My Unfinished Essay on the Pending Collapse of the United States

Bob Jensen at Trinity University

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

Entitlements are two-thirds of the federal budget. Entitlement spending has grown 100-fold over the past 50 years. Half of all American households now rely on government handouts. When we hear statistics like that, most of us shake our heads and mutter some sort of expletive. That’s because nobody thinks they’re the problem. Nobody ever wants to think they’re the problem. But that’s not the truth. The truth is, as long as we continue to think of the rising entitlement culture in America as someone else’s problem, someone else’s fault, we’ll never truly understand it and we’ll have absolutely zero chance...
Steve Tobak ---
http://www.foxbusiness.com/business-leaders/2013/02/07/truth-behind-our-entitlement-culture/?intcmp=sem_outloud

The booked National Debt in September 2013 actually went over $18.8 trillion although it may be shown lower below--- 
U.S. National Debt Clock --- http://www.usdebtclock.org/
Also see http://www.brillig.com/debt_clock/

"These Slides Show Why We Have Such A Huge Budget Deficit And Why Taxes Need To Go Up," by Rob Wile, Business Insider, April 27, 2013 ---
http://www.businessinsider.com/cbo-presentation-on-the-federal-budget-2013-4
This is a slide show based on a presentation by a Harvard Economics Professor.

Bob Jensen's threads on Entitlements ---
http://www.trinity.edu/rjensen/Entitlements.htm


How to Mislead With Statistics

"The truth about the real size of the US national debt," Pravda, August 22, 2013 ---
http://english.pravda.ru/business/finance/22-08-2013/125468-usa_national_debt-0/

Everyone got used to the largest officially announced U.S. national debt of 16 trillion dollars. Moreover, despite the dire predictions, the global economy seems to be more or less stable, and recently liberal media have been happily reporting GDP growth in the United States and the European Union. However, it is not all that great.

Let's start with statistics. A number of researchers have conducted studies that indicate that the official U.S. statistics in nearly all areas - from unemployment to price fluctuations - is blatantly distorted and paints a positive picture that is very different from the reality.

The work of Professor James Hamilton of the University of Economics, California who analyzed the size of the public debt of the United States particularly stands out. According to official data since 2008, when the global economic crisis commenced, the U.S. national debt has increased from 5 to 16.4 trillion dollars. The debt is repaid by ordinary taxpayers who pay approximately $220 billion annually in interest alone.

This huge sum emerged due to the fact that in an effort to get out of the crisis, the Federal Reserve in coordination with the U.S. authorities pumped money into the economy and bought a lot of assets. Accordingly, the amount of state debt increased every year, and the interest on the debt service alone by 2021 will exceed the costs of defense spending.

Given these figures, Professor Hamilton has calculated the value of the U.S. government debt that consists of the debts of individual states, corporations, individuals, government welfare payments and other obligations of the federal U.S. government to its creditors. The resulting figure is a staggering 70 trillion dollars. The U.S. lawmakers allowed debt ceiling of 16.4 trillion dollars that has been reached late last year, then U.S. Treasury Secretary Timothy Geithner informed Congress about the beginning of the suspension of debt repayments and emergency measures to avoid a default. If this research is only half true, it means that the U.S. is in a state of a default.

The fact that this assumption is not far from the truth is evidenced by the situation in American cities. Hundreds of cities are not able to pay their bills and fulfill social obligations. According to the World Bank, this may lead to their bankruptcy, putting the country on the brink of a sovereign default in the next three years.

As of August 1, 2013, 12 U.S. cities have declared themselves bankrupt and insolvent. Nearly 350 small and medium-sized cities in the country and 113 municipal districts of large cities, particularly New York, are close to doing that. In mid-July, the City Hall of the former automotive capital of the United States Detroit has filed for bankruptcy. The city's debt amounts to 18 billion, of which 9.2 billion are pensions and medical.

The overall deficit of the pension fund in the U.S. is $2.7 trillion, or 17 percent of GDP. The lack of money in the pension fund, for example, in Illinois is 2.5 times the amount of annual tax revenues, Connecticut - 1.9, Kentucky - 1.4 times.

The largest bankrupt city is currently Stockton, California, with 300,000 thousand residents. The situation in this city can show what will happen to other cities dealing with financial difficulties. The police department was cut by half, and the streets got filled with homeless, drug dealers and gangs of drunk teenagers. This year, 56 murders were recorded in the city, while in New York with the 15 million residents 414 such crimes were registered.

Meanwhile, Stockton, like another bankrupt city of San Bernardino, is located in the richest state of California. What can be said about other states when Los Angeles has a budget deficit of $238 million and prospects of a default in the next year?

Continued in article

Jensen Comment
Note that the dispute between $16 trillion versus $70 trillion concerns only the booked USA National Debt.  the Unbooked entitlements under contract bring the total obligations of the USA Federal Government to over $100 trillion.

Not to worry! Zimbabwe, err I mean the Federal Reserve, will print greenbacks to meet all USA obligations. This is not Greece. We can print U.S. dollars instead of taxing or borrowing. Life is good!


"The Krugman Conundrum," by Eric Peters, Townhall, October 4, 2014 ---
http://townhall.com/columnists/ericpeters/2014/10/04/the-krugman-conundrum-n1900129?utm_source=thdaily&utm_medium=email&utm_campaign=nl

The Congressional Budget Office recently released an update to their 2014-2024 budget projections, sending the Washington Budget wonks into a frenzy. With deficits projected to reach heights not seen since World War Two, the spin doctors have been out in full force trying to turn around recent report. One such man is New York Times columnist Paul Krugman. Armed with a Nobel Prize in New Trade Theory, Mr. Krugman’s opinion column carries extraordinary weight in intellectual circles however his latest on Medicare doesn’t pass the smell test upon closer examination.

Krugman recently wrote of the “Medicare Miracleabout how the growth of Medicare spending had slowed compared to earlier projections. This slowdown he argued shows that entitlement spending and America’s long term fiscal outlook is not as bleak as previously anticipated. The problem with Krugman’s analysis is that it’s incredibly narrow in focus and fails to account for healthcare and mandatory spending as a whole. His rationale took a further hit when CBO announced that tax receipts would be $2 trillion less than expected by 2023 and the Medicare savings he championed just a week ago would be erased five times over.

According to the CBO, spending on major health care programs “will jump by 67 billion (or about 9 percent) in 2014”, this spending is primarily due to costly expansion of Medicaid as well as costly subsidies to for individuals who signed up for Obamacare. Contrary to the opinion of Mr. Krugman, this trend of increased healthcare spending is unlikely to decline anytime in the near future. Overall Health Care Spending is projected to increase from $935 billion in 2014 to $1.7 trillion in 2024. Medicaid spending increased by 15 percent while spending on Obamacare subsidies increased from $1 billion to $17 billion from 2013. While therate of growth for one program may have slowed, Medicaid and Obamacare spending has certainly picked up the slack at total healthcare spending will increase from 4.9 percent of GDP to 5.9 percent of GDP by 2024. By telling only one third of the overall spending on health care one could be forgiven thinking that Mr. Krugman is simply peddling talking points for ideological reasons.

Continued in article

Jensen Comment
Two of the things that created enormous drains on the Medicare insurance plan were: (1) the addition Medicare coverage to disabled people of any age coupled with (2) the Medicare D program enacted by George W. Bush. The lifetime disability program is costing hundreds of billions annually, much of it for lifetime frauds. Medicare D is costing hundreds of billions for medications for older folks like us that could be using some of our retirement savings for such medications.

Surely nobody who has studied the future of Medicare, including Professor Krugman, thinks the program is sustainable as currently written. Whereas Social Security entitlements can be paid off, if necessary, with inflation in the future, it's not possible to pay off Medicare obligations with inflation as the law is currently written. As written Medicare is just not sustainable. Either future benefits have to be limited or recipients will have to pay much larger deductibles to the extent they can afford paying for medical services and drugs out of their retirement savings.

 


"How to Create a Real Economic Stimulus Entitlement reform is key to shrinking the ratio of debt to GDP and making room for pro-growth tax cuts," by Martin Feldstein, The Wall Street Journal, September 16, 2013 ---
http://online.wsj.com/article/SB10001424127887323595004579065361191486206.html?mod=djemEditorialPage_h

Earlier this year, former U.S. Treasury Secretary Larry Summers expressed doubts about the Federal Reserve's quantitative easing policy of buying $85 billion a month of government bonds and other long-term assets. His skepticism antagonized some Fed insiders and liberal Democrats, who recently opposed his consideration by President Obama as the next Fed chairman.

When Mr. Summers on Sunday withdrew his candidacy for the chairman's job, there was one immediate benefit: Now Larry Summers will be free to voice an even clearer and stronger critique of current policy.

The United States certainly needs a new strategy to increase economic growth and employment. The U.S. growth rate has fallen to less than 2%, and total employment is a smaller share of the population now than it was five years ago. The official unemployment rate has declined sharply (to 7.3% last month from 10% in October 2009) only because so many people have stopped looking for work or are working part-time.

The Fed's monetary policy is no longer effective in stimulating demand. The near-zero interest-rate policy and aggressive quantitative easing, it has become increasingly clear, create dangerous risks to future stability. The Fed's announcement in June that it will soon reduce the rate of buying long-term assets raised long-term rates, slowing the recovery in the housing market and other activity. And the unemployment rate is approaching the 6.5% threshold that could lead the Fed to raise short rates.

On the fiscal side, a replay of the $830 billion "stimulus" in 2009 is politically out of the question. That poorly designed package added more to the national debt than it did to aggregate spending. The national debt has increased from 37% of gross domestic product before the economic downturn to 75% now. The Congressional Budget Office warns that the debt will remain at that level for the coming decade and then rise rapidly as the aging population increases the cost of Social Security and Medicare. The large projected national debt is a drag on the economy, causing businesses and entrepreneurs to fear higher tax rates and a sharp rise in interest rates when the Fed stops its massive bond purchases.

A successful growth and employment strategy would combine substantial reductions in the relative size of the future national debt with immediate permanent tax-rate cuts and a multiyear program of infrastructure spending. The challenge is to reduce future government spending by enough to make the ratio of debt to GDP predictably lower a decade from now, despite the tax-rate cuts and near-term infrastructure spending.

Fortunately, a relatively small change in annual deficits would significantly shrink the debt ratio. With a national debt of 75% of GDP, a projected annual deficit of 4% of GDP would keep the debt rising to 100% of GDP. In contrast, a deficit of 1% would cause the debt ratio to decline year after year until it reaches 25% of GDP.

The only way to reduce future deficits without weakening incentives and growth is by cutting future government spending. The share of GDP devoted to defense and to nondefense discretionary programs is already headed to its lowest level in the past half-century. Reducing spending therefore requires slowing the growth of the benefits of middle-class retirees and cutting the spending that is built into the tax code.

Raising the age for full benefits is a simple but powerful way to slow the cost of Social Security and Medicare. Thirty years ago, Congress voted to increase gradually the age for full benefits from 65 to 67. Since then, the life expectancy at age 67 has increased by an additional three years. Congress should vote now to continue raising the full benefit age from 67 to 70. When that is fully phased in, the annual cost of Social Security benefits would be reduced by about 20%, equivalent to a saving in 2020 of $200 billion or about 1% of GDP.

Gradually raising the age of Medicare eligibility in line with the age for full Social Security benefits would achieve a budget saving of more than 1% of GDP in 2020 and later years. Individuals between ages 65 and 70 could still enroll in Medicare by paying a fair premium.

Limiting the tax breaks built into the tax code would also help. The combination of tax credits, deductions and exclusions increases the annual budget deficit by hundreds of billions of dollars. Those tax breaks are really subsidies that should be seen as government spending.

While many of the smaller tax subsidies should simply be eliminated, it would be politically impossible to eliminate such popular features as the deduction for mortgage interest or the exclusion of employer payments for health insurance. A better alternative would be to allow individuals to keep all of these tax benefits but to limit the amount by which individuals can reduce their tax liabilities in this way to 2% of adjusted gross income. This one change to the tax code would reduce the 2013 federal deficit by $140 billion or nearly 1% of GDP even if the deduction for charitable contributions was fully retained.

Slower entitlement growth and reduced tax expenditures should be phased in slowly to avoid weakening the recovery. But by 2020 they could be producing annual savings equal to more than 3% of GDP.

With the future debt under control, it would be fiscally responsible to enact permanent tax-rate reductions and an effective short-term program of infrastructure investment in things like bridges, airports and other projects that will boost demand. Each dollar spent on a well-designed infrastructure program would increase GDP by a dollar or more, unlike the 2009 "stimulus" program that spent its funds on transfer payments, temporary tax cuts and other programs that did little to raise total spending.

Lower personal tax rates would raise GDP by increasing incentives for additional earning and increased entrepreneurial activity. Bringing the U.S. corporate tax rate (35%) in line with the tax rates in other industrial countries (closer to 25%) would spur investment and production.

Continued in article


How to Mislead With Governmental Accounting
"How Much Do We Really Owe?," by John Goodman, Forbes, August 7, 2014 ---
http://www.forbes.com/sites/johngoodman/2014/08/07/how-much-do-we-really-owe/

First the good news: the official federal deficit is only 3% of GDP – way below the 10% figure it reached only a few years ago. Now the bad news: The real deficit is more than ten times that amount.

The U.S. government’s deficit is expected to be $514 billion this year, according to the Congressional Budget Office (CBO). That’s the number you get when you look at cash flow. It means the government will spend $514 billion more than it takes in during the 2014 fiscal year.

But this kind of accounting ignores federal government liabilities that will become due in future years. For example, over the course of a year millions of people earn Social Security and Medicare benefits as well as other government entitlement benefits that will have to be paid in future years. When you total all that up (and subtract expected future revenues to pay those benefits), we added $5 trillion in debt last year according to Boston University economist Larry Kotlikoff.

Another way to look at the problem is to consider not just one year’s deficit, but the total amount of debt that government has accumulated. US debt held by the public is currently $12.6 trillion, or about 75% of the size of our economy the way the CBO measures things. But in arriving at that number, the CBO doesn’t recognize promises to pay Social Security checks and medical bills as real obligations.

Take a senior citizen who is expecting an interest payment on a government bond next month and who is also expecting a Social Security check. The way the CBO looks at the world, the interest payment on the bond is a real obligation of the government. But the Social Security check isn’t.

That’s a strange way of accounting and Kotlikoff and his colleagues reject it. Instead they project the value of all the promises we have made under Social Security and other entitlement programs – benefits that ordinary citizens believe they have earned – and subtract expected future revenues, given the current tax law. The difference is an unfunded liability that is every bit as real as promises to make future interest payments on bonds and Treasury bills.

Calculating obligations in this way, Kotlikoff estimates that the total unfunded liability of the federal government is $210 trillion, or about 12 times the size of our economy. Writing in The New York Times, Kotlikoff says:

“The fiscal gap — the difference between our government’s projected financial obligations and the present value of all projected future tax and other receipts — is, effectively, our nation’s credit card bill. Eliminating it, would require an immediate, permanent 59 percent increase in federal tax revenue. An immediate, permanent 38 percent cut in federal spending would also suffice. The longer we wait, the worse the pain. If, for example, we do nothing for 20 years, the requisite federal tax increase would be 70 percent, or the requisite spending cut, 43 percent.”

And the tax increase, by the way, doesn’t work unless the money is sequestered and invested. It can’t just be deposited in the Treasury’s bank account and spent on other things.

