country's three big entitlement programs - Social Security, Medicaid and especially Medicare. Medicaid and Medicare have grown progressively more expensive as the cost of health care has dramatically outpaced inflation over the past 30 years, a trend that is expected to continue for at least another decade or two.

And with the first baby boomers becoming eligible for Social Security in 2008 and for Medicare in 2011, the expenses of those two programs are about to increase dramatically due to demographic pressures. People are also living longer, which makes any program that provides benefits to retirees more expensive.

Medicare already costs four times as much as it did in 1970, measured as a percentage of the nation's gross domestic product. It currently comprises 13 percent of federal spending; by 2030, the Congressional Budget Office projects it will consume nearly a quarter of the budget.

Economists Jagadeesh Gokhale of the American Enterprise Institute and Kent Smetters of the University of Pennsylvania have an even scarier way of looking at Medicare. Their method calculates the program's long-term fiscal shortfall - the annual difference between its dedicated revenues and costs - over time.

By 2030 they calculate Medicare will be about $5 trillion in the hole, measured in 2004 dollars. By 2080, the fiscal imbalance will have risen to $25 trillion. And when you project the gap out to an infinite time horizon, it reaches $60 trillion.

Medicare so dominates the nation's fiscal future that some economists believe health care reform, rather than budget measures, is the best way to attack the problem.

"Obviously health care is a mess," says Dean Baker, a liberal economist at the Center for Economic and Policy Research, a Washington think tank. "No one's been willing to touch it, but that's what I see as front and center."

Social Security is a much less serious problem. The program currently pays for itself with a 12.4 percent payroll tax, and even produces a surplus that the government raids every year to pay other bills. But Social Security will begin to run deficits during the next century, and ultimately would need an infusion of $8 trillion if the government planned to keep its promises to every beneficiary.

Calculations by Boston University economist Lawrence Kotlikoff indicate that closing those gaps - $8 trillion for Social Security, many times that for Medicare - and paying off the existing deficit would require either an immediate doubling of personal and corporate income taxes, a two-thirds cut in Social Security and Medicare benefits, or some combination of the two.

Why is America so fiscally unprepared for the next century? Like many of its citizens, the United States has spent the last few years racking up debt instead of saving for the future. Foreign lenders - primarily the central banks of China, Japan and other big U.S. trading partners - have been eager to lend the government money at low interest rates, making the current $8.5-trillion deficit about as painful as a big balance on a zero-percent credit card.

In her part of the fiscal wake-up tour presentation, Rogers tries to explain why that's a bad thing. For one thing, even when rates are low a bigger deficit means a greater portion of each tax dollar goes to interest payments rather than useful programs. And because foreigners now hold so much of the federal government's debt, those interest payments increasingly go overseas rather than to U.S. investors.

More serious is the possibility that foreign lenders might lose their enthusiasm for lending money to the United States. Because treasury bills are sold at auction, that would mean paying higher interest rates in the future. And it wouldn't just be the government's problem. All interest rates would rise, making mortgages, car payments and student loans costlier, too.

A modest rise in interest rates wouldn't necessarily be a bad thing, Rogers said. America's consumers have as much of a borrowing problem as their government does, so higher rates could moderate overconsumption and encourage consumer saving. But a big jump in interest rates could cause economic catastrophe. Some economists even predict the government would resort to printing money to pay off its debt, a risky strategy that could lead to runaway inflation.

Macroeconomic meltdown is probably preventable, says Anjan Thakor, a professor of finance at Washington University in St. Louis. But to keep it at bay, he said, the government is essentially going to have to renegotiate some of the promises it has made to its citizens, probably by some combination of tax increases and benefit cuts.

But there's no way to avoid what Rogers considers the worst result of racking up a big deficit - the outrage of making our children and grandchildren repay the debts of their elders.

"It's an unfair burden for future generations," she says.

You'd think young people would be riled up over this issue, since they're the ones who will foot the bill when they're out in the working world. But students take more interest in issues like the Iraq war and gay marriage than the federal government's finances, says Emma Vernon, a member of the University of Texas Young Democrats.

"It's not something that can fire people up," she says.

The current political climate doesn't help. Washington tends to keep its fiscal house in better order when one party controls Congress and the other is in the White House, says Sawhill.

"It's kind of a paradoxical result. Your commonsense logic would tell you if one party is in control of everything they should be able to take action," Sawhill says.

But the last six years of Republican rule have produced tax cuts, record spending increases and a Medicare prescription drug plan that has been widely criticized as fiscally unsound. When President Clinton faced a Republican Congress during the 1990s, spending limits and other legislative tools helped produce a surplus.

So maybe a solution is at hand.

"We're likely to have at least partially divided government again," Sawhill said, referring to predictions that the Democrats will capture the House, and possibly the Senate, in next month's elections.

But Walker isn't optimistic that the government will be able to tackle its fiscal challenges so soon.

"Realistically what we hope to accomplish through the fiscal wake-up tour is ensure that any serious candidate for the presidency in 2008 will be forced to deal with the issue," he says. "The best we're going to get in the next couple of years is to slow the bleeding."

Question
Was Nobel Prize-winning economist Friedrich Hayek wrong about free markets and prosperity?

"Dismal Science," by William Easterly, The Wall Street Journal, November 15, 2006; Page A18 --- http://online.wsj.com/article/SB116355956112023480.html?mod=todays_us_opinion

Scientific American, in its November 2006 issue, reaches a "scientific judgment" that the great Nobel Prize-winning economist Friedrich Hayek "was wrong" about free markets and prosperity in his classic, "The Road to Serfdom." The natural scientists' favorite economist -- Prof. Jeffrey Sachs of Columbia University -- announces this new scientific breakthrough in a column, saying "the evidence is now in." To dispel any remaining doubts, Mr. Sachs clarifies that anyone who disagrees with him "is clouded by vested interests and by ideology."

This sounds like one of those moments in which the zeitgeist of mass confusion about national poverty, world poverty and prosperity comes together in one mad tragicomic brew.

First, Mr. Sachs disses the great Hayek by repeating the old canard that Hayek thought any attempt at taxpayer-funded social insurance would put us all on the "Road to Serfdom." This is an especially strange charge, since Hayek (while certainly opposed to the social engineering that proponents of a full-blown welfare state usually have in mind) himself calls for some form of taxpayer-funded social insurance against severe physical deprivation on pages 133-134 of "The Road to Serfdom." Mr. Sachs, who is currently best known for his star-driven campaign to end world poverty, has apparently spent more time studying the economic thinking of Salma Hayek than that of Friedrich.

Second, if he had studied (Friedrich) Hayek, Mr. Sachs would realize what "The Road to Serfdom" is really about, and how it is of great relevance to Mr. Sachs's own current work, which has ironically little to do with what he wrote about in Scientific American. Hayek's great book is all about the dangers of large-scale state economic planning, courageously written in 1944 when Soviet central planning, technocratic socialism and administrative control of the wartime economy appealed as a peacetime model to many New Dealers, celebrity economists and policy wonks of all stripes.

The countries that are now rich subsequently listened enough to Hayek and to common sense to avoid the road to serfdom. Yet today, Mr. Sachs (in his book "The End of Poverty") is peddling his own administrative central plan -- 449 steps in all -- to end world poverty. In his plan, the U.N. secretary-general (to whom he is an adviser) would supervise and coordinate thousands of international civil servants and technocratic experts to solve the problems of every poor village and city slum everywhere. Mr. Sachs is not in favor of central planning as an economic system, but he offers it as a solution, anyway, to the multifold problems of the world's poorest people. If you want the best analysis of why the approach of Mr. Sachs and his confreres in Hollywood and the U.N. will fail to end world poverty this time (as similar efforts failed over the past six decades), you can find it in Hayek.

Third, Mr. Sachs's attempt to make the case for his best possible society, the Scandinavian welfare state, is a little shaky. If this is what passes for the scientific method in Scientific American, American science is in even worse shape than we thought. Economics is usually about the incentives that cause people to solve their own or other peoples' problems, but to Mr. Sachs, problem-solving seems always to be about raising more public money for whatever cause he is concerned with at the moment. (To give the celebrity economist his due, he does successfully raise the profile of genuinely tragic problems which compassionate people everywhere would like to see alleviated.)

Mr. Sachs's empirical analysis purports to show that Nordic welfare states are outperforming those states that follow the "English-speaking" tradition of laissez-faire, like the U.K. or the U.S. Poverty rates are indeed lower in the Nordic countries, although the skeptical reader (probably an ideologue) might wonder if the poverty outcome in, say, the U.S., with its tortured history of a black underclass and its de facto openness to impoverished but upwardly mobile immigrants, is really comparable to that of Nordic countries.

Then there is the big picture, where those laissez-faire Anglophones in, first, the U.K. and, then, the U.S., just happened to have been the leaders of the ongoing global industrial revolution that abolished far more poverty over the past two centuries than a few modest Scandinavian redistribution schemes. Mr. Sachs apparently thinks the industrial revolution was led by IKEA. Lastly, let's hear from the Nordics themselves, who have been busily moving away from the social welfare state back toward laissez-faire. According to the English-speaking ideologues that composed the Heritage Foundation/Wall Street Journal Index of Economic Freedom, Denmark, Finland and Sweden were all included in the 20 countries classified as "free" in 2006 (with Denmark actually ranked ahead of the U.S.). Only Norway missed the cut -- barely.