Bob Jensen's threads on the sad state of governmental accounting ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting

 


"MyRAs - Washington's Latest Scam," by Star Parker, Townhall, February 2, 2014 ---
http://townhall.com/columnists/starparker/2014/02/03/myras--washingtons-latest-scam-n1787716?utm_source=thdaily&utm_medium=email&utm_campaign=nl

. . .

If handled correctly, the State of the Union should be like the annual report of a corporate chief executive to shareholders. It should convey key information so that stakeholders know what’s going on.

But that’s not what happens. This isn’t about informing stakeholders. It’s about political calculations and pitching a laundry list of proposals, invariably with wonderful benefits, and rarely any perceivable costs, designed to make the President and his party look good.

President Obama introduced in this year’s State of the Union address his proposal to create new retirement accounts for, in the words of the White House, “the millions of low and middle-income households earning up to $191,000.” What they are calling “MyRAs.”

How could enhancing retirement savings not be a good idea? And, even better, it is a free lunch. Again in the words of the White House, “the account balance will never go down in value” and will be totally secure because it will be “backed by the U.S. government.”

President Obama is creating these accounts with the greatest of ease, without even a new law from Congress, by doing what he has done better than any president in American history. Drive the U.S. government into debt.

These wonderful new retirement accounts will receive bonds from the U.S. Government. And who guarantees them?

Please, dear reader, if you are a U.S. taxpayer, look in the mirror and say “me.”

If the State of the Union was really about the president informing Congress and the nation, he would have reported the following from the recent 2013 Long-Term Budget Outlook report of the Congressional Budget Office:

“Federal debt held by the public is now about 73 percent of the economy’s annual output…higher than at any point in U.S. history, except a brief period around World War II, and it is twice the percentage at the end of 2007.”

“CBO projects,” the report continues, “that federal debt held by the public would reach 100 percent of GDP by 2038….even without accounting for the harmful effects that growing debt would have on the economy.”

Meanwhile, as President Obama uses U.S. government bonds to create magical new risk-free retirement savings accounts, there was not a word in the State of the Union of the broken state of affairs of the government’s oldest retirement plan – Social Security.

According to Social Security’s latest trustees report, the revenue shortfall, in today’s dollars, of projected requirements of Social Security to meet its long-term obligations is $9.6 trillion. Beginning in 2033, when those now in their late forties start retiring, there will be only funds “sufficient to pay 77 percent of scheduled benefits.”

If the president really wants to enhance retirement savings of low and middle income Americans, and create real savings and investment while addressing the fiscal disaster of Social Security, let these folks opt out of the Social Security black hole and use those funds to open a real retirement account.

This is what was done in Chile and it worked. The Chilean economy grew because the new retirement accounts directed investments into the real economy (as opposed to creating more government debt) and Chilean workers have achieved real returns and newly created wealth.

Wouldn’t it be novel if the president really reported on the State of the Union each year and if we solved our existing problems before creating new ones?

Bob Jensen's threads on entitlements ---
http://www.trinity.edu/rjensen/Entitlements.htm


Question
How does the U.S. government hide its true debt total?

Answer
Firstly, there are $100-$200 trillion in unbooked entitlements. Nobody has an accurate estimate of those future obligations, especially for the Medicare gorilla.

The U.S. currently has "booked" National Debt slightly over $16 trillion that is a more accurate estimate of the debt coming due soon?
Or is this an accurate number by any stretch of the imagination?

"Why $16 Trillion Only Hints at the True U.S. Debt:  Hiding the government's liabilities from the public makes it seem that we can tax our way out of mounting deficits. We can't," by Chris Cox (former SEC Director) and Bill Archer (PwC), The Wall Street Journal, November 26, 2012 ---
http://professional.wsj.com/article/SB10001424127887323353204578127374039087636.html?mod=djemEditorialPage_t&mg=reno64-wsj

A decade and a half ago, both of us served on President Clinton's Bipartisan Commission on Entitlement and Tax Reform, the forerunner to President Obama's recent National Commission on Fiscal Responsibility and Reform. In 1994 we predicted that, unless something was done to control runaway entitlement spending, Medicare and Social Security would eventually go bankrupt or confront severe benefit cuts.

Eighteen years later, nothing has been done. Why? The usual reason is that entitlement reform is the third rail of American politics. That explanation presupposes voter demand for entitlements at any cost, even if it means bankrupting the nation.

A better explanation is that the full extent of the problem has remained hidden from policy makers and the public because of less than transparent government financial statements. How else could responsible officials claim that Medicare and Social Security have the resources they need to fulfill their commitments for years to come?

As Washington wrestles with the roughly $600 billion "fiscal cliff" and the 2013 budget, the far greater fiscal challenge of the U.S. government's unfunded pension and health-care liabilities remains offstage. The truly important figures would appear on the federal balance sheet—if the government prepared an accurate one.

But it hasn't. For years, the government has gotten by without having to produce the kind of financial statements that are required of most significant for-profit and nonprofit enterprises. The U.S. Treasury "balance sheet" does list liabilities such as Treasury debt issued to the public, federal employee pensions, and post-retirement health benefits. But it does not include the unfunded liabilities of Medicare, Social Security and other outsized and very real obligations.

As a result, fiscal policy discussions generally focus on current-year budget deficits, the accumulated national debt, and the relationships between these two items and gross domestic product. We most often hear about the alarming $15.96 trillion national debt (more than 100% of GDP), and the 2012 budget deficit of $1.1 trillion (6.97% of GDP). As dangerous as those numbers are, they do not begin to tell the story of the federal government's true liabilities.

The actual liabilities of the federal government—including Social Security, Medicare, and federal employees' future retirement benefits—already exceed $86.8 trillion, or 550% of GDP. For the year ending Dec. 31, 2011, the annual accrued expense of Medicare and Social Security was $7 trillion. Nothing like that figure is used in calculating the deficit. In reality, the reported budget deficit is less than one-fifth of the more accurate figure.

Why haven't Americans heard about the titanic $86.8 trillion liability from these programs? One reason: The actual figures do not appear in black and white on any balance sheet. But it is possible to discover them. Included in the annual Medicare Trustees' report are separate actuarial estimates of the unfunded liability for Medicare Part A (the hospital portion), Part B (medical insurance) and Part D (prescription drug coverage).

As of the most recent Trustees' report in April, the net present value of the unfunded liability of Medicare was $42.8 trillion. The comparable balance sheet liability for Social Security is $20.5 trillion.

Were American policy makers to have the benefit of transparent financial statements prepared the way public companies must report their pension liabilities, they would see clearly the magnitude of the future borrowing that these liabilities imply. Borrowing on this scale could eclipse the capacity of global capital markets—and bankrupt not only the programs themselves but the entire federal government.

These real-world impacts will be felt when currently unfunded liabilities need to be paid. In theory, the Medicare and Social Security trust funds have at least some money to pay a portion of the bills that are coming due. In actuality, the cupboard is bare: 100% of the payroll taxes for these programs were spent in the same year they were collected.

In exchange for the payroll taxes that aren't paid out in benefits to current retirees in any given year, the trust funds got nonmarketable Treasury debt. Now, as the baby boomers' promised benefits swamp the payroll-tax collections from today's workers, the government has to swap the trust funds' nonmarketable securities for marketable Treasury debt. The Treasury will then have to sell not only this debt, but far more, in order to pay the benefits as they come due.

When combined with funding the general cash deficits, these multitrillion-dollar Treasury operations will dominate the capital markets in the years ahead, particularly given China's de-emphasis of new investment in U.S. Treasurys in favor of increasing foreign direct investment, and Japan's and Europe's own sovereign-debt challenges.

When the accrued expenses of the government's entitlement programs are counted, it becomes clear that to collect enough tax revenue just to avoid going deeper into debt would require over $8 trillion in tax collections annually. That is the total of the average annual accrued liabilities of just the two largest entitlement programs, plus the annual cash deficit.

Nothing like that $8 trillion amount is available for the IRS to target. According to the most recent tax data, all individuals filing tax returns in America and earning more than $66,193 per year have a total adjusted gross income of $5.1 trillion. In 2006, when corporate taxable income peaked before the recession, all corporations in the U.S. had total income for tax purposes of $1.6 trillion. That comes to $6.7 trillion available to tax from these individuals and corporations under existing tax laws.

 

In short, if the government confiscated the entire adjusted gross income of these American taxpayers, plus all of the corporate taxable income in the year before the recession, it wouldn't be nearly enough to fund the over $8 trillion per year in the growth of U.S. liabilities. Some public officials and pundits claim we can dig our way out through tax increases on upper-income earners, or even all taxpayers. In reality, that would amount to bailing out the Pacific Ocean with a teaspoon. Only by addressing these unsustainable spending commitments can the nation's debt and deficit problems be solved.

Neither the public nor policy makers will be able to fully understand and deal with these issues unless the government publishes financial statements that present the government's largest financial liabilities in accordance with well-established norms in the private sector. When the new Congress convenes in January, making the numbers clear—and establishing policies that finally address them before it is too late—should be a top order of business.

Mr. Cox, a former chairman of the House Republican Policy Committee and the Securities and Exchange Commission, is president of Bingham Consulting LLC. Mr. Archer, a former chairman of the House Ways & Means Committee, is a senior policy adviser at PricewaterhouseCoopers LLP.

Jensen Comment
Let's forget about this debt and entitlement nonsense.
President Obama should appoint Nobel Laureate Professor Paul Krugman as his only economic advisor and print all the money we owe without having to worry about taxes and spending and cliffs. It's called Quantitative Easing but by any other name it's just printing greenbacks to scatter over the money supply ---
http://en.wikipedia.org/wiki/Quantitative_easing

Not because we will need the money, but let's also confiscate the wealth of the top 25% as punishment for their abuses of the tax and regulation laws. Greed is a bad thing, and they need to be knocked to ground level because of their greed.

 

Not because we will need the money, but let's also confiscate the wealth of the top 25% as punishment for their abuses of the tax and regulation laws.

Bob Jensen's threads on the sad state of governmental accounting (it's all done with smoke and mirrors) ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting

Added Jensen Comment
Whether or not you love or hate the scholarship and media presentations of the University of Chicago's Milton Friedman, I think you have to appreciate his articulate response on this historic Phil Donohue Show episode. Many of the current dire warnings about entitlements were predicted by him as one of the cornerstones in his 1970's PBS Series on "Free to Choose." We just didn't listen as we poured on unbooked national debt (over $100  trillion and not counting) for future generations to deal with rather than pay as we went so to speak! .
The Grand Old Scholar/Researcher on the subject of greed in economics
Video:  Milton Friedman answers Phil Donohue's questions about capitalism.---
http://www.cs.trinity.edu/~rjensen/temp/MiltonFriedmanGreed.wmv

Bob Jensen's health care messaging updates --- http://www.trinity.edu/rjensen/Health.htm


From the University of Pennsylvania (Wharton):  The U.S. Deficit is Tremendously Understated
"A Proper Accounting: The Real Cost of Government Loans and Credit Guarantees," Knowledge@Wharton, December 5, 2012 ---
http://knowledge.wharton.upenn.edu/article.cfm?articleid=3126


"Extending Social Security and Medicare Eligibility Ages," by Nobel Laureate Gary Becker, Becker-Posner Blog, March 10, 2013 ---
http://www.becker-posner-blog.com/2013/03/extending-social-security-and-medicare-eligibility-ages-becker-.html 

"Extending Social Security and Medicare Eligibility Ages," by Richard Posner, Becker-Posner Blog, March 10, 2013 ---
http://www.becker-posner-blog.com/2013/03/extending-the-social-security-and-medicare-eligiblity-agesposner.html


At the start of an exam, a student openly wondered, "But Professor Einstein, this is the same exam question as last year!" To which the great man supposedly replied, "Correct, young man, but we need to find new answers."
Werner Reinartz --- http://blogs.hbr.org/cs/2013/03/measuring_creativity_we_have_t.html

A Retirement Crisis is Brewing

Question
How would you like to retire with a small nest egg that cannot earn as much as one percent per year in a safe investment?

If you lock up a minimum of $100,000 for five years in a Certificate of Deposit the best you can do is 1.75 % which most likely won't cover food and fuel price increases over the next five years. A one-year CD gets you a whopping 0.94% annual rate. ---
http://cdrates.bankaholic.com/ ---
Thanks ever so much Ben Bernanke.

The CREF bond yield to date in 2013 is at a (negative)  -0.13%.
The TIAA-CREF Inflation linked bond fund is at a (negative) -0.80% thus far in 2013
The CREF Equity Index at a (positive) +0.73% thus far in 2013 but has much more high-risk volatility for what you've struggled to save and might lose
According to MSNBC, President Obama's approval rating fell 15% since January 2013 and is now less than 50%
Congressional approval ratings barely registers
It's time for term limits

From CFO.com Morning Ledger on March 19, 2013

A retirement crisis is brewing as workers save too little and companies face bigger pension liabilities. A report out today from the Employee Benefit Research Institute (PDF) shows that 57% of U.S. workers have less than $25,000 in total household savings and investments excluding their homes. Only 49% reported having so little money saved in 2008. And 28% of Americans have no confidence they will have enough money to retire comfortably—the highest level in the study’s 23-year history, the WSJ’s Kelly Greene and CFOJ’s Vipal Monga report.

Corporate balance sheets (including TIAA-CREF) are also under pressure. Based on another recent report, the Society of Actuaries said rising life expectancies could add as much as $97 billion to corporate pension liabilities in coming years, an increase of up to 5%. Goodyear said life expectancy growth for its plan’s beneficiaries is one reason its global pension-funding gap widened to $3.5 billion last year from $3.1 billion in 2011.

The effect of longer life spans on pension obligations has been dwarfed by the impact of declining interest rates over recent years. Because of the way pension liabilities are calculated, lower rates mean that future obligations are higher today. But interest rates are likely to rise at some point, which will lessen pension obligations. “Rates can go up,” said Rama Variankaval, an executive director in the corporate finance advisory group of J.P. Morgan’s investment bank. “Mortality is more of a one-way street.

 

World Life Expectancy Map --- http://www.worldlifeexpectancy.com/index.php

Life Expectancy Trend for the United States --- http://www.aging.senate.gov/crs/aging1.pdf

Summary

As a result of falling age-specific mortality, life expectancy rose dramatically in the United States over the past century . Final data for 2003 (the most recent available) show that life expectancy at birth for the total population has reached an all-time American high level, 77.5 years, up from 49.2 years at the turn of the 20th century. Record-high life expectancies we re found for white females (80.5 years) and black females (76.1 years), as well as for white males (75.3 year s) and black males (69.0 years). Life expectancy gaps between males and females and between whites and blacks persisted.

In combination with decreasing fertility, the life expectancy gains have led to a rapid aging of the American population, as reflected by an increasing proportion of persons aged 65 and older. This report documents the improvements in longevity that have occurred, analyzing both the underlying factors that contributed to mortality reductions and the continuing longevity differentials by sex and race. In addition, it considers whether life expectancy will continue to increase in future years. Detailed statistics on life expectancy are provided. A brief comparison with other countries is also provided.

While this report focuses on a description of the demographic context of life expectancy change in the United States, these trends have implications for a wide range of social and economic programs and issues that are likely to be considered by Congress.

Question
How is the Federal Reserve under Ben Bernanke destroying pension funds, especially defined benefit pensions like those of teachers, firefighters, police, municipal workers, and state workers, and postal workers.?

There's no worry about Social Security Trust Funds since Congress, in it's great wisdom, emptied those trust funds long ago on things other than Social Security pensions.