Mr. Sachs is wrong that Hayek was wrong. In his own global antipoverty work, he is unintentionally demonstrating why more scientists, Hollywood actors and the rest of us should go back and read "The Road to Serfdom" if we want to know what will not work to achieve "The End of Poverty." Hayek gave the best exposition ever of the unpopular ideas of economic freedom that somehow triumph anyway, alleviating far more national and global poverty than more fashionable Scandinavia-envy and grandiose plans to "make poverty history."

Mr. Easterly, professor of economics at New York University, is the author of "The White Man's Burden: Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good" (Penguin, 2006).

"Expensive Lesson for Maine as Health Plan Stalls," by Pam Belluck, The New York Times, April 30, 2007 --- http://www.nytimes.com/2007/04/30/us/30maine.html?_r=1&hp&oref=slogin

When Maine became the first state in years to enact a law intended to provide universal health care, one of its goals was to cover the estimated 130,000 residents who had no insurance by 2009, starting with 31,000 of them by the end of 2005, the program’s first year.

So far, it has not come close to that goal. Only 18,800 people have signed up for the state’s coverage and many of them already had insurance.

. . .

But as Maine tries to reform its reforms, it faces some particular challenges: It has large rural, poor and elderly populations with significant health needs. It has many mom-and-pop businesses and part-time or seasonal workers, and few employers large enough to voluntarily offer employees insurance. And most insurers here no longer find it profitable to sell individual coverage, leaving one carrier, Anthem Blue Cross Blue Shield, with a majority of the market, a landscape that some economists said could make it harder to provide broad choices and competitive prices.

Some parts of the state’s current program — named Dirigo after the state motto, which means “I lead” in Latin — are seen as promising. These include the creation of a state watchdog group to promote better health care, and an effort to control costs by asking hospitals to rein in price increases and spending, although experts and advocates said those cuts needed to be greater.

But a financing formula dependent on sizable payments from private insurers has angered businesses and is being challenged in court.

And while some people have benefited from the subsidized insurance, which provides unusually comprehensive coverage, others have found it too expensive. And premiums have increased, not become more affordable, because some of those who signed up needed significant medical care, and there are not enough enrollees, especially healthy people unlikely to use many benefits.

“It was broad-based reform that just never got off the ground,” said Laura Tobler, a health policy analyst with the National Conference of State Legislatures. “The way that they funded the program became controversial. And getting insurance was voluntary and it wasn’t that cheap.”

Governor Baldacci said in an interview that when the Legislature enacted the Dirigo Health Reform Act in 2003, it gave him less money and more compromises than he had wanted. He said his administration had now learned more about what works and what does not.

His new proposals include requiring people to have insurance and employers to offer it and penalizing them financially if they do not; making the subsidized insurance plan, DirigoChoice, more affordable for small businesses; creating a separate insurance pool for high-risk patients; instituting more Medicaid cost controls; and having the state administer DirigoChoice, which is now sold by Anthem Blue Cross.

“We’ve got a reform package that takes Dirigo to the next level,” Mr. Baldacci said. “It takes the training wheels off.”

The proposed overhaul seems to include something each of Maine’s constituencies can embrace and something each opposes, so there is no guarantee which changes will be adopted by the Legislature.

“It’s very hard politically to deal with the underlying costs of the system,” said Andrew Coburn, director of the Institute for Health Policy at the Muskie School of Public Service in Portland. “And Maine is just not wealthy enough to cobble together enough resources to fully cover the uninsured.”

Continued in article

"Social Security Accounting Change Sought," by Andrew Taylor, SmartPros, October 25. 2006 --- http://accounting.smartpros.com/x55259.xml

Advocates of a change in how the books are kept on future Social Security and Medicare benefits say Americans need a better sense of the government's fiscal health.

The change, if approved, would have no impact on benefits themselves. It would, however, show just how much the social programs truly cost, which proponents say would highlight the need to find long-term fiscal fixes.

The move is the brainchild of an obscure panel, the Federal Accounting Standards Advisory Board, that is recommending how the government should maintain its books. Bush administration representatives on the board are adamantly opposed to the proposal and could kill it.

The idea behind the proposal, which was detailed Monday in a 150-page document, is to present policymakers and the public with a better way to measure the spiraling costs of Social Security and the Medicare health program for the elderly.

Social Security, for example, is running big surpluses now but faces bruising demographic changes in coming decades. Increasingly fewer workers are paying into the system for each retiree, and that will only worsen as the baby-boom generation retires over the coming years.

Medicare is also facing a fiscal train wreck in coming decades because of similar demographic pressure combined with rapidly rising health care and prescription drug costs.

Under current rules, the Social Security program is posted on the government's books as a cash transaction. Taxes and interest income are on the revenue side of the ledger, and benefit payments are on the spending side. Medicare is far more complicated.

Promises of Social Security and Medicare benefits are seen by many as a binding contract. Taxpayers receive annual reports detailing their future benefit packages every year. Those who want the change argue that the promises should be put on the books right away.

"Accounting is about recording the economic substance of a transaction or in this case the economic substance of the promise between the government and the taxpayers," board member Thomas Allen said.

However, administration and other government officials on the advisory board say such a system wouldn't paint an accurate long-term fiscal picture. And, they say, current calculations of federal retirement benefits are in no way a legal contract like a private-sector pension plan.

For starters, there's widespread agreement that benefits will eventually have to be curbed or payroll taxes raised to keep retirement costs from swamping taxpayers in coming decades. Benefit estimates are a political promise, not a legal one, opponents of the change argue.

"Every mature American knows that we are going to have to adjust Social Security in the future," said Joe Minarik of the Committee on Economic Development, a business-funded think tank.

Government Accountability Office Comptroller General David Walker has been trumpeting the dangers of the looming budget crisis for years. He's part of a minority on the board that supports an alternative plan that would characterize the sustainability of social insurance programs. It would also, in effect, revive the idea of a Social Security "lockbox" and exclude present-day Social Security surpluses from deficit calculations.

The proposal is a long way from being implemented. It's being sent out for public comment, and a second round of comments will be required before it's issued in final form. Though outnumbered now, the administration has a strong hand in the outcome since it has a veto over the final rule.

Question
What is the FASAB?

"Uncle Sam's Halloween," The Wall Street Journal,  October 30, 2006; Page A12 ---
http://online.wsj.com/article/SB116217217911207397.html?mod=opinion&ojcontent=otep

Want to have some fun this Halloween? Find a government accountant. You probably think there isn't a more unflappable person anywhere than one of the green-eyeshade boys. OK, now sneak up behind him and whisper "Medicare obligations" into his ear. Aaaagggghh! He'll go racing in the street, stark-raving mad with fright. Entitlement costs are Uncle Sam's permanent Halloween.

Government and private accountants who worry about these costs belong to something called the Federal Accounting Standards Advisory Board, or Fasab, which sets government accounting standards. The nightmare that keeps these folks awake is that Congresses and Presidents have made entitlement promises for Social Security and Medicare so outsized, so outlandish and so unaffordable that the U.S. is, in theory, heading for the financial abyss. And no one cares!

The head of the hopelessly mistitled Government Accountability Office, David M. Walker, is touring the country giving speeches about the impending fall of the financial sky. "You can't solve a problem until the majority of the people believe you have a problem that needs to be solved," Mr. Walker moans.

The folks at Fasab have come up with an idea to focus the nation: They want the U.S. government to account for Social Security and Medicare not when people get a check, as now, but as people accrue the right to these payouts. The result would be huge new near-term budget deficits on the books. This presumably would produce a more "accurate" picture of America's fiscal condition. And of course the truly horrifying spectacle of all this red ink in turn would force the politicians and the people to "do something."

Alas, one of the things frightened people sometimes do is jump off the cliff. So before Fasab drags us all over the side, let's take a closer look at the problem and the proposed solution.

The problem is real. Well, sort of real. People often say the government should be run like a business. Well, the government is not a business. Congress has the ability to alter legislatively government obligations whenever it gets the whim. Contrasted to Treasury notes, which are debt with a legal repayment obligation, Social Security and other entitlement programs are not legal contracts. Congress could abolish Social Security tomorrow -- and with it all its financial obligations.

The Supreme Court has acknowledged this important distinction. In 1960, it said in Flemming v. Nestor that entitlement promises are not individual assets and that the taxes people pay today guarantee them nothing in the future. Including accrued entitlement outlays on the current books would if anything be deceptive, since even small legislative changes to these programs down the road could change the numbers.

By now many readers will have anticipated the troublesome political problem with what Fasab is proposing: It's an argument for raising taxes, big-time. It would merely bolster the public misconception that Social Security and Medicare payments are guaranteed. If with this accounting change you force Congress to choose between raising taxes or cutting "guaranteed" benefits, Congress will obviously raise taxes, throwing over any chance of genuine reform.

A minority of Fasab members -- mainly Bush Administration officials -- last week advocated a different approach focused on the real political problem: better disclosure of these obligations. The Social Security Administration and the Department of Health and Human Services are already required to publish an annual projection of future costs of their retirement and health insurance programs. This November, for the first time, the agencies will report statements that have even been audited.