"Bernanke Unbounded:  The Fed enters a brave new world of unlimited monetary easing," The Wall Street Journal, September 13, 2012 ---
http://professional.wsj.com/article/SB10000872396390444709004577649831698298106.html?mg=reno64-wsj#mod=djemEditorialPage_t
Read that printing trillions of greenbacks without taxing or borrowing to pay Federal government bills. The net effect is to drive interest rates on savings accounts, Certificates of Deposits, and pension funds to virtually zero.

From the CFO.com Morning Ledger on March 20, 2013

Pension math overwhelmed by discount rate.
Longer lifespans are putting some pressure on corporate defined benefit plans, but changes in the interest rates used to calculate liabilities are by far the biggest issue facing pensions, writes Vipal Monga. As we noted yesterday, increased longevity could add as much as 5% to pension liabilities. But, as CFO Journal reported last month, that increase is dwarfed by the impact of falling discount rates. “Mortality is somewhat of a second-order element [in the rise of obligations],” said Rama Variankaval, an executive director in the corporate finance advisory group of J.P. Morgan’s, investment bank. DuPont CFO Nick Fanandakis said in an interview that his company tries to adjust its mortality assumptions every year, and any increase in the lifespan of retirees will be insignificant compared to changes in the discount rate. “[Longevity increases] won’t move the needle,” he said. The company’s U.S. plans had a pension deficit of $6.6 billion at the end of 2012.

Jensen Comment
University employees in TIAA are given a choice to transfer funds into the riskier CREF equity funds, although there are restrictions on how much can be shifted in any give year. TIAA is not doing so well since 2008 thanks to Ben Bernanke.

Every Breath You Take
Here's an anti-Bernanke musical performance by the Dean of Columbia Business School ---
http://www.youtube.com/watch?v=3u2qRXb4xCU
Ben Bernanke (Chairman of the Federal Reserve and a great friend of big banks) --- http://en.wikipedia.org/wiki/Ben_Bernanke
R. Glenn Hubbard (Dean of the Columbia Business School) ---
http://en.wikipedia.org/wiki/Glenn_Hubbard_(economics)

Quantitative Easing (QE) --- http://en.wikipedia.org/wiki/Quantitative_easing

"Fed Official Who Helped Orchestrate QE: 'I'm Sorry, America,' QE Really Was A Huge Wall Street Bailout," by Steven Perlberg, Business Insider, November 12, 2013 ---
http://www.businessinsider.com/fed-official-sorry-about-qe-2013-11

Andrew Huszar, a former Federal Reserve employee who executed QE, has written a Wall Street Journal op-ed apologizing for the "unprecedented shopping spree."

Huszar worked at the Fed for seven years before leaving for Wall Street. The central bank recruited him back in 2009 to manage "what was at the heart of QE’s bond-buying spree–a wild attempt to buy $1.25 trillion in mortgage bonds in 12 months."

"I can only say: I'm sorry, America," Huszar writes. From the Journal:

It wasn't long before my old doubts resurfaced. Despite the Fed's rhetoric, my program wasn't helping to make credit any more accessible for the average American. The banks were only issuing fewer and fewer loans. More insidiously, whatever credit they were extending wasn't getting much cheaper. QE may have been driving down the wholesale cost for banks to make loans, but Wall Street was pocketing most of the extra cash.

From the trenches, several other Fed managers also began voicing the concern that QE wasn't working as planned. Our warnings fell on deaf ears. In the past, Fed leaders—even if they ultimately erred—would have worried obsessively about the costs versus the benefits of any major initiative. Now the only obsession seemed to be with the newest survey of financial-market expectations or the latest in-person feedback from Wall Street's leading bankers and hedge-fund managers. Sorry, U.S. taxpayer.

Huszar argues that QE, while "dutifully compensating for the rest of Washington's dysfunction," has become Wall Street's new "too big to fail."

Video:  Nobel Laureate Eugene Fama on how the Fed's Quantitative Easing Doesn’t do Much ---
http://pragcap.com/eugene-fama-qe-doesnt-do-much 

Video:  Nobel Laureate Eugene Fama on QE, Tapering, and Volatility
http://video.cnbc.cohttp://video.cnbc.com/gallery/?video=3000211021 m/gallery/?video=3000211021

Jensen Comment
Where QE has been monumentally successful is in compensating the savings of older people. Many could previously retire and have saving supplemented by safe Certificate Deposit interest income. Thanks to QE the CDs and other save savings alternatives pay virtually zero interest such that these old folks must more of their savings capital for living expenses. Thanks Ben. You wiped out the old folks and provide zero incentives for younger folks to save early in the career for compounded interest. Compounded interest? What's that?

Every Breath You Take
Here's an anti-Bernanke musical performance by the Dean of Columbia Business School (Glenn Hubbard)---
http://www.youtube.com/watch?v=3u2qRXb4xCU
Ben Bernanke (Chairman of the Federal Reserve and a great friend of big banks) --- http://en.wikipedia.org/wiki/Ben_Bernanke
R. Glenn Hubbard (Dean of the Columbia Business School) ---
http://en.wikipedia.org/wiki/Glenn_Hubbard_(economics)

 

Bob Jensen's threads on entitlements ---
http://www.trinity.edu/rjensen/Entitlements.htm


"CEOs want to raise the retirement age to 70," by Suzy Khimm, The Washington Post, January 18, 2013 ---
http://www.washingtonpost.com/blogs/wonkblog/wp/2013/01/18/ceos-want-to-raise-the-retirement-age-to-70/

A lot of CEOs have gotten on the deficit-reduction bandwagon, but they’ve often been loath to push for specific proposals, endorsing instead an overall “framework” for fiscal consolidation that’s big and bipartisan.

That’s now starting to change: A group of the country’s leading CEOs from the Business Roundtable has put out an entitlement reform plan that proposes to raise the eligibility age for both Social Security and Medicare to 70.

Leading Republicans have long rallied to raise the eligibility age for Social Security to 70, but the Business Roundtable’s recommendations for Medicare go significantly further than the GOP consensus: During the fiscal cliff negotiations, for instance, Boehner proposed raising the Medicare eligibility age from 65 to 67 years, while the CEOs want to push it three years higher.

The group wants a slew of other changes as well: higher premiums for wealthy beneficiaries, chained CPI and more private competition for Medicare and private retirement programs.

“Even though most of these modernization initiatives would be phased in gradually, the immediate benefits would be enormous. First, they would put Medicare and Social Security on the sound financial footing needed to provide a sustainable retirement safety net. This would represent a major step forward in reducing the growth of government spending,” Gary Loveman, CEO of Caesars Entertainment Corp. and Business Roundtable participant, wrote in the Wall Street Journal.

The Business Roundtable believes its proposals would save the government $300 billion in Medicare spending and extend Social Security’s solvency for 75 years. But the changes would also come with costs to others as well. By eliminating Medicare coverage for those between 65 and 70 years old, the plan would send more individuals into Medicaid and the newly created health-insurance exchanges, as not everyone would continue to work or be covered by their employers’ insurance, explains Tricia Neuman, a vice president at the Kaiser Family Foundation.

That would drive up health-care premiums overall in the exchanges, as there would be older, sicker people getting coverage, says Neuman. In states that don’t elect to participate in the Medicaid expansion under Obamacare, lower-income people in their mid- to late-60s could also become uninsured, particularly those who are in physically demanding jobs they might not be able to continue until they’re 70. Overall, raising the eligibility age “would reduce federal spending but would do so in a way that shifts costs to other payers and raises overall health care costs,” says Neuman, who’s examined the impact of raising the age to 67.

On the flip side, proponents of the changes argue that raising the retirement age makes sense given the rise in life expectancy, and that sacrifices are necessary to ensure the solvency of entitlement programs. “What has happened to Social Security over years is because people are living much more longer, it’s moved more toward a middle-aged retirement system,” says Eugene Steuerle, a senior fellow at the Urban Institute.

Continued in article

World Life Expectancy Map --- http://www.worldlifeexpectancy.com/index.php

Life Expectancy Trend for the United States --- http://www.aging.senate.gov/crs/aging1.pdf

Summary

As a result of falling age-specific mortality, life expectancy rose dramatically in the United States over the past century . Final data for 2003 (the most recent available) show that life expectancy at birth for the total population has reached an all-time American high level, 77.5 years, up from 49.2 years at the turn of the 20th century. Record-high life expectancies we re found for white females (80.5 years) and black females (76.1 years), as well as for white males (75.3 year s) and black males (69.0 years). Life expectancy gaps between males and females and between whites and blacks persisted.

In combination with decreasing fertility, the life expectancy gains have led to a rapid aging of the American population, as reflected by an increasing proportion of persons aged 65 and older. This report documents the improvements in longevity that have occurred, analyzing both the underlying factors that contributed to mortality reductions and the continuing longevity differentials by sex and race. In addition, it considers whether life expectancy will continue to increase in future years. Detailed statistics on life expectancy are provided. A brief comparison with other countries is also provided.

While this report focuses on a description of the demographic context of life expectancy change in the United States, these trends have implications for a wide range of social and economic programs and issues that are likely to be considered by Congress.

Bob Jensen's threads on entitlements ---
http://www.trinity.edu/rjensen/Entitlements.htm

 


David M. Walker --- http://en.wikipedia.org/wiki/David_M._Walker_%28U.S._Comptroller_General%29

Career as Comptroller General

Walker served as Comptroller General of the United States and head of the Government Accountability Office (GAO) from 1998 to 2008. Appointed by President Bill Clinton, his tenure as the federal government's chief auditor spanned both Democratic and Republican administrations. While at the GAO, Walker embarked on a Fiscal Wake-up Tour,[1] partnering with the Brookings Institution, the Concord Coalition, and the Heritage Foundation to alert Americans to wasteful government spending.[2] Walker left the GAO to head the Peterson Foundation on March 12, 2008.[3] Labor-management relations became fractious during Walker's nine-year tenure as comptroller general. On September 19, 2007, GAO analysts voted by a margin of two to one (897–445), in a 75% turnout, to establish the first union in GAO's 86-year history.

Peter G. Peterson Foundation

In 2008, Walker was personally recruited by Peter G. Peterson, co-founder of the Blackstone Group, and former Secretary of Commerce under Richard Nixon, to lead his new foundation. The Foundation distributed the documentary film, I.O.U.S.A. which follows Walker and Robert Bixby, director of the Concord Coalition, around the nation, as they engage Americans in town-hall style meetings, along with luminaries such as Warren Buffett, Alan Greenspan, Paul Volcker and Robert Rubin.

Peterson was cited by the New York Times as one of the foremost "philanthropists whose foundations are spending increasing amounts and raising their voices to influence public policy."[5] In philanthropy, Walker has advocated a more action-based approach to the traditional foundation: “I do believe, however, that foundations have been very cautious and somewhat conservative about whether and to what extent they want to get involved in advocacy.”[5] David Walker stepped down as President and CEO of the Peter G. Peterson Foundation on October 15, 2010 to establish his own venture, the Comeback America Initiative

Campaign for fiscal responsibility

Walker has compared the present-day United States to the Roman Empire in its decline, saying the U.S. government is on a "burning platform" of unsustainable policies and practices with fiscal deficits, expensive overcommitments to government provided health care, swelling Medicare and Social Security costs, the enormous expense of a prospective universal health care system, and overseas military commitments threatening a crisis if action is not taken soon]

Walker has also taken the position that there will be no technological change that will mitigate health care and social security problems into 2050 despite ongoing discoveries.

In the national press, Walker has been a vocal critic of profligate spending at the federal level. In Fortune magazine, he recently warned that "from Washington, we'll need leadership rather than laggardship." in another op-ed in the Financial Times, he argued that the credit crunch could portend a far greater fiscal crisis;[11] and on CNN, he said that the United States is "underwater to the tune of $50 trillion" in long-term obligations.

He favorably compares the thrift of Revolutionary-era Americans, who, if excessively in debt, would "merit time in debtors' prison", with modern times, where "we now have something closer to debtors' pardons, and that's not good."

Other responsibilities

Prior to his appointment to the GAO, Walker served as a partner and global managing director of Arthur Andersen LLP and in several government leadership positions, including as a Public Trustee for Social Security and Medicare from 1990 to 1995 and as Assistant Secretary of Labor for Pension and Welfare Benefit Programs during the Reagan administration. Before his time at Arthur Andersen, Walker worked for Source Finance, a personnel agency, and before that was in Human Resources at accounting firm Coopers & Lybrand.

Continued in article

In 2010 David Walker was admitted to the Accounting Hall of Fame --- Click Here
http://fisher.osu.edu/departments/accounting-and-mis/the-accounting-hall-of-fame/membership-in-hall/david-michael-walker/

"Former comptroller general urges fiscally responsible reforms," by Ken Tysiac, Journal of Accountancy, October 6, 2012 ---
http://journalofaccountancy.com/News/20126578.htm

The giant red digits on the “U.S. Burden Barometer” outside the auditorium where David Walker spoke Friday provided the numbers behind this prominent CPA’s message: The United States urgently needs significant government financial reform.

Counting upward at a feverish pace, the barometer represented an estimate of what Walker, a former U.S. comptroller general, calls the “federal financial sinkhole,” combining explicit liabilities, commitments and contingencies, and obligations to Social Security and Medicare.

Shortly before Walker began his presentation, the number stood at $70,821,389,917,073.

“It’s 70.8 trillion dollars, going up 10 million a minute, a hundred billion a week,” Walker told an audience consisting primarily of CPAs at the University of North Carolina at Chapel Hill. “So the federal financial sinkhole is much bigger than the politicians admit. It’s growing rapidly by them doing nothing, and they’ve become very adept at doing nothing. And something has got to be done.”

Walker, a political independent, headed the U.S. Government Accountability Office from 1998 to 2008. As CEO of the not-for-profit Comeback America Initiative, he is promoting fiscal responsibility and seeking solutions to federal, state, and local fiscal imbalances in the United States.

His tour, which is barnstorming 16 states in 34 days, ends Tuesday and positions Walker as one of the leading sentinels in a growing chorus of concern over the economic direction of the United States at an important time. With a presidential election closing in on its final days, one of the most persistent questions both candidates face is how they will handle the economy, taxes, and the federal deficit.

Educating the public about the deficit and the important, difficult, disciplined action that could bring it under control is Walker’s passion. He warns of the impending “fiscal cliff” the nation faces in January 2013 as the result of the scheduled expiration of various tax provisions, and says a U.S. debt crisis is possible within two years.

He comes armed on his tour with statistics that demonstrate the financial peril that government spending and deficits have brought for the United States. His PowerPoint slides show that:

  • Federal spending as a percentage of GDP has grown from 2% in 1912 to 24% in 2012.
  • Total government debt in the U.S. is estimated to be 137.8% of the economy, when intra-governmental holdings are included, in 2012.
  • Publicly held federal debt as a percentage of GDP is projected to grow to 185% by 2035, according to one scenario in the Congressional Budget Office’s long-term outlook.


“The federal government has grown too big, promised too much, lost control of the budget, waited too long to restructure, and it needs fundamental restructuring,” Walker said during an interview before the event. “Not nip and tuck. Radical reconstructive surgery done in installments over a period of time.”

Walker showed that defense spending in the United States in 2010 exceeded the combined total spent by 15 other nations, including China, Russia, France, the U.K., Japan, Saudi Arabia, India, and Germany. And he showed that U.S. per capita health care costs ($7,960) were more than double the OECD average ($3,361) and far outpaced those of Canada ($4,363) and Germany ($4,218).