The minority Fasab members recommend that we stick with the current system of accounting for entitlement programs, but require an annual "statement of fiscal sustainability." This statement would go much further than the current DHS and SSA social-insurance reports. It would list not just the black-and-white cost numbers, but also provide measurements and data that would show a clearer picture of precisely when these programs will become a problem and when they will become a financial tsunami. Both proposals are out for public comment.

Yes, we need to know what the politicians have done, what political financial commitments have been made. And yes, it's a problem. But the solution is not to create yet another nightmare by treating them like contractual debt. The key to avoiding this coming horror show is to reform these programs.

Perhaps the U.S. is not "entitled" to survive
Will America have to declare Chapter 11 because of $80 trillion in unfunded entitlement promises? That's a question posed recently by Laurence Kotlikoff, an economist at Boston University, in his attention-grabbing essay on Medicare, Medicaid and Social Security entitled: "Is the United States Bankrupt?" Mr. Kotlikoff's answer is perhaps yes: "Nations can go broke, the United States is going broke . . . and radical reform of U.S. fiscal institutions is essential."
"The Entitlement Panic," The Wall Street Journal, August 22, 2006; Page A12 --- http://online.wsj.com/article/SB115620669096641701.html?mod=opinion&ojcontent=otep

The Pending Meltdown of the United States:
It's largely the fault of a president who would not veto spendthrifts like himself
Historians will note spring 2006 as the time when America's fiscal meltdown became unavoidable. Fiscal conservatism is not just dead in Washington; it is long forgotten, and no resurrection is on the horizon. Despite a brief blip of outrage over bridges-to-nowhere and obscene earmarks growing rampant and engorged, budget talk has again turned into a bidding war. The Bush administration's own modest attempts to restrain spending have been swept away by a Congress eager to spend as much as possible in a midterm election year. The numbers tell a sad enough tale. Federal spending is now 20.8 percent of GDP, up from the 18.4 percent President Bush inherited from President Clinton.
 Jeff A. Taylor, "Cash Carries the Day Spending is the Alpha and Omega in Washington," Reason Magazine, March 17, 2006 --- http://www.reason.com/links/links031706.shtml

Jensen Comment
It's not clear that fiscal sanity can be maintained in me-first society where the welfare of future generations is asymptotically approaching zero among hand-to-mouth constituents. Whereas our parents would scrimp and slave and sacrifice everything for our education, our medical care, and our grandparents' care, today's parents want the government to pay for everything that we and our grandparents need. We've come to think everything is free from the government. Any attempt to put the brakes on entitlements is political suicide since the day Ronald Regan drained all the ink from the White House veto pen.

Figure this while GM (and possibly Ford) prepare to crash and burn in Michigan

"Toyota Considers Michigan As Site for New Engine Plant," by Norihiko Shirouzu, The Wall Street Journal,  January 7, 2006; Page A2 --- http://online.wsj.com/article/SB113660037058840541.html?mod=todays_us_page_one

"Is There a Future in Ford's Future?," by Micheline Maynard, The New York Times, January 8, 2006 --- http://www.nytimes.com/2006/01/08/business/yourmoney/08ford.html 

The difficulty of his task was underscored just last week, when Standard & Poor's cut Ford's credit rating an additional two notches deeper into junk status, moving the company even further away from regaining the top investment grade rating it had used as a competitive tool throughout much of the 1980's and 1990's.

Book Review
"The decline of the US economy:  Three Billion New Capitalists," by Clyde Prestowitz, Asia Times, December 17, 2005 --- http://www.atimes.com/atimes/Global_Economy/GL17Dj01.html

This is a first-class book with a sober and penetrating analysis of global arrangements and the US role in them. The author is well informed, with quite critical views of the future of the US.

The source of the problems is not that the US has lost its democratic innocence and plunged recklessly into the Iraq war, as bemoaned in recent books and articles by Zbigniew Brzezinski, former president Jimmy Carter's national security

adviser. Neither is it that the US retained its capitalist predatory nature and engaged in war and exploitation of the rest of the globe, including polluting the environment - the point of the American left

The reason is the US is in the process of losing its position as the major economic power. Author Prestowitz has actually destroyed one of the essential myths of American civilization, the myth of American efficiency.

This myth has always been related to the image of capitalism - and America has been the very embodiment of capitalism. This capitalism is brutal in a social-Darwinistic way and can also be militarily weak. Indeed, for generations, Americans have agreed that they are not militaristic and can be beaten by others, but never economically.

During the Cold War, the Soviets were accepted as military but not as economic peers. And it is only now that fundamental changes are occurring - America is increasingly losing its economic standing in regard to the rest of the world. In fact, the US is starting to be pressed hard on not just one but several economic fronts, including those of whose very existence most Americans have not been aware.