He wants to reform budgeting, Social Security, health care, Medicare and Medicaid, defense spending, and the tax code.

He envisions measures that tie debt to GDP targets as needed reforms of federal budget controls. He advocates suspending the pay of members of Congress if they fail to pass a budget. With regard to Social Security, he would raise the taxable wage base cap, gradually raise the retirement eligibility ages, and revise the benefit structure based on income.

Walker would guarantee a basic level of health coverage for all citizens, revise payment practices to be evidence based, and phase out the tax exclusion for employer-provided health insurance, which he says estimates show will cost the federal government a total of more than $650 billion from 2010 to 2014. He would impose an annual budget for Medicare and Medicaid spending, and make Medicare premium subsidies more needs based.

He would reform the military by requiring cost consideration in defense planning, “right-sizing” bases and force structure, and modernizing purchasing and compensation practices. He also would reform individual and corporate federal income taxes, increasing the effective tax paid by the wealthy and decreasing the number of citizens who pay no income tax.

At an event whose sponsors included the AICPA, the North Carolina Association of Certified Public Accountants, and the N.C. Chamber of Commerce, Walker said CPAs have an important role to play in bringing about these changes.

“I believe that CPAs have a disproportionate opportunity and an obligation to be informed and involved here,” Walker said. “They’re good with numbers. They’re respected by the public. And I think that our profession, really, ought to be leaders in this area.”

The AICPA has long been a leading advocate for comprehensive reform that would simplify tax laws without reducing the productive capacity of the economy. In addition, the AICPA works as a proponent of personal financial literacy and fiscal responsibility through efforts such as 360 Degrees of Financial Literacy and What’s at Stake.”

Anthony Pugliese, AICPA senior vice president–Finance, Operations and Member Value, said Walker’s message was on point with the Institute’s initiatives promoting financial literacy and responsibility at the consumer, business, and government levels.

“We hope our members can make a difference. We know they can make a difference with the clients they serve and small business owners around the country and individual consumers,” Pugliese said. “We hope this message is spread, and I think we have a vital role to play in this.”

Walker said that political changes need to be made in order to bring about all these other transformations that would put the United States on a better fiscal path. He encourages development of a strategic framework for the federal government and creation of a government transformation task force. He calls for Congressional redistricting reform, integrated and open primaries, campaign finance reform, and term limits.

Continued in article


Question
If the job market does not improve, how long will it take for the Fed to own all the real estate mortgages in the United States?

"Fed to Purchase $40 Billion Per Month in Bonds Until Job Market Improves," Time Magazine, September 12, 2012 ---
http://business.time.com/2012/09/13/fed-to-purchase-40-billion-per-month-in-bonds-until-job-market-improves/ 

The Federal Reserve says it will spend $40 billion a month to buy mortgage-backed securities for long as necessary to stimulate the still-weak economy and reduce high unemployment.

It also extended a plan to keep short-term interest rates at record lows through mid-2015. And it said it’s ready to take other steps to boost the economy even after it strengthens.

The Fed announced the series of bold steps after its two-day policy meeting ended Thursday. Its actions pointed to how sluggish the economy remains more than three years after the Great Recession ended. “We’re not sure what the economic effects of this program will be – it should help growth and employment on the margin,” Dan Greenhaus, chief global strategist at BTIG LLC, said in a research note.

(VIDEO: How the Federal Reserve Works)

Stocks rose after the announcement. The Dow Jones industrial average was up 15 points for the day just before 12:30 p.m. It surged by 105 points within minutes of the announcement, then gave up some gains to be just 35 points higher.

The dollar dropped against major currencies, and the price of gold shot up about $16 an ounce, roughly 1 percent, to $1,750. “If the outlook for the labor market does not improve substantially, the committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability,” the Fed said in a statement released after the meeting.

The statement was approved on an 11-1 vote. The lone dissenter was Richmond Fed President Jeffrey Lacker, who worries about igniting inflation.

The bond purchases are intended to lower long-term interest rates to spur borrowing and spending. The Fed has previously bought $2 trillion in Treasury bonds and mortgage-backed securities since the 2008 financial crisis.

(MORE: U.S. Federal Reserve Earned $77 Billion Profit in 2011)

Skeptics caution that further bond buying might provide little benefit. Rates are already near record lows. Critics also warn that more bond purchases raise the risk of higher inflation later.

With less than eight weeks left until Election Day, the economy remains the top issue on most voters’ minds. Many Republicans have been critical of the Fed’s continued efforts to drive interest rates lower, saying they fear it could ignite inflation.

The Fed is under pressure to act because the U.S. economy is still growing too slowly to reduce high unemployment. The unemployment rate has topped 8 percent every month since the Great Recession officially ended more than three years ago.

Continued in article

"Bernanke Unbounded:  The Fed enters a brave new world of unlimited monetary easing," The Wall Street Journal, September 13, 2012 ---
http://professional.wsj.com/article/SB10000872396390444709004577649831698298106.html?mg=reno64-wsj#mod=djemEditorialPage_t

So much for fears that the Federal Reserve might disappoint Wall Street. Chairman Ben Bernanke and his music men at the Fed's Open Market Committee put on their party hats Thursday and unleashed an unlimited program of monetary easing. The move exceeded even Wall Street's expectations, but whether it will help the real economy in the long term is doubtful.

This is the Fed's third round of quantitative easing (QE3) since the 2008 panic, and the difference this time is that Ben is unbounded. The Fed said it will keep interest rates at near-zero "at least through mid-2015," which is six months longer than its previous vow. The bigger news is that the Fed announced another round of asset purchases—only this time as far as the eye can see.

The Fed will start buying $40 billion of additional mortgage assets a month, with a goal of further reducing long-term interest rates. But if "the labor market does not improve substantially," as the central bankers put it, the Fed will plunge ahead and buy more assets. And if that doesn't work, it will buy still more. And if . . .

The Fed statement paid lip service to pursuing its "dual mandate" of controlling inflation and reducing unemployment, but no one should be fooled. The Fed has declared that it is going all-in to cut the jobless rate, no matter what it takes.

"We have to do more, and we'll do enough to make sure the economy gets on the right track," Mr. Bernanke declared at his Thursday press conference. That bravado contradicts the Chairman's by now routine caveat that monetary policy "is no panacea" and can't save the economy by itself, but no matter. He's going to try.

Will it work? Mr. Bernanke recently offered a scholarly defense of his extraordinary policy actions since 2008, and there's no doubt that QE1 was necessary in the heat of the panic. We supported it at the time. The returns on QE2 in 2010-2011 and the Fed's other actions look far sketchier, even counterproductive.

QE2 succeeded in lifting stocks for a time, but it also lifted other asset prices, notably commodities and oil. The Fed's QE2 goal was to conjure what economists call "wealth effects," or a greater propensity to spend and invest as consumers and businesses see the value of their stock holdings rise. But the simultaneous increase in commodity prices lifted food and energy prices, which raised costs for businesses and made consumers feel poorer.

These "income effects" countered Mr. Bernanke's wealth effects, and the proof is that growth in the real economy decelerated in 2011. It decelerated again this year amid Operation Twist. When does the Fed take some responsibility for policies that fail in their self-professed goal of spurring growth, rather than blaming everyone else while claiming to be the only policy hero?

Then there are the real and potential costs of endless easing, three of which Mr. Bernanke addressed at his Thursday press conference. He said Americans shouldn't complain about getting a pittance of interest on their savings because they'll benefit in the long term from a better economy spurred by low rates. Retirees might retort that they know what Lord Keynes said about the long term.

Mr. Bernanke was also as slippery as a politician in claiming that his policies don't promote deficit spending because the Fed earns interest on the bonds it buys and hands that as revenue to the Treasury. Yes, but its near-zero policy also disguises the real interest-payment burden of running serial $1.2 trillion deficits, while creating a debt-repayment cliff when interest rates inevitably rise. Does he really think Congress would spend as much if he weren't making the cost of government borrowing essentially free?

The third cost is the risk of future inflation, which Mr. Bernanke accurately said hasn't strayed too far above the Fed's 2% "core inflation" target. That conveniently ignores the run-up in food and energy prices, which consumers pay even if the Fed discounts them in its own "core" calculations.

The deeper into exotic monetary easing the Fed goes, the harder it will also be to unwind in a timely fashion. Mr. Bernanke says not to worry, he has the tools and the will to pull the trigger before inflation builds.

That's what central bankers always say. But good luck picking the right moment, which may be before prices are seen to be rising but also before the expansion has begun to lift middle-class incomes. That's one more Bernanke Cliff the economy will eventually face—maybe after Ben has left the Eccles Building. ***

Given the proximity to the Presidential election, the Fed move can't be divorced from its political implications. Mr. Bernanke forswore any partisan motives on Thursday, and we'll give him the benefit of the personal doubt. But by goosing stock prices, and thus lifting the short-term economic mood, the Fed has surely provided President Obama an in-kind re-election contribution.

The irony is that, with this historic and open-ended easing, Mr. Bernanke is also tacitly admitting how lousy the Obama-Bernanke economy really is. For all the back-slapping by the Fed and the White House about how they've saved us from a Great Depression, four years later the Fed is acknowledging that the recovery is rotten, that job creation stinks, and that their policies haven't helped the middle class. But, hey, it's great for Wall Street.

Jensen Comment
What is really sad that in it's effort to deceive the public, our deceptive government removed increases in food and fuel prices from the definition of "inflation."

From Duke University:  Bernanke's $40 billion per month currency printing is a failure from the start

"QE3 is a Mistake," Garden of Eden, September 2012 --- http://gardenofecon.com/2012/09/qe3-is-a-mistake/

The Fed made a mistake today in launching QE3. This is not just my opinion. It is the overwhelming opinion of America’s CFOs.

In the Duke University-CFO Magazine Global Business Outlook Survey released September 10, 2012, we asked a key question. If your borrowing costs were reduced by 50bp [an optimist assessment of QE3], would you accelerate or increase your capital investment? 647 of 667 or 97% of CFOs said "No".

We also asked them why? Here I quote them directly (I did not correct spelling or grammar). An extraordinary 343 CFOs took the time to respond. Here is an excerpt of some of their comments.

CFOs: We need increased growth not lower rates

CFOs: Rates already low so even lower irrelevant

CFOs: Uncertainty and regulatory climate hurts investment

Summary

It is amazing to me that all of the focus is on interest rates – when these rates are at a 50-year low.

Continued in article

Jensen Comment
I won't call the QE3 printing of currency a mistake until I get my home refinanced for less than two percent on a 30-year mortgage.

 

The sad, sad state of governmental accounting that's all done with smoke and mirrors ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting

"Longer-term inflation expectations spike in reaction to the Fed" Sober Look, September 13, 2012 ---
http://soberlook.com/2012/09/longer-term-inflation-expectations.html

Bob Jensen's threads on the bailout are at
http://www.trinity.edu/rjensen/2008Bailout.htm

 


Question
Should we keep increasing the government spending deficit and the national debt every year ad infinitum?

Answers
Although in these down economic times, the liberal's Keynesian hero and Nobel Prize economist, Paul Krugman, thinks recovery is stalled because the government is not massively increasing spending deficits. But he's not willing to commit himself to never reducing deficits or never paying down some of the national debt. Hence, he really does not answer the above question ---
http://www.nytimes.com/2012/01/02/opinion/krugman-nobody-understands-debt.html

So let's turn to a respected law professor who advocates increasing the government spending deficit and the national debt every year ad infinitum?

"Why We Should Never Pay Down the National Debt (even partly)," by Neil H. Buchanan George Washington University Law School), SSRN, 2012 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2101811

Abstract:
Calls either to balance the federal budget on an annual basis, or to pay down all or part of the national debt, are based on little more than uninformed intuitions that there is something inherently bad about borrowing money. We should not only ignore calls to balance the budget or to pay down the national debt, but we should engage in a responsible plan to increase the national debt each year. Only by issuing debt to lubricate the financial system, and to support the economy’s healthy growth, can we guarantee a prosperous future for current and future citizens of the United States.

Student Assignment

Since many of the most liberal economists are not quite willing to assert that "we should never pay down the national debt," what questionable and unmentioned assumptions have been made by Neil H. Buchanan that need to be addressed?

Are some of these assumptions unrealistic in any world other than a utopian world?

Bob Jensen's Answers ---
http://www.cs.trinity.edu/~rjensen/temp/NationalDeficit-Debt.htm

 


How serious will it be in 2017 when China's GDP surpasses that of the US?
"In Defense of Niall Ferguson," by David Frum, The Daily Beast, August 23, 2012 ---
http://www.thedailybeast.com/articles/2012/08/21/china.html

 

A BRIC nation at the moment is a nation that has vast resources and virtually no entitlement obligations that drag down economic growth --- http://en.wikipedia.org/wiki/BRIC

In economics, BRIC (typically rendered as "the BRICs" or "the BRIC countries") is an acronym that refers to the fast-growing developing economies of Brazil, Russia, India, and China. The acronym was first coined and prominently used by Goldman Sachs in 2001. According to a paper published in 2005, Mexico and South Korea are the only other countries comparable to the BRICs, but their economies were excluded initially because they were considered already more developed. Goldman Sachs argued that, since they are developing rapidly, by 2050 the combined economies of the BRICs could eclipse the combined economies of the current richest countries of the world. The four countries, combined, currently account for more than a quarter of the world's land area and more than 40% of the world's population.

Brazil, Russia, India and China, (the BRICs) sometimes lumped together as BRIC to represent fast-growing developing economies, are selling off their U.S. Treasury Bond holdings. Russia announced earlier this month it will sell U.S. Treasury Bonds, while China and Brazil have announced plans to cut the amount of U.S. Treasury Bonds in their foreign currency reserves and buy bonds issued by the International Monetary Fund instead. The BRICs are also soliciting public support for a "super currency" capable of replacing what they see as the ailing U.S. dollar. The four countries account for 22 percent of the global economy, and their defection could deal a severe blow to the greenback. If the BRICs sell their U.S. Treasury Bond holdings, the price will drop and yields rise, and that could prompt the central banks of other countries to start selling their holdings to avoid losses too. A sell-off on a grand scale could trigger a collapse in the value of the dollar, ending the appeal of both dollars and bonds as safe-haven assets. The moves are a challenge to the power of the dollar in international financial markets. Goldman Sachs economist Alberto Ramos in an interview with Bloomberg News on Thursday said the decision by the BRICs to buy IMF bonds should not be seen simply as a desire to diversify their foreign currency portfolios but as a show of muscle.
"BRICs Launch Assault on Dollar's Global Status," The Chosun IIbo, June 14, 2009 ---
http://english.chosun.com/site/data/html_dir/2009/06/12/2009061200855.html

Their report, "Dreaming with BRICs: The Path to 2050," predicted that within 40 years, the economies of Brazil, Russia, India and China - the BRICs - would be larger than the US, Germany, Japan, Britain, France and Italy combined. China would overtake the US as the world's largest economy and India would be third, outpacing all other industrialised nations. 
"Out of the shadows," Sydney Morning Herald, February 5, 2005 --- http://www.smh.com.au/text/articles/2005/02/04/1107476799248.html 

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 


When I was in college at Iowa State University in 1957 Ronald Reagen was an activist who gave a speech for the Democratic Party on campus.
The finest and most predictive speech ever given by Ronald Reagen was in 1964 when he explained why he was bolting from the Democratic Party ---
http://www.youtube.com/watch?v=yt1fYSAChxs&playnext=1&list=PLA8EA9621FEBBD294 


But in reality, Republicans were almost as much at fault as Democrats for deficit spending.. George W. Bush was one of the worst offenders in history while he was President of the United States. Unlike President Reagen, President Bush did not use his veto pen to challenge wild deficit spending.