This is, for example, the case with Europe. With fresh views on American/European economic rivalry, the author follows a line that one cannot easily find in the US mass media. The media usually present Europe as a stagnating, declining economy that cannot carry the heavy task of a protective safety net for Europe's citizens. This stagnant semi-socialist group of countries is juxtaposed to the dynamic, vibrant, albeit tough, America.

The author has discarded this notion. With a close look at statistical data, he has concluded that Europe is economically not far behind the US. Moreover, in some key areas, Europe is actually ahead. For example, in the author's view, the US is in a process of erosion of its industrial skeleton, while the European picture is much brighter.

Moreover, European industrial goods have retained their reputation of high quality and thus make it possible for Europeans to sell their goods to China, for example, despite what seems to be prohibitive prices because of the euro exchange rate.

With all the importance of the European economy, it is not Europe that constitutes the major threat for the American economy. The battering ram that could destroy it is coming from Asia, mostly China. The American economy is increasingly unable to compete with Asian goods, and the situation will be worse in the future.

Why is this happening? In the view of the author, it is mostly due to globalization. At the beginning of the post-Cold War era, globalization was hailed in the US as a blessing that would bring absolute economic and implicitly geopolitical domination. But the reality is quite different. And the author suggests that globalization has led to disaster for the American economy. According to his views, Asia has the ability to acquire the technology and skills to compete with the US in nearly all areas. Cheap labor makes Asian goods even more competitive.

Continued in article

If the 20th was the American century, then the 21st belongs to China. It's that simple, Ted C. Fishman says, and anyone who doubts it should take his whirlwind tour of the world's fastest-developing economy.
"Car Clones and Other Tales of the Mighty Economic Engine Known as China," by William Grimes, The New York Times, February 15, 2005 ---  http://www.nytimes.com/2005/02/15/books/15grim.html 
This is a book review of China, Inc. by Ted C. Fishman --- http://snipurl.com/ChinaIndFeb15

"Hong Kong Wrong:  What would Cowperthwaite say?" by Milton Friedman, The Wall Street Journal, October 6, 2006 --- http://www.opinionjournal.com/editorial/feature.html?id=110009051

It had to happen. Hong Kong's policy of "positive noninterventionism" was too good to last. It went against all the instincts of government officials, paid to spend other people's money and meddle in other people's affairs. That's why it was sadly unsurprising to see Hong Kong's current leader, Donald Tsang, last month declare the death of the policy on which the territory's prosperity was built.

The really amazing phenomenon is that, for half a century, his predecessors resisted the temptation to tax and meddle. Though a colony of socialist Britain, Hong Kong followed a laissez-faire capitalist policy, thanks largely to a British civil servant, John Cowperthwaite. Assigned to handle Hong Kong's financial affairs in 1945, he rose through the ranks to become the territory's financial secretary from 1961-71. Cowperthwaite, who died on Jan. 21 this year, was so famously laissez-faire that he refused to collect economic statistics for fear this would only give government officials an excuse for more meddling. His successor, Sir Philip Haddon-Cave, coined the term "positive noninterventionism" to describe Cowperthwaite's approach.

The results of his policy were remarkable. At the end of World War II, Hong Kong was a dirt-poor island with a per-capita income about one-quarter that of Britain's. By 1997, when sovereignty was transferred to China, its per-capita income was roughly equal to that of the departing colonial power, even though Britain had experienced sizable growth over the same period. That was a striking demonstration of the productivity of freedom, of what people can do when they are left free to pursue their own interests.

The success of laissez-faire in Hong Kong was a major factor in encouraging China and other countries to move away from centralized control toward greater reliance on private enterprise and the free market. As a result, they too have benefited from rapid economic growth. The ultimate fate of China depends, I believe, on whether it continues to move in Hong Kong's direction faster than Hong Kong moves in China's.

Mr. Tsang insists that he only wants the government to act "when there are obvious imperfections in the operation of the market mechanism." That ignores the reality that if there are any "obvious imperfections," the market will eliminate them long before Mr. Tsang gets around to it. Much more important are the "imperfections"--obvious and not so obvious--that will be introduced by overactive government.

A half-century of "positive noninterventionism" has made Hong Kong wealthy enough to absorb much abuse from ill-advised government intervention. Inertia alone should ensure that intervention remains limited. Despite the policy change, Hong Kong is likely to remain wealthy and prosperous for many years to come. But, although the territory may continue to grow, it will no longer be such a shining symbol of economic freedom.

Yet that doesn't detract from the scale of Cowperthwaite's achievement. Whatever happens to Hong Kong in the future, the experience of this past 50 years will continue to instruct and encourage friends of economic freedom. And it provides a lasting model of good economic policy for others who wish to bring similar prosperity to their people.

Dr. Friedman, the 1976 Nobel laureate in economics, is a senior research fellow at Stanford's Hoover Institution.

The European Union is facing a crisis of historic proportions. Its infamous social model is failing as new trends in the industrialized world

"The Third Way to Lisbon," by Patrick Diamond and Anthony Giddens, The Wall Street Journal, March 21, 2006 --- http://online.wsj.com/article/SB114289285539103336.html?mod=opinion&ojcontent=otep

The European Union is facing a crisis of historic proportions. Its infamous social model is failing as new trends in the industrialized world -- globalization, ageing, and rapid technological change -- threaten to permanently destroy the European way of life.

At the heart of the EU's feeble and inadequate economy is the slow pace of change. This week's European Spring Council offers the Continent's leaders a chance to add urgent impetus to the reform effort. Even the most ardent proponents of the "Lisbon Agenda" -- a strategy for transforming Europe into the most dynamic knowledge economy in the world by 2010 -- admit the formula of regular, top-level peer review has been a blunt instrument. The EU is obsessed with process and susceptible to bureaucratic stagnation, and often fails to achieve tangible outcomes.

Meanwhile, national leaders have failed to formulate a coherent program for structural reform. Some on the Continent even yearn for their own Margaret Thatcher.

It is naïve to imagine that EU institutions could substitute for strong political leadership at home. To the contrary, under-performance within the member states fuels the legitimacy crisis of the European project as a whole. Liberalization, enlargement and immigration are blamed for destroying jobs and living standards. Brussels cannot cut itself off from rising ethnic tensions in Europe's cities, or widespread anxiety about the competitive threat of India and China.

Only reforms rooted in social justice can be sold to the public. But social justice must be understood as providing equal opportunities for all rather than just simply generous transfer payments. Then it will compliment rather than stifle competitiveness in a globalizing world. Yet none of Europe's models of welfare capitalism even remotely lives up to this concept. That's why Europe's traditional ideas of welfare have to change. Full employment no longer exists in most member states, and hasn't for decades. Even high employment countries like Sweden and the U.K. face rising claims for sickness, invalidity benefits, and an increasing proportion of households without breadwinners.

Continued in article

The beginning of the end
As Federal planners hasten to put the finishing administrative touches on medicare in time for its July 1 debut, the health insurance industry is scurrying to meeting the same deadline. Under medicare, the Government will pay most of oldsters' hospital bills...
The Wall Street Journal, March 4, 1966

First estimate $400 billion, Revised estimate $1.2 trillion:  Where were the accountants?
The administration's last official ten-year cost projection—that the new Medicare law would cost $534 billion over ten years—was deservedly controversial. The administration hid the estimate while publicly touting a much lower estimate ($400 billion). Thus most observers were suspicious when the president's budget was released last week.  The latest estimate, which projected the cost of just the drug benefit, was much higher: $1.2 trillion over 10 years. This is not directly comparable to the previous projection, for a number of reasons. First, it is a gross figure that does not include offsets that will accrue to the Treasury. Accounting for these brings the 10-year cost projection for the drug benefit to a net $725 billion.
"A Billion Here, a Billion There:  Fuzzy math on the Medicare prescription drug benefit," ReasonOnLine, February 28, 2005 --- http://www.reason.com/hod/mc022805.shtml 

Is this a national health plan?  The government will soon pick up half of the nation's medical bills
Growth in health-care spending will continue to slow, but federal, state and local governments will be picking up nearly half of all U.S. health costs within a decade, a shift that largely reflects Medicare's new prescription-drug coverage, federal analysts forecast. Government will pay 49% of health costs by 2014, up from 46% currently, according to the agency that runs Medicare, the federal health program for the elderly and disabled. The government's portion has been rising steadily, from 43% in 1980 and 38% in 1970.
Sarah Lueck, "Government Is Likely to Pay 49% Of All U.S. Health Costs by 2014," The Wall Street Journal, February 24, 2005; Page A4 --- http://online.wsj.com/article/0,,SB110918230012762231,00.html?mod=todays_us_page_one 

Say what?  Alan's implying that I'm going to be collecting more than you working stiffs can afford.  
"I fear that we may have already committed more physical resources to the baby-boom generation in its retirement years than our economy has the capacity to deliver. If existing promises need to be changed, those changes should be made sooner rather than later. We owe future retirees as much time as possible to adjust their plans for work, saving, and retirement spending. They need to ensure that their personal resources, along with what they expect to receive from the government, will be sufficient to meet their retirement goals.
Testimony of Chairman Alan Greenspan Economic outlook and current fiscal issues Before the Committee on the Budget, U.S. House of Representatives March 2, 2005