Debt --- http://en.wikipedia.org/wiki/Debt

History of Money and Debt --- http://en.wikipedia.org/wiki/History_of_money

Debt (booked by accountants) versus Entitlements (promises made that are not yet booked) ---
http://en.wikipedia.org/wiki/Entitlement

"We've Always Been Deadbeats Debt is not a new American way," by Scott Reynolds Nelson, Chronicle of Higher Education, September 10, 2012 ---
http://chronicle.com/article/Borrowed-Dreams/134146/

My father was a repo man. He did not look the part, which made him all the more effective. He alternately wore a long mustache or a shaggy beard and owned bell-bottoms in black, blue, and cherry red. His imitation-silk shirts were festooned with city maps, cartoon characters, or sailing ships. Dad sang in the car, at the top of his lungs, mostly obscure show tunes. His white Dodge Dart had Mach 1 racing stripes that he had lifted from a souped-up Ford Mustang. The "deadbeats" saw him coming, that's for sure, but they did not understand his profession until he walked into their homes and took away their televisions.

Dad worked for Woolco, a company that lent appliances on an installment plan. When borrowers failed to pay, ignored the letters and phone calls, my father would come by. He often posed as a meter reader or someone with a broken-down car. If he saw a random object lying abandoned in the yard, he would pick it up and bring it to the door as if he were returning it. He was warm and funny, charming, but pushy. He did not carry a gun, but he was fearless under pressure and impervious to verbal abuse. If the door opened, he was inside; if he was inside, he shortly had his hands on the appliance; the rest was bookkeeping.

. . .

In each case, lenders had created complex financial instruments to protect themselves from defaulters like the ones I watched from the car. And in each case, the very complexity of the chain of institutions linking borrowers and lenders made it impossible for those lenders to distinguish good loans from bad.

In 1837, for example, banks in the north of England discovered that the unpaid "cotton bills of exchange" in their vaults made them the indirect owners of slaves in Mississippi. In 2007, shareholders in DBS, the largest bank in Singapore, found themselves part owners of homes facing foreclosure in California, Florida, and Nevada. In both cases, efficient foreclosure proved impossible.

In those crashes in America's past, perhaps a repo man in a Dodge Dart with a million gallons of gas could have visited every debtor, edged his way in, and decided who was good for it. (My dad did accept cash or money orders for Woolco's goods.) But big lenders have neither the time nor the capacity to act with the diligence of a repo man. Instead, such lenders (let's agree to call them all banks) try to unload debts, hide from their own creditors, go into bankruptcy, and call on state and federal institutions for relief. Banks have also routinely overestimated the collateral—the underlying asset—for the loans they hold. When those debts go unpaid or appear unpayable, banks quickly withdraw lending; the teller's window slams shut. A crisis on Wall Street becomes a crisis on Main Street. Money is tight. Loans are impossible: Crash.

***

Scholarship on these financial downturns has its own long and checkered past.

From the 1880s to the 1950s, scholars told the history of the nation's economic downturns as the history of banks. Such an approach was not entirely wrong, but it tended to focus on big personalities like J.P. Morgan or New York institutions; it tended to ignore the farmers, artisans, slaveholders, and shopkeepers whose borrowing had fed the booms and busts.

Then, in the 1960s and 1970s, the so-called new economic historians (or cliometricians) came along with a different story. Using state and federal data, they tried to build mathematical models of the nation's financial health. Moving beyond banks, they emphasized what they termed the "real economy," by which they meant measurable indices of growth and profit. Taking the nation's health like a simple temperature reading, they used gross domestic product, gross income, or collective return on investment. Of course, none of those figures had been measured directly before the 1930s, and so the prognoses tended to vary widely.

Such economic models of financial health, however scientific they looked, tended to be abstract representations of an economy that was, in fact, more complex and more interconnected than they pictured. The models, for example, often assumed that old banks were like modern banks, sharing common accounting principles, or that because banks first issued credit cards in the 1960s, they offered no consumer credit before then. Drilling into historical documents for seemingly relevant numbers, then plugging those numbers into a model of a world they understood rather than the economy they sought to describe, the cliometricians often produced ahistorical work. Hence, one economic historian assumed that American barrels of flour sent to New Orleans were consumed in the South, though most were bound for re-export to the Caribbean. Another calculated that railroads played little role in America's economic booms by modeling a scenario in which canals could have (somehow) crossed the arid plains into the Sierra Nevada mountains.

Bear in mind, that same kind of intellectual hubris about models of economic behavior had awful effects in the recent past. Around 2000, Barclays Bank borrowed a simple diffusion model from physics (called the "Gaussian copula function") to suggest that foreclosures would have a relatively small effect on nearby property values. Economists tested it with two years of foreclosure and price data and agreed. Billions of investment in real-estate followed, often in indirect markets like real-estate derivatives and collateralized debt obligations. By 2008 the model proved shockingly inaccurate.

If some historians focused on the temperature of the "real economy," economists were becoming obsessed with the money supply as the single factor explaining most American panics. Again, a certain kind of blindness to the history of debt and deadbeats ensued. The most important book here was Milton Friedman and Anna Jacobson Schwartz's seminal A Monetary History of the United States, 1867-1960 (1963). It urged economists to steer away from stories of speculation spun out by Keynesians like John Kenneth Galbraith.

How, according to Friedman and Schwartz, can we separate speculation and investment? All loans are risky. The riskier they are, the higher the return. Some investments will fail. Markets need to clear, and those buyers who come along to sweep up bargains are not ruthless profiteers but simply maximizers who make markets work. Thus, the pair steered economists away from problems of risk and toward the problems of state intervention. They were the prophets of financial deregulation.

Their story about past financial panics had the advantage of suggesting simple solutions: Use the Federal Reserve to inflate or deflate the currency. For them, financial crises were mostly monetary. Thus, the 1929 downturn started with a financial shock and then was prolonged by an overly tight monetary policy. After A Monetary History became gospel, economics textbooks dropped their numerous chapters on financial panics because the policy solution became so clear; economists trained after 1965 know little about financial downturns before the Great Depression.

Yet a tripling of the money supply has still not fully pulled the United States and the rest of the world out of our current financial crisis—suggesting that our problems, and all the previous ones, were not just monetary. My dad would have pointed out that economists have misunderstood the problem. Crises are mostly about productive assets—the promises in his trunk.

Social historians (and I count myself among them) tell a very different story about financial panics, but we have our own blind spots. Since the late 1960s, we have often discussed the American economy as if farmers were coherent families of self-sufficient yeomen surprised by the market economy. That story of a sudden revolution misses the early and intimate relationship between Americans and credit. It overlooks how American stores provided consumer credit to farmers, plantations owners, and renters who settled the West.

Thus, American social historians have used the term "market revolution" to describe the period after the 1819 panic. Accordingly market forces rushed in as repo men like my dad became vanguards of a new capitalist order. The financial jeremiads of Jacksonian Democrats of the 1820s and 30s against bankers and paper money became the natural outgrowth of frontier farmers' anger at a capitalism they had never seen before. But the store system of Andrew Jackson's day borrowed practices from the colonial store system that goes back to the 17th century, if not earlier. It was how the fur-trading and East and West India companies prospered. John Jacob Astor and Andrew Jackson were cut from the same cloth. They made their fortunes from their stores, and their store system made settlement possible.

Part of the reason we overlook the importance of credit in American history is our continued attachment to Marx's divide between precapitalist and capitalist forms of agriculture. That misses the relationship between farming and credit for most of the people who settled America. The more I study panics, the more I am persuaded that the pioneer American institution of the 18th and early 19th centuries was not the homestead or the trapper's shack but the store, an institution that sold foreign goods to farmers on credit, taking payment in easily movable settler products like furs, potash, barrel hoops, and butter.

Rather than imagining some golden age of subsistence, scholars in the Marxist tradition should look more closely at anticapitalist movements in the wake of panics. I include here not just the utopian and religious communities like Quakers, Shakers, and Oneidans but also the early Mormons, the Grangers, and the Populists. Those people understood what it meant for banks, and then railroads, to extend credit through stores. Often regarding capital as a collective inheritance, they built their own associations to replace such institutions of credit (and the railroad was an institution of credit) with locally managed cooperatives that distributed agricultural benefits in a way that served the broader community. The temple, the elevator, and the cooperative were attempts to break the chain of debt without demonizing capital.

From the perspective of business history, Joseph A. Schumpeter argued that business-cycle downturns came from periods of "creative destruction" in which new technologies undermined old ones. Outdated technologies, with millions invested in them, became instantly obsolete, leading to financial failures that cascaded to other industries. While Schumpeter, who died in 1950, once persuaded me, I think there is a mechanistic fallacy in the argument. Railroads, for example, have taken the blame for the 1857, 1873 and 1893 downturns. While there may be something there, the whole account seems reductive and technologically determinist. For example, canals, the Bessemer process, fractional distillation of oil, and washing machines are all revolutionary technologies that flourished during the American panics, not before them. They did sweep away older technologies, but rather than causing panics those technologies benefited by the uncertainty that panic created.

In a very different camp, neo-Marxists like Giovanni Arrighi and David Harvey betray a similar kind of reductive history, a latter-day Schumpeterianism. Their work posits a "spatial fix," a center of capitalism that then organizes and draws tribute from the rest of the world. For the late Arrighi, it was a kind of pump that sucked assets from elsewhere as states were forming throughout the sweep of centuries. For Harvey it is an investment in a capital city (Amsterdam, London, New York) and a new communication technology (telegraph, telephone, the Internet) that drew higher profits from everywhere else. Dutch and British hegemony became American hegemony after World War II. That suggests that these scholars have not really considered the tremendous influence of the U.S. Federal Reserve in reorienting international trade between 1913 and the 1920s. Their story seems more or less political to me: American empire comes when Americans claim victory in World War II. The economic material seems to be used in the service of a story about the rise and decline of empires.

If we follow the money, the American empire emerged during World War I, when the international flow of debt changed drastically. For Arrighi and Harvey, the International Monetary Fund and the World Bank are the pathbreakers of financial empire. But it is worth remembering that those institutions were explicitly designed to restrain the dirty tricks of financial empires of the 1920s and 1930s: No more American banks using gunboat diplomacy in Peru; no more Germans sending tanks into Poland to collect unpaid debts.

***

As a historian, I have learned the most about financial disasters from long-dead historians whose work blended primary, secondary, and quantitative material. Rosa Luxemburg, William Graham Sumner, Frank W. Taussig, and Charles Kindleberger would never have agreed about anything. Luxemburg, a renegade Marxist who read in five languages, described how the dangerous mix of a hierarchical production process with the anarchy of international trade could lead manufacturers to block free trade and embrace higher prices for their raw materials in the wake of a panic. Sumner, a laissez-faire Social Darwinist who argued that income inequality benefited society, carefully explained how drastic economic changes could follow from tiny changes in international trade deals. Put in a room together, each would have retreated to a corner to begin throwing furniture. But they and the others were storytellers who used a mixture of sources. Telling a story by looking through the trunk of assets and watching the damage afterward makes more sense to me than simple models of financial contagion, money supply, technological watersheds, or global fixes.

My father died before I started writing about financial panics, but my thoughts have grown out of our 30-year-long argument about financial downturns. Not surprisingly, he disliked "deadbeats," seeing them as the people whose false promises weakened our country. He probably had a point, and no doubt the executives of Woolco would agree. But I find much in them to admire, for defaulters are often dreamers. Viewing America's financial panics through the lens of numerous unfulfilled and forgotten debts that even the oldest banker cannot possibly remember can afford a perspective my dad would have appreciated: with my view from the Dodge Dart, the minute he rang the doorbell, when both debtor and creditor prepared their stories.

Scott Reynolds Nelson is a professor of history at the College of William and Mary. His book A Nation of Deadbeats: An Uncommon History of America's Financial Disasters has just been published by Alfred A. Knopf.

Video
"Debt: The First 5,000 Years," by Paul Kedrosky , Kedrosky.com, September 10, 2011 --- Click Here
http://paul.kedrosky.com/archives/2011/09/debt-the-first-5000-years.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+InfectiousGreed+%28Paul+Kedrosky%27s+Infectious+Greed%29

Debt versus Equity --- http://www.trinity.edu/rjensen/Theory02.htm#FAS150

The booked National Debt in August 2012 went over $16 trillion ---
U.S. National Debt Clock --- http://www.usdebtclock.org/
Also see http://www.brillig.com/debt_clock/
The unbooked entitlements have a present value between $80 and $100 trillion. But who's counting?

Pending Collapse of the United States --- http://www.trinity.edu/rjensen/Entitlements.htm

Should we never pay down  (even partly) the U.S. National Debt or Spending Deficit? ---
http://www.cs.trinity.edu/~rjensen/temp/NationalDeficit-Debt.htm


"America’s Future? Look to Illinois," by Fritz Pfister, Townhall, January 11, 2013 --- Click Here
http://finance.townhall.com/columnists/fritzpfister/2013/01/11/americas-future-look-to-illinois-n1486915?utm_source=thdaily&utm_medium=email&utm_campaign=nl

Somewhere along the line I remember a song about how you can take the kid out of the country, but you can’t take the country out of the kid. Guess one could write a song, you can take the kid out of Chicago but you can’t take Chicago out of the kid.

In October of 2008 my warnings went unheeded regarding candidate Barack Obama. All one needed do to see America in four years was to look at Blagojevich’s Illinois. It turned out worse than imagined.

Blagojevich’s Illinois was reeling in corruption, political favoritism, extra constitutional mandates, and unfunded pension liabilities growing exponentially due to quid pro quo union contracts.

Blago was a living example of liberal economic illiteracy when he quadrupled fees on trucking companies not realizing trucks have wheels, and 25,000 jobs were lost overnight. The exodus from Illinois was underway.

After getting caught with something ‘golden’ Blago was impeached, tried, and sent to prison leaving behind a state in financial shambles.

Enter Pat Quinn from Chicago. Another graduate of the Chicago School for Liberal Economic Illiteracy Quinn shoved through the biggest tax increase in Illinois history during a lame duck session.

That was in January 2011 with projected revenues that would solve all Illinois’ money woes with $7 billion in new revenue. By the end of 2011 the tax increased revenue by only $6 billion, and Quinn began his version of austerity measures which of course failed.

To see where Obama is taking America look to Illinois at the end of 2012. Here’s the report card; unfunded pension obligations up, budget deficit up, deficit spending up, unpaid bills to state vendors up, credit downgrade probable, talk of more taxes.

You can expect the same results from the economic illiterate in DC as the economic illiterate in Illinois. Obama’s attack on the wealthy with the cliff tax deal, and new Obamacare taxes will kill jobs too, just on a grander scale.

Obama must have at least one liberal adviser with a calculator because the day after raising taxes over $600 billion on the wealthy Obama was calling for a trillion more in revenue by eliminating deductions for the evil rich who are keeping the economy down.

Liberal hopes were dashed during the just concluded lame duck session in Illinois. While the state is bursting into flames of insolvency citizens were aghast that the lame duckers didn’t move on pension reform, gay marriage, and bans on assault weapons.

Continued in article

Bob Jensen's threads on entitlements are at
http://www.trinity.edu/rjensen/Entitlements.htm


"Ben Bernanke puts Obama, Congress on notice," by Josh Boak, Politico, April 25, 2012 ---
http://www.politico.com/news/stories/0412/75611.html

Federal Reserve Chairman Ben Bernanke says he’s trying to save the economy, but he warned Wednesday that he won’t be able to if the president and Congress send the country off a “fiscal cliff.”

The central bank has control over interest rates — used to pull the nation out of an economic abyss in 2008 — but Bernanke said that won’t make much of a difference if both ends of Pennsylvania Avenue can’t agree to extend some of the expiring tax cuts.

“If no action were to be taken by the fiscal authorities, the size of the fiscal cliff is such that there’s absolutely no chance that the Federal Reserve could or would have any ability to offset that affect on the economy,” Bernanke said at an afternoon press conference.

That appears to be the “big what if” for a recovery that Fed projections out Wednesday said is healthier than initially believed.

By a 9-1 vote, the Federal Open Market Committee kept interest rates near zero percent through late 2014.

Fed officials raised their estimates for economic growth this year. Their Wednesday “central tendency” forecast predicted an unemployment rate between 7.8 percent and 8 percent, much lower than January projections of unemployment being 8.2 to 8.5 percent. Unemployment is currently at 8.2 percent.

Similarly, the uptick in Gross Domestic Product this year is anticipated to be between 2.4 percent and 2.9 percent, slightly better than in January.

But Fed policy remained unchanged, despite the fresh projections, because of tepid growth and the lingering threat from Europe’s financial crisis. Rising oil prices contributed to inflation, but the Fed said the impact will disappear going forward.

The bank also did not commit to reviving policies to push down borrowing rates for prospective homeowners and businesses.

However, Bernanke stressed in the press conference after the committee meeting that “those tools remain very much on the table and we will not hesitate to use them, should the economy require additional support.”

One policy Bernanke ruled out was raising the inflation target above 2 percent. It’s been argued that a higher inflation target would fuel faster growth, causing a more significant drop in unemployment. Bernanke called the move “reckless,” saying that would undermine 30 years the Fed has devoted to building up a reputation for fighting inflation, a policy that gave it credibility with the markets for dramatic interventions following the 2008 financial meltdown.

“To risk that asset for what I think would be quite tentative and perhaps doubtful gains on the real side would be, I think, an unwise thing to do,” he said.

Jensen Comment
We look forward to statesman-like courage and bipartisanship in this election year. Yeah Right!

Message from Congress and President Obama to the Bernanke:  No sweat, just print another $2 trillion in greenbacks so we don't have to tighten our belts.

Bob Jensen's threads on the pending deficit and entitlements ---
http://www.trinity.edu/rjensen/Entitlements.htm


How to lie with statistics

"Four Deficit Myths and a Frightening Fact:   We don't have a generalized overspending problem. We have a humongous health-care problem," by Alan S. Binder, The Wall Street Journal, January 19, 2012 ---
http://online.wsj.com/article/SB10001424052970204468004577164820504397092.html?mod=djemEditorialPage_t

Here's the clinker in Binder's liberal economics analysis:

According to the CBO, if nothing is done, the primary deficit will bottom out at 2.6% of GDP in 2018 and then rise to 7.4% of GDP by 2040. Where will the additional 4.8% of GDP come from? Remarkably, every penny will come from health-care spending, which balloons from 6.6% of GDP to 11.4% in the projections, or 4.8% more of GDP. This exact match is just a coincidence, of course. If we use 2050 as the endpoint instead of 2040, the projected primary deficit increases by 6% of GDP, of which health-care spending accounts for 6.6 percentage points. Yes, you read that right: Apart from increased health-care costs, the rest of the primary deficit actually falls relative to GDP.

The CBO projects federal spending on all purposes other than health care and interest to be roughly stable as a share of GDP from 2015 to 2035, and then to drift lower. So no, America, we don't have a generalized overspending problem for the long run. We have a humongous health-care problem.

 

The clinker is that health care and interest on the National Debt will soon become the overwhelming, really overwhelming, components of federal spending. What will the deficit's share of GDP be after factoring in health care and interest be Professor Binder? Liberal economists like Princeton's Binder and Krugman conveniently factor out the big clinkers in the deficit.

This is analogous to saying that household pending on all purposes other than food, rent, utilities, and transportation to be roughly stable as a share of GDP from 2015 to 2035, and then to drift lower.

Our Pentagon is now in the process of shifting military from other parts of the world to the vicinity of China.
Did you hear about the scenario that says the only way we can go to war with China is to borrow the money from China?

I think I'm going to be sick!


The Hall of Fame Accountant Versus the Famous Keynesian Economist

U.S. National Debt Clock --- http://www.usdebtclock.org/
Also see http://www.brillig.com/debt_clock/

Accounting Hall of Fame Citation for David Walker ---
http://fisher.osu.edu/departments/accounting-and-mis/the-accounting-hall-of-fame/membership-in-hall/david-michael-walker/

"Walker Warns of Ballooning Government Debt," by Michael Cohn, Accounting Today, May 16, 2012 ---
http://www.accountingtoday.com/debits_credits/Walker-Warns-Ballooning-Government-Debt-62674-1.html

Former U.S. Comptroller General David Walker has been actively spreading the word for years about the dangers of the nation’s out-of-control budget deficit and national debt.

Those views are finally getting taken seriously in Washington, with Republicans and Democrats in Congress and the Obama administration issuing their own plans for cutting the deficit, building on the proposals of various deficit commissions and think tanks. Walker delivered a speech Thursday at the American Institute of CPAs’ Spring Meeting of Council in Washington, a day after former Senator Alan Simpson, who co-chaired the Simpson-Bowles Commission, gave a humorous talk to AICPA Council members at an evening reception.

Walker’s speech was far more serious in tone. “I’m still an active CPA and I’m proud to be a CPA,” he said. “How you keep score matters. We have a responsibility to lead the fight for truth.”

He urged CPAs in the audience to take up the struggle to persuade the government to control the deficit. “The decisions that fail to be made by elected officials within the next three to five years will largely determine whether our collective future is better than our past,” he said. “We are approaching a tipping point. Some states and localities have passed the tipping point.”

Walker is leading what he calls the Comeback America Initiative at www.keepingamericagreat.org. “In the last few years we have strayed from some of our values that made us great in the past: limited and effective government, personal responsibility and accountability, fiscal responsibility and equity, stewardship.”

He worries about the integrity of the Social Security Trust Funds, quipping, “By the way you can’t trust them, they’re not funded.” He said the country has a progressive tax system, even though the progressivity is subject to debate. Warren Buffett’s effective tax rate is less than his, but over 40 percent of taxpayers pay no federal income taxes.

Continued in the article

Nobel Laureate Paul Krugman ---
http://en.wikipedia.org/wiki/Paul_Krugman

"Debt Is (Mostly) Money We Owe to Ourselves," by Paul Krugman, The New York Times, December 28, 2012 ---
http://krugman.blogs.nytimes.com/2011/12/28/debt-is-mostly-money-we-owe-to-ourselves/#h[AacAag,1]

. . .

¶People think of debt’s role in the economy as if it were the same as what debt means for an individual: there’s a lot of money you have to pay to someone else. But that’s all wrong; the debt we create is basically money we owe to ourselves, and the burden it imposes does not involve a real transfer of resources.

¶That’s not to say that high debt can’t cause problems — it certainly can. But these are problems of distribution and incentives, not the burden of debt as is commonly understood. And as Dean says, talking about leaving a burden to our children is especially nonsensical; what we are leaving behind is promises that some of our children will pay money to other children, which is a very different kettle of fish.

Comment of Larry L on the above Krugman OpEd on December 28, 2012

generally agree with the economic observations of Krugman and I understand what he is saying about internal-external transfers of wealth/debt.

But, I have to disagree with him on the inter-generational argument. People focus on the size of the debt but they do NOT focus on HOW the money has been spent (the money we borrowed over the past generation).

The reality is that Boomers borrowed to spend and NOT build. The lower taxes of the previous 30 years was a subsidy for personal spending (especially for the top 1%). The national debt is a representation of the money borrowed (but not earned) to pay for all sort of personal spending (and destructive wars). If you look at the sort of spendthrift nonsense at the top of the pyramid, this has been an incredibly wasteful use of our country's resources and infrastructure.

So, while other countries may have a high debt level internally, most of that debt is being used to upgrade their physical infrastructure and intellectual property, increasing their productivity and therefore raise their incomes and standards of living. For them, the debt was well spent and will result in passing a better life to the next generation.

The U.S. has done the exact opposite.

Jensen Comment

Of course there are some nations that behaved more like the U.S., including Portugual, Ireland, Greece, and Spain and not Italy.

Increasingly the U.S. National Debt is owed to other nations, especially those in Asia and the Middle East. Hence, it's becoming much more than just something we owe to ourselves. And to keep those amounts we owe to outsiders, Krugman and the Head of the Federal Reserve (Bernanke) are leaning more and more on the Zimbabwe School of Economics that cuts down on the rate of increase in the National Debt by simply increasing the money supply (tantamount to printing more greenbacks not arising from taxes or borrowing). To date Bernanke has flooded our economy with over $2 trillion in this "free money."

The problem of course is at some point free money spending policies of the government come home to roost with a sudden increase in prices. To combat inflation, the Fed will be forced to raise interest rates on the existing National Debt (fueled by annual trillion-dollar government spending deficits) to a point where interest on that debt may become an unsustainable chuck of the Federal budget.

At that point the only way to meet some future entitlements obligations such as Social Security, Medicare, and other entitlements will either be to print more money and become increasingly like Zimbabwe or cut back drastically on promised paid to earlier generations.

I think we in the United States should listen more to the accountant (David Walker) than the Economist who preaches very nearly unrestrained borrowing and printing. A quotation from http://en.wikipedia.org/wiki/Krugman#Economics_and_policy_recommendations

Krugman was one of the most prominent advocates of the 2008–2009 Keynesian resurgence , so much so that economics commentator Noah Smith referred to it as the "Krugman insurgency."

. . .

Economist and former United States Secretary of the Treasury Larry Summers has stated Krugman has a tendency to favor more extreme policy recommendations because "it’s much more interesting than agreement when you’re involved in commenting on rather than making policy."

According to Harvard professor of economics Robert Barro, Krugman "has never done any work in Keynesian macroeconomics" and makes arguments that are politically convenient for him. Nobel laureate Edward Prescott charged that Krugman "doesn't command respect in the profession", as "no respectable macroeconomist" believes that economic stimulus works.

Krugman himself cleverly made tens of millions of dollars writing books and making high-priced speeches to the 99% while he himself basks in the 1%. Nice work if you can get it, and his fortune in no small way came from one time winning a Nobel Prize.

Bob Jensen's threads on entitlements are at
http://www.trinity.edu/rjensen/Entitlements.htm

 

Government Accountability Office (GAO) Podcast [iTunes] http://www.gao.gov/podcast/watchdog.xml

Video: Fora.Tv on Institutional Corruption & The Economy Of Influence ---
http://www.simoleonsense.com/video-foratv-on-institutional-corruption-the-economy-of-influence/

Video from the AICPA
What's at Stake? A CPA's Insights into the Federal Government's Finances ---
http://www.aicpa.org/Advocacy/Pages/CPAsInsight.aspx

Bob Jensen's threads on the sad state of governmental accounting ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting


Former Comptroller General David Walker has been saying this all along
"Social Security’s Woes Are Worse Than You Think," by Ramesh Ponnuru, Bloomberg, August 27, 2012 ---
http://www.bloomberg.com/news/2012-08-27/social-security-s-woes-are-worse-than-you-think.html

While the Romney and Obama camps have made increasingly bitter accusations about each other’s plans for Medicare, a bipartisan consensus on entitlements has emerged in the past few years. Too bad that consensus is wrong.

On both left and right, the politicians and the experts are saying the U.S. needs to fix Medicare -- and have made fixing Social Security an afterthought. President Barack Obama has signed changes to Medicare into law, but has done nothing about Social Security. For two years in a row, Republicans in Congress have supported budgets that rein in the growth of Medicare spending but leave Social Security alone. Expect to hear a lot more about Medicare than Social Security at the Republican convention this week.

The main reason Medicare is getting more attention is that in the long run, it has much higher costs than Social Security. That’s why it’s often described, accurately, as the driver of America’s long-term debt problem.

The Social Security gap looks small, though, only in relation to Medicare. On any other scale, it’s pretty big. The 1983 deal to fix Social Security is often held up as a model of bipartisan achievement, with the implication that it just needs to be replicated to fill the gap: No big deal. Charles Blahous, a Social Security trustee and the author of a recent book on the program, points out that this model is actually pretty discouraging. Twice as Large

In 1983, the financing gap over the next 75 years amounted to 1.8 percent of payroll. Blahous estimates that the gap today, measured using the same standards as in 1983, is 3.5 percent: almost double what it was then. And every year that passes without action, that number gets bigger. Do we think today’s politicians are prepared to solve twice as large a problem as their predecessors did?

Right now, we spend more money on Social Security than on Medicare, and that will remain the case for a while. The programs’ trustees project that by 2035 Social Security will consume 6.4 percent of the economy and Medicare 5.7 percent. The Medicare projection may be optimistic about recent attempts to impose cost controls, but we shouldn’t expect Medicare to become vastly larger than Social Security in the next two decades. After that point, Social Security costs start going down as demographics play out while Medicare becomes a vastly larger problem.

But our finances will be in what’s technically called a world of hurt before Social Security costs peak. Under current projections by the Congressional Budget Office, by 2025 public debt will have reached 106 percent of gross domestic product. By 2035, it will have reached 181 percent. What would happen after that point is an academic question: We can’t allow ourselves to get there.

We need to fix both programs. If anything, it’s Social Security that ought to be saved first because it’s the more urgent near-term problem. Some of the steps we can take to make the program solvent, moreover, would improve Medicare’s finances, too. Raising the retirement age, for example, would encourage people to work longer and thus pay more taxes into both programs. Restraining Growth

Perhaps even more important, we have a better sense of how to restrain the growth of Social Security than of Medicare.

One promising option is to reduce the growth of Social Security benefit levels, especially for high earners. The program could be reformed so that high earners who retire in 2040 receive the same benefit level that high earners who retire in 2020 will -- with an adjustment for inflation, but nothing more. Under the program as it stands now, those future retirees will get a bigger benefit.

Benefit levels for people in the middle of the income spectrum, meanwhile, could be set so that they more than keep up with inflation but don’t rise as much as currently scheduled.

It’s easy to attack this sort of proposal. In the past, opponents have said, for example, that it would be a draconian 40 percent cut in benefits for high earners. That’s true, when the proposal is compared with the benefit levels that the law has scheduled but hasn’t figured out how to pay for. Compared with today’s benefit levels, though, it’s not a cut at all.

Democrats will prefer to raise taxes, especially on high earners, to let benefits grow faster. The drawback to this approach is that higher payroll taxes, the CBO has found, discourage people from working and saving. We would be taking a hit to economic growth for a purpose -- boosting benefit levels for relatively well-off seniors -- that shouldn’t be a high social priority. It seems perverse to raise taxes on high earners to finance higher benefits for them.

Continued in article


From The Wall Street Journal Accounting Weekly Review on June 8, 2012

Dire CBO Report Urges Fiscal Fixes
by: John D. McKinnon
Jun 06, 2012
Click here to view the full article on WSJ.com
 

TOPICS: Governmental Accounting

SUMMARY: "The Congressional Budget Office [CBO] released new projections of a worsening U.S. fiscal outlook...By the end of this year, the CBO said, cumulative federal debt will reach roughly 70% of gross domestic product...the highest level since just after World War II.[and] up from about 40% in 2008.