My Advice:  People just should not wait much longer to get old.
`Benefits promised to a burgeoning retirement-age population under mandatory entitlement programs, most notably Social Security and Medicare, threaten to strain the resources of the working-age population in the years ahead,'' Greenspan said.  ``Real progress on these issues will unavoidably entail many difficult choices. But the demographics are inexorable and call for action,'' he added.
"Greenspan Says Entitlement Programs Need Reform," Associated Press, The New York Times, February 16, 2005 --- http://www.nytimes.com/aponline/business/AP-Greenspan.html? 
Bob Jensen's essay on entitlement is at http://www.trinity.edu/rjensen/entitlements.htm 
PS:  Greenspan gave lukewarm support for Bush's Social Security reform plan.  Greenspan thinks that Bush's proposal is not enough.  Greenspan most likely will favor drastic cuts in benefits.  Paint those red and blue states uniformly black and blue.

Betting on China 
Business titans Bill Gates and Warren Buffett say America is on the decline, while China is the world's best bet. Their candid words should wake us up to the looming economic threat — and the need to respond now. By Ted C. Fishman, page 11A Bill Gates is betting on America's decline and putting his money on China's rise. Or so the Microsoft founder seemed to say last month at the World Economic Forum held in Davos, Switzerland. “I'm short the dollar,” he said. “The ol' dollar is going down.”
Ted C. Fishman, "Betting on China," USA Today, February 17, 2005, Page 11A --- http://www.usatoday.com/printedition/news/20050217/oplede17.art.htm 

Betting on China
If the 20th was the American century, then the 21st belongs to China. It's that simple, Ted C. Fishman says, and anyone who doubts it should take his whirlwind tour of the world's fastest-developing economy.
"Car Clones and Other Tales of the Mighty Economic Engine Known as China," by William Grimes, The New York Times, February 15, 2005 ---  http://www.nytimes.com/2005/02/15/books/15grim.html
This is a book review of China, Inc. by Ted C. Fishman --- http://snipurl.com/ChinaIndFeb15

Blame it on us baby boomers!
Alan's implying that I'm going to be collecting more than you working stiffs can afford.  
Common now, you can work harder than you've been working:  Push that barge and lift that bail
"I fear that we may have already committed more physical resources to the baby-boom generation in its retirement years than our economy has the capacity to deliver. If existing promises need to be changed, those changes should be made sooner rather than later. We owe future retirees as much time as possible to adjust their plans for work, saving, and retirement spending. They need to ensure that their personal resources, along with what they expect to receive from the government, will be sufficient to meet their retirement goals.
Testimony of Chairman Alan Greenspan Economic outlook and current fiscal issues Before the Committee on the Budget, U.S. House of Representatives March 2, 2005

Little Red Riding Hood doesn't know it's the really big bad wolf
As the Social Security debate heats up, it pays to watch the political sleight-of-hand. The latest gimmick to emerge, cleverly marketed as a potential bipartisan compromise and "victory" for the White House, is the notion of "add-on" personal investment accounts.  Under President Bush's proposal, individuals would be able to divert part of their payroll taxes into personal accounts that they would own. That idea is apparently too shocking for many in Congress and the AARP, however, so instead they're proposing new accounts that would be financed by other tax revenue -- that is, by other taxpayers. In short, they want to create a new entitlement to "add" to all the old ones. If this is what is going to count as Social Security "reform," count us out.
" 'Adding-On' Entitlements," The Wall Street Journal,  March 9, 2005; Page A20 --- http://online.wsj.com/article/0,,SB111033447404774285,00.html?mod=todays_us_opinion 

Sound farfetched?  
Imagine a government that has stopped providing national defense, halted criminal prosecutions, canceled mail delivery and abandoned its highways and parklands. This government, in fact, does nothing but write benefit checks and pay interest on its debts — and still runs an annual deficit.  Sound farfetched?  Actually, that prospect is just three decades off if U.S. government benefit programs grow at current rates and the size of government relative to the economy stays constant.  Social Security is partly to blame for this dire outlook. Without changes, its costs will rise from about 20% of federal spending to 30% in the next 25 years.  But by far the biggest culprit is the exploding cost of health care, particularly Medicare, the government's insurance program for seniors. Medicare has grown 23-fold in the past three decades, from $13 billion in 1975 to $295 billion this year. It is on a trajectory that will soon rocket it past Social Security to the upper stratosphere of unaffordability. In 25 years, it will rise from 13% of federal spending to almost 40%.  As a problem for the U.S. economy and future retirees, exploding health care costs dwarf Social Security. By focusing exclusively on the latter, President Bush is overlooking the bigger problem. This is akin to getting a car tuned up when its transmission is shot and its engine has locked up.
"Medicare's mounting troubles dwarf Social Security's woes: &