CLASSROOM APPLICATION: The article can be used in governmental accounting classes to differentiate between budget deficits and total U.S. debt.

QUESTIONS: 
1. (Introductory) Summarize the findings in the Congressional Budget Office report according to the description in this article.

2. (Advanced) What two numbers comprise the 70% ratio forecasted by the end of 2012? How does this ratio help to be able to compare our country's circumstances over time? How do you think each component has changed since the 2008 measure of 40% to result in this rise to 70%?

3. (Introductory) Define the term budget deficit. Does this 70% ratio have anything to do with the U.S. budget deficit?

4. (Advanced) Consider the graph labeled Components of Spending and Revenue. What two amounts result in the U.S. budget deficit? What are the major components of U.S. governmental spending?
 

Reviewed By: Judy Beckman, University of Rhode Island

 

"Dire CBO Report Urges Fiscal Fixes," by John D. McKinnon, The Wall Street Journal, June 6, 2012 ---
http://professional.wsj.com/article/SB10001424052702303918204577448343232424870.html?mod=djem_jiewr_AC_domainid&mg=reno64-wsj

The Congressional Budget Office released new projections of a worsening U.S. fiscal outlook, adding fuel to the election-year debate over the causes of rising government debt.

By the end of this year, the CBO said, cumulative federal debt will reach roughly 70% of gross domestic product—the value of all goods and services produced by the economy—the highest level since just after World War II. That's up from about 40% in 2008. Without changes in current policies, federal debt would reach about 200% of GDP in 25 years, the report said.

"The explosive path of federal debt…underscores the need for large and timely policy changes to put the federal government on a sustainable fiscal course," CBO director Doug Elmendorf wrote on his blog on Tuesday.

Budget watchdogs have long warned the U.S. was on an untenable fiscal path, due largely to the projected growth in spending on Medicare and other entitlement benefits as baby boomers age. Tax cuts enacted under former President George W. Bush also have contributed to the current fiscal plight.

Without changes in benefits or higher taxes—or both—the federal debt held by the public could reach 199% of GDP in 25 years, the CBO said, up from 187% in last year's projection.

The CBO said this course would likely have dire consequences for the economy, as well as forcing cuts in non-entitlement programs such as defense and social services. Without changes to stave off high debt and interest payments, U.S. GDP would be lower than otherwise over time.

The report showed that under current tax and spending policies, Social Security, Medicare and Medicaid—the three major programs that benefit older people—would amount to 16.6% of GDP in 2037, up from 10.4% now. That would tend to increase deficits dramatically and push interest costs to almost 10% of GDP in 2037, up from 1.4% now.

Republicans and Democrats blamed each other for the worsening budget outlook.

In a statement, Lanhee Chen, a top aide to Mitt Romney, the presumptive GOP presidential nominee, said the report showed President Barack Obama "has placed us on a path to fiscal ruin" by allowing debt to rise so quickly.

Obama campaign spokesman Ben LaBolt alluded to the policies of Mr. Obama's Republican predecessor, Mr. Bush, saying, "The president inherited a $1 trillion deficit as a result of two unfunded wars and tax cuts for the wealthiest." Mr. LaBolt added that Mr. Obama has "signed $2 trillion in deficit reduction into law and proposed a balanced plan to reduce the deficit by more than $4 trillion."

The political sniping also reflected the parties' sharp disagreement over several budget issues, including how to reduce the deficit, how to fuel stronger economic growth and how to handle the large tax increases and spending cuts scheduled to occur at the end of 2012.

Former President Bill Clinton, for example, appearing with Mr. Obama on Monday night, urged more short-term spending to boost the economy, and suggested Republicans were endangering growth with their zeal to cut spending.

"If you do not have economic growth, no amount of austerity will balance the budget, because you will always have revenues go down more than you can possibly cut spending," Mr. Clinton said of Republican budget plans.

Continued in article


"Four Numbers Add Up to an American Debt Disaster," by Caroline Baum, Bloomberg, March 28, 2012 ---
http://www.bloomberg.com/news/2012-03-28/four-numbers-add-up-to-an-american-debt-disaster.html

Consider the following numbers: 2.2, 62.8, 454, 5.9. Drawing a blank? Not to worry. They don’t mean much on their own.

Now consider them in context:

1) 2.2 percent is the average interest rate on the U.S. Treasury’s marketable and non-marketable debt (February data).

2) 62.8 months is the average maturity of the Treasury’s marketable debt (fourth quarter 2011).

3) $454 billion is the interest expense on publicly held debt in fiscal 2011, which ended Sept. 30.

4) $5.9 trillion is the amount of debt coming due in the next five years.

For the moment, Nos. 1 and 2 are helping No. 3 and creating a big problem for No. 4. Unless Treasury does something about No. 2, Nos. 1 and 3 will become liabilities while No. 4 has the potential to provoke a crisis.

In plain English, the Treasury’s reliance on short-term financing serves a dual purpose, neither of which is beneficial in the long run. First, it helps conceal the depth of the nation’s structural imbalances: the difference between what it spends and what it collects in taxes. Second, it puts the U.S. in the precarious position of having to roll over 71 percent of its privately held marketable debt in the next five years -- probably at higher interest rates. First Among Equals

And that’s a problem. The U.S. is more dependent on short- term funding than many of Europe’s highly indebted countries, including Greece, Spain and Portugal, according to Lawrence Goodman, president of the Center for Financial Stability, a non- partisan New York think tank focusing on financial markets.

The U.S. may have had a lot more debt in relation to the size of its economy following World War II, but the structure was much more favorable, with 41 percent maturing in less than five years, 31 percent in five-to-10 years and 21 percent in 10 years or more, according to CFS data. Today, only 10 percent of the public debt matures outside of a decade.

Based on the current structure, a one percentage-point increase in the average interest rate will add $88 billion to the Treasury’s interest payments this year alone, Goodman says. If market interest rates were to return to more normal levels, well, you do the math.

Some economists have cited the Treasury’s ability to borrow all it wants at 2 percent as an argument for more fiscal stimulus. Why not, as long as it’s cheap?

Goodman says the size of the deficit (8.2 percent of gross domestic product) or the debt (67.7 percent of GDP) is only part of the problem. The bigger threat is rollover risk: “the same thing that got countries from Portugal to Argentina to Greece into trouble,” he says. “It’s the repayment of principal that often provides the catalyst for a market event or a crisis.”

The U.S. is unlikely to go from all-you-want-at-2-percent to basket-case overnight. That said, policy makers would be wise to view recent market volatility as a taste of things to come.

Talking to Goodman, I was reminded of the Treasury’s standard sales pitch before quarterly refunding operations during periods of rising yields. Some undersecretary for domestic finance would be dispatched to tell us that Treasury expected to have no trouble selling its debt.

I had an equally standard response: At what price?

That seems particularly relevant today. The Federal Reserve purchased 61 percent of the net Treasury issuance last year, according to the bank’s quarterly flow-of-funds report. That’s masking the decline in demand from everyone else, including banks, mutual funds, corporations and individuals, Goodman says.

Of course, Fed Chairman Ben Bernanke might look at the same numbers and see them as a sign of success. His stated goal in buying bonds is to lower Treasury yields and push investors into riskier assets.

Free to Borrow

Then there’s the distortion in the relative value of stocks versus bonds to worry about. Using the 10-year cyclically adjusted price-earnings ratio and the inverse of the 10-year Treasury yield, Goodman says the relationship hasn’t been this out of whack since 1962.

Continued in article

Video on the History of Debt
"Debt: The First 5,000 Years," by Paul Kedrosky , Kedrosky.com, September 10, 2011 --- Click Here
http://paul.kedrosky.com/archives/2011/09/debt-the-first-5000-years.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+InfectiousGreed+%28Paul+Kedrosky%27s+Infectious+Greed%29


Regardless of who wins the election, the yawning federal budget deficit cries out for tough medicine. The questions are what kinds and who will bear the burden.
Professor Alan Blinder, close Princeton University colleague of Paul Krugman

"A Republican Ticket From Far Right Field With Romney and Ryan, it's out with FDR and in with Ayn Rand," by Alan S. Blinder, The Wall Street Journal, September 5, 2012 ---
http://professional.wsj.com/article/SB10000872396390444273704577633211572264238.html?mg=reno64-wsj#mod=djemEditorialPage_t

It is by now a commonplace that this looks like a watershed election. By choosing Paul Ryan as his running mate, instead of shaking the Etch A Sketch toward the center, Mitt Romney embraced an economic vision that differs radically from the rough politico-economic consensus in the United States since Franklin Roosevelt. Barack Obama accepts that broad consensus and, like many other presidents, has sought to deepen it.

The Rooseveltian consensus embodied three main elements: a modest social safety net to protect vulnerable Americans from some of the downsides of unfettered markets, Keynesian-style policies to shorten recessions, and a progressive tax-transfer system to mitigate income inequality (albeit only slightly).

The two political parties certainly had their differences between the 1930s and the 2000s, but the broad consensus often had bipartisan support. Thus Eisenhower built public infrastructure; Nixon declared himself a Keynesian and established the Environmental Protection Agency; both Reagan and Bush II acted like Keynesians; Bush I promised a "kinder, gentler nation" and Bush II expanded Medicare—unfortunately, without a way to pay for it.

But with Messrs. Romney and Ryan, it's out with Franklin Roosevelt and in with Ayn Rand. As many observers have noticed, even Ronald Reagan would be considered a bit too lefty for the current Republican Party. After all, he signed several tax increases to shrink the budget deficit and barked at but never seriously bit the safety net.

A government's budget is more than a mass of numbers; it reveals a nation's priorities and aspirations. The Obama and Romney budget proposals offer two starkly different visions of America's future, making this election the sharpest contrast between competing economic philosophies since Lyndon Johnson routed Barry Goldwater in 1964.

The Romney-Ryan budget would shred the safety net; President Obama thickened it with near-universal health insurance. Mr. Obama wants a more progressive tax code; Mr. Romney would pile on yet more income tax cuts for the most prosperous Americans. Leading Republicans claim, against both evidence and logic, that the 2009 fiscal stimulus failed to create any jobs. They even oppose the Federal Reserve's efforts to boost economic growth.

Regardless of who wins the election, the yawning federal budget deficit cries out for tough medicine. The questions are what kinds and who will bear the burden.

Mr. Obama's 10-year deficit-reduction plan offers a balanced approach that shares the castor oil widely—it is similar (but not identical) to that of the Simpson-Bowles fiscal commission. His budget would end the Bush tax cuts for upper-income taxpayers, raise additional revenue by limiting various deductions and exemptions, shrink nondefense discretionary spending to the lowest share of GDP in 50 years, trim the defense budget, and make selective cuts in entitlement programs including Medicare and Medicaid. While doing so, it seeks higher spending on education, infrastructure and basic research.

The nonpartisan Congressional Budget Office estimates that the president's proposals would reduce the federal budget deficit to about 3% of GDP by 2015. That's a sensible interim target which would roughly stabilize the ratio of debt to GDP. But, as I have argued on this page, more will have to be done about health-care costs in the long run.

Continued in article

Jensen Comment
The problem for 2013-2016 may not so much be the presidency as it is with a politically paralyzed House and Senate. I anticipate that President Obama will be elected, but the victory will be bitter sweet with a Congress that blocks his bigger-government progressive initiatives and a President who blocks smaller-government initiatives conceived in Congress. It will not be pretty surviving four years of stalemate with no checkmate.

There's no end of trillion dollar annual deficits and greenback printing machines in sight.

And who will bail out California and Illinois unfunded pension fund blockbusters?
http://www.trinity.edu/rjensen/Theory02.htm#Pensions

"The endangered public company:  The rise and fall of a great invention, and why it matters," The Economist, May 19, 2012 ---
http://www.economist.com/node/21555562

AS THIS newspaper went to press, Facebook was about to become a public company. It will be one of the biggest stockmarket flotations ever: the social-networking giant expects investors to value it at $100 billion or so. The news raises several questions, from “Is it worth that much?” to “What will it do next?” But the most intriguing question is what Facebook’s flotation tells us about the state of the public company itself.

At first glance, all is well. The public company was invented in the mid-19th century to provide the giants of the industrial age with capital. That Facebook is joining Microsoft and Google on the stockmarket suggests that public listings are performing the same miracle for the internet age. Not every 19th-century invention has weathered so well.

But look closer and the picture changes (see article). Mark Zuckerberg, Facebook’s young founder, resisted going public for as long as he could, not least because so many heads of listed companies advised him to. He is taking the plunge only because American law requires any firm with more than a certain number of shareholders to publish quarterly accounts just as if it were listed. Like Google before it, Facebook has structured itself more like a private firm than a public one: Mr Zuckerberg will keep most of the voting rights, for example.

The number of public companies has fallen dramatically over the past decade—by 38% in America since 1997 and 48% in Britain. The number of initial public offerings (IPOs) in America has declined from an average of 311 a year in 1980-2000 to 99 a year in 2001-11. Small companies, those with annual sales of less than $50m before their IPOs—have been hardest hit. In 1980-2000 an average of 165 small companies undertook IPOs in America each year. In 2001-09 that number fell to 30. Facebook will probably give the IPO market a temporary boost—several other companies are queuing up to follow its lead—but they will do little to offset the long-term decline.

Companies are like jets; the elite go private

Mr Zuckerberg will be joining a troubled club. The burden of regulation has grown heavier for public companies since the collapse of Enron in 2001. Corporate chiefs complain that the combination of fussy regulators and demanding money managers makes it impossible to focus on long-term growth. Shareholders are also angry. Their interests seldom seem to be properly aligned at public companies with those of the managers, who often waste squillions on empire-building and sumptuous perks. Shareholders are typically too dispersed to monitor the men on the spot. Attempts to solve the problem by giving managers shares have largely failed.

At the same time, alternative corporate forms are flourishing. Once “going public” was every CEO’s dream; now it is perfectly respectable to “go private”, like Burger King, Boots and countless other famous names. State-run enterprises have recovered from the wreck of communism and now include the world’s biggest mobile-phone company (China Mobile), its most successful port operator (Dubai World), its fastest-growing big airline (Emirates) and its 13 biggest oil companies.

No doubt the sluggish public equity markets have played a role in this. But these alternative corporate forms have addressed some of the structural weaknesses that once held them back. Access to capital? Private-equity firms, helped by tax breaks, and venture capitalists both have cash to spare, and there are private markets such as SecondMarket (where $1 billion-worth of shares has changed hands since 2008). Limited liability? Partners need no longer be fully liable, and firms can have as many partners as they want. Professional managers? Family firms employ them by the HBS-load and state-owned ones are no longer just sinecures for the well-connected.

Make capitalism popular again

Does all this matter? The increase in the number of corporate forms is a good thing: a varied ecosystem is more robust. But there are reasons to worry about the decline of an organisation that has spread prosperity for 150 years.

First, public companies have been central to innovation and job creation. One reason why entrepreneurs work so hard, and why venture capitalists place so many risky bets, is because they hope to make a fortune by going public. IPOs provide young firms with cash to hire new hands and disrupt established markets. The alternative is to sell themselves to established firms—hardly a recipe for creative destruction. Imagine if the fledgling Apple and Google had been bought by IBM.

Second, public companies let in daylight. They have to publish quarterly reports, hold shareholder meetings (which have grown acrimonious of late), deal with analysts and generally conduct themselves in an open manner. By contrast, private companies and family firms operate in a fog of secrecy.

Third, public companies give ordinary people a chance to invest directly in capitalism’s most important wealth-creating machines. The 20th century saw shareholding broadened, as state firms were privatised and mutual funds proliferated. But today popular capitalism is in retreat. Fewer IPOs mean fewer chances for ordinary people to put their money into a future Google. The rise of private equity and the spread of private markets are returning power to a club of privileged investors.

All this argues for a change in thinking—especially among the politicians who have heaped regulations onto Western public companies, blithely assuming that businessfolk have no choice but to go public in the long run. Many firms now go (or stay) private to avoid red tape. The result is that ever more business is conducted in the dark, with rich insiders playing a more powerful role.

Public companies built the railroads of the 19th century. They filled the world with cars and televisions and computers. They brought transparency to business life and opportunities to small investors. Because public companies sell shares to the unsophisticated, policymakers are right to regulate them more tightly than other forms of corporate organisation. But not so tightly that entrepreneurs start to dread the prospect of a public listing. The public company has long been the locomotive of capitalism. Governments should not derail it.


Selling the debt in the left pocket to the right pocket:  The Fed is all smoke and mirrors

"Fed Is Buying 61 Percent of U.S. Government Debt," by Bob Adelmann, The New American, March 29, 2012
http://thenewamerican.com/economy/commentary-mainmenu-43/11357-fed-is-buying-61-of-us-government-debt

In his attempt to explode the myth that there is unlimited demand for U.S. government debt, former Treasury official Lawrence Goodman explained that there is high perceived demand because the Federal Reserve is doing most of the buying.

Wrote Goodman,

Last year the Fed purchased a stunning 61% of the total net Treasury issuance, up from negligible amounts prior to the 2008 financial crisis.

This not only creates the false impression of limitless demand for U.S. debt but also blunts any sense of urgency to reduce supersized budget deficits.

What about Japan and China? Aren’t they the major purchasers of U.S. debt? Not any more, notes Goodman. Foreign purchases of U.S. debt dropped to less than 2 percent  of GDP (Gross Domestic Product) from almost 6 percent just three years ago. And private sector investors — banks, money market and bond mutual funds, individuals and corporations — have cut their buying way back as well, to less than 1 percent of GDP, down from 6 percent. This serves to hide the fact that the government can’t find outside buyers willing to accept rates of return that are below the inflation rate (“negative interest”) given the precarious financial condition of the government. It also hides the impact of $1.3 trillion deficits from the public who would likely get much more concerned if real, true market rates of interest were being demanded for purchasing U.S. debt, as such higher rates would increase the deficit even further. Finally it takes pressure off Congress to “do something” because there is no public clamor over the matter, at least for the moment. 

One of those promoting the myth that buyers of U.S. debt must exist because interest rates are so low is none other than one of those recently seated at the Federal Reserve’s Open Market Committee table, Alan BlinderNow a professor of economics at Princeton University, Blinder was vice chairman of the Fed in the mid-nineties and should know all about the Fed’s manipulations and machinations in the money markets. Apparently not. 

On January 19 Blinder wrote in the Wall Street Journal that

Strange as it may seem with trillion-dollar-plus deficits, the U.S. government doesn’t have a short-run borrowing problem at all. On the contrary, investors all over the world are clamoring to lend us money at negative real interest rates.

In purchasing power terms, they are paying the U.S. government to borrow their money!

Blinder repeated the error in front of the Senate Banking Committee just one week later: "In fact, world financial markets are eager to lend the United States government vast amounts at negative real interest rates. That means that, in purchasing power terms, they are paying us to borrow their money!"

Aggressive promotion of a myth never makes it a fact. All it does is hide, for a period, the reality that the world isn’t willing to lend to the United States at negative interest rates. This places the burden on the Fed to make the myth appear real by expanding its own balance sheet and gobbling up U.S. debt. 

There are going to be consequences. As Goodman put it,

The failure by officials to normalize conditions in the U.S. Treasury market and curtail ballooning deficits puts the U.S. economy and markets at risk for a sharp correction…. [Emphasis added.]

In other words, budget deficits often take years to build or reduce, while financial markets react rapidly and often unexpectedly to deficit spending and debt.

The recent release by the Congressional Budget Office (CBO) of future inflation expectations provides little assurance either as it mimics the line that inflation will stay low for the foreseeable future: "In CBO’s forecast, the price index for personal consumption expenditures increases by just 1.2 percent in 2012 and 1.3 percent in 2013."

With the Fed continuing to buy U.S. government debt, which keeps interest rates artificially low, when will reality set in? Amity Shlaes has the answer. Writing in Bloomberg last week, Shlaes explains:

The thing about [price] inflation is that it comes out of nowhere and hits you….

[It] has happened to us before. In World War I … the CPI [Consumer Price Index] went from 1 percent for 1915 to 7 percent in 1916 and 17 percent in 1917….

In 1945, all seemed well. Inflation was at 2 percent, at least officially. Within two years that level hit 14 percent.

All appeared calm in 1972, too, before inflation jumped to 11 percent by 1974 and stayed high for the rest of the decade….

One thing is clear: pretty soon, we’ll all be in deep water.

Doug Casey agrees: “Don’t think there are no consequences to our unwise fiscal and monetary course; a potentially ugly tipping point is more likely than not at some point.”

Coninued in article

The video is a anti-Bernanke musical performance by the Dean of Columbia Business School ---
http://www.youtube.com/watch?v=3u2qRXb4xCU
Ben Bernanke (Chairman of the Federal Reserve and a great friend of big banks) --- http://en.wikipedia.org/wiki/Ben_Bernanke
R. Glenn Hubbard (Dean of the Columbia Business School) ---
http://en.wikipedia.org/wiki/Glenn_Hubbard_(economics)

 


Teaching Case on Political Insanity:  Charging Up Social Security and Medicare Monthly Entitlements on Our Chinese Credit Card

From The Wall Street Journal Accounting Weekly Review on February 17, 2012

Deal Reached on Payroll Tax
by: Naftali Bendavid and Kristina Peterson
Feb 15, 2012
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com WSJ Video
 

TOPICS: Tax Laws, Tax Policy, Taxation

SUMMARY: Congressional lawmakers negotiated across party lines to extend the FICA payroll tax rate cut which was due to expire on February 29. The original provision to enact the rate cut had been set to expire in December 2011 but a two month extension was then agreed upon as described in the related article from that time. The political parties were in an unusual situation in which Republicans were arguing against the extension--without corresponding spending cuts to pay for the cost-and Democrats were arguing for the tax cut. The bill to be submitted also will "...provide that Medicare would continue to pay physicians at current rates, avoiding a 27.4% cut in fees [when caring for patients on this plan] which would have kicked in March 1....[and] an extension of enhanced unemployment benefits...."

CLASSROOM APPLICATION: The article is useful to introduce the political viewpoints on taxes in a tax class or when discussing payroll taxes in a financial accounting class.

QUESTIONS: 
1. (Advanced) What are payroll taxes? Describe all payroll taxes paid by a company employer and by an employee.

2. (Introductory) What tax rate reduction was given for U.S. payroll taxes? Who pays the tax that was cut? When was this tax cut first scheduled to expire? Hint: You may refer to the related article to find a description of the original expiration of this payroll tax cut.

3. (Advanced) Arguments discussed in the related video identify that temporary tax cuts don't stimulate the economy. In general, how are taxes related to the economy?

4. (Advanced) Further comments in the video indicate that the agreement reached among lawmakers to extend this tax cut has more to do with politics in this presidential election year than with the impact of the payroll taxes on the economy. What are the political viewpoints of the lawmakers on the two sides of the debate over extending this tax cut?
 

Reviewed By: Judy Beckman, University of Rhode Island
 

RELATED ARTICLES: 
Lawmakers Deadlock Over Tax Cut
by Janet Hook
Dec 20, 2011
Online Exclusive

 

"Deal Reached on Payroll Tax," by: Naftali Bendavid and Kristina Peterson, The Wall Street Journal, February 15, 2012 ---
http://online.wsj.com/article/SB10001424052970204883304577223581091709596.html?mod=djem_jiewr_AC_domainid

Congressional negotiators reached a tentative a deal Tuesday night on extending the current payroll-tax cut through the end of the year, as well as continuing longer unemployment benefits and avoiding a steep cut in Medicare doctors' fees.

The agreement, culminating a long and angry debate, followed a major concession earlier in the week from House Republicans, who agreed to extend the payroll-tax holiday without offsetting spending cuts. Without an agreement, payroll-tax rates would rise on March 1 for 160 million American workers.

Rep. Steve LaTourette (R., Ohio) said that it's "a done deal subject to the i's being dotted and t's crossed."

Rep. David Camp (R., Mich.), who along with Sen. Max Baucus (D., Mont.) was one of the chief negotiators, added, "We have a structure and a framework."

The deal represents a victory for President Barack Obama and fellow Democrats, who have argued the payroll-tax break is an emergency measure to support the weak recovery and doesn't have to be paid for. The deal also plays into Democrats' attempts to position themselves as champions of the middle class.

Republicans also have reason to welcome the deal, since it gets a politically troubling issue off the table. Republicans had found themselves on the defensive over the payroll-tax cut. Some worried about whether it would be effective or wise, and Democrats had hammered them for opposing a middle-class tax cut.

The agreement showed the reluctance of both sides, but especially Republicans, to re-engage in the sort of brinksmanship that has caused congressional approval to plummet. The payroll-tax cut, unemployment benefits and Medicare payment system would have expired on Feb. 29, and an agreement two weeks ahead of time is a major change from last year's 11th-hour deals.

Leaders of both parties had been waiting to gauge the reaction of House GOP conservatives, who have been an unpredictable faction in the past year. But conservatives emerging from a closed-door meeting of House Republicans Tuesday night suggested the deal was likely to pass.

"I think you'll see a fair number of dissenters on it," said Rep. Dennis Ross (R., Fla.), a freshman, who worried that the tax cut could hurt Social Security, which is funded by the payroll tax. But he added, "I think they'll have the votes to pass it."

The deal, which could be formalized as early as Wednesday, would extend the tax cut for the rest of the year. After months of insisting that the tax break, which will cost the government $93 billion in revenue, must be paid for, GOP leaders dropped that demand on Monday.

The agreement would also provide that Medicare would continue to pay physicians at current rates, avoiding a 27.4% cut in fees that would have kicked in March 1. That fee adjustment, expected to cost about $30 billion, would be funded by cuts in payments to Medicare providers, as well as a cut to the wellness and prevention fund in Mr. Obama's health-care law.

Among the thorniest issues was continuing longer unemployment benefits, which currently provide jobless benefits for up to 99 weeks, depending on a state's jobless rate.

The two sides were making conflicting claims on the duration of benefits under the new deal. Some Democrats said the maximum length would be 75 weeks. Republicans said that for most states, the maximum number of weeks would be capped at 63 weeks. About 1.3 million unemployed people would lose their benefits by the end of March in case of no deal.

This extension would be funded with an array of measures, including a sale of the broadband spectrum and a cut in the government's contribution to employee pensions.

Earlier Tuesday, Senate Majority Leader Harry Reid (D., Nev.) had pushed hard for a deal on jobless benefits, noting that Congress is on recess next week.

"We still have about 40 million people who are unemployed," Sen. Reid said. "We cannot leave here without the conference committee having resolved a way of dealing with unemployment compensation."

Many Republicans worry that the payroll-tax cut will hurt Social Security, and others say it should at least be paid for at a time of soaring federal budget deficits. Democrats say the Social Security funds will be replenished with money from the general treasury.

The payroll-tax issue has flummoxed Republicans since late last year, when Democrats began pushing for a one-year extension of the cut, which initially was set to expire in December.

Some Republicans countered the tax code needed a thorough overhaul rather than temporary tinkering, and that the tax break would do little to create jobs. Republicans also demanded offsetting spending cuts to pay for the tax cut. In response, Democrats proposed an upper-income tax increase to pay for the break, but Republicans opposed that.

Continued in article

Why the Canadians never built an $80 trillion Titanic that lies deep in the ocean.
"Expect higher payroll taxes in 2012, taxpayers group says," by Joanna Smith, The Star, December 28, 2011 --- Click Here
http://www.thestar.com/news/canada/politics/article/1107876--expect-higher-payroll-taxes-in-2012-taxpayers-group-says?bn=1

Canadians will see the biggest increase in payroll taxes in a decade next year, according to a Canadian Taxpayers Federation analysis of how many of your dollars will go to federal government coffers.

Employment insurance premiums will increase 5 cents per $100 of insurable earnings as of Jan. 1. That’s half of what the Conservative government originally planned but the analysis shows employees will still see a $53 jump to $840 in EI premiums in 2012

Combine that with the federal pension plan contributions and it means employees will have to give up a total of $3,147 in payroll taxes next year — an increase of about $142 over this year.

Employers will have to shell out about $164 more in payroll taxes next year, for a total of $3,483.

The combined net increase of 4.84 per cent is the highest since 2002.

“Finance Canada tells us that we should be thanking the government because they are not going to be raising payroll taxes as much as they promised,” said Derek Fildebrandt, national research director for the advocacy group.

A spokeswoman for the federal finance department suggested exactly that.

“The Canada Employment Insurance Financing Board is responsible for setting premium rates to ensure that the program just breaks even over time and managing a cash reserve — including adjustments in rates,” Suzanne Prebinski wrote in an email.

“However, to protect the economy and jobs, we cut any potential increases in half for 2012 — keeping EI premiums near their lowest level since 1982. This change is expected to save employers and employees $600 million in 2012.”

Prebinski noted there is no change to the Canada Pension Plan contribution rate, which has been at 9.9 per cent of pensionable earnings since 2003, but there will be an increase in the maximum contribution to account for inflation.

Continued in article

Why the Canadians never built an $80 trillion Titanic that lies deep in the ocean.
"Expect higher payroll taxes in 2012, taxpayers group says," by Joanna Smith, The Star, December 28, 2011 --- Click Here
http://www.thestar.com/news/canada/politics/article/1107876--expect-higher-payroll-taxes-in-2012-taxpayers-group-says?bn=1

Canadians will see the biggest increase in payroll taxes in a decade next year, according to a Canadian Taxpayers Federation analysis of how many of your dollars will go to federal government coffers.

Employment insurance premiums will increase 5 cents per $100 of insurable earnings as of Jan. 1. That’s half of what the Conservative government originally planned but the analysis shows employees will still see a $53 jump to $840 in EI premiums in 2012

Combine that with the federal pension plan contributions and it means employees will have to give up a total of $3,147 in payroll taxes next year — an increase of about $142 over this year.

Employers will have to shell out about $164 more in payroll taxes next year, for a total of $3,483.

The combined net increase of 4.84 per cent is the highest since 2002.

“Finance Canada tells us that we should be thanking the government because they are not going to be raising payroll taxes as much as they promised,” said Derek Fildebrandt, national research director for the advocacy group.

A spokeswoman for the federal finance department suggested exactly that.

“The Canada Employment Insurance Financing Board is responsible for setting premium rates to ensure that the program just breaks even over time and managing a cash reserve — including adjustments in rates,” Suzanne Prebinski wrote in an email.

“However, to protect the economy and jobs, we cut any potential increases in half for 2012 — keeping EI premiums near their lowest level since 1982. This change is expected to save employers and employees $600 million in 2012.”

Prebinski noted there is no change to the Canada Pension Plan contribution rate, which has been at 9.9 per cent of pensionable earnings since 2003, but there will be an increase in the maximum contribution to account for inflation.

Continued in article


Video
"Debt: The First 5,000 Years," by Paul Kedrosky , Kedrosky.com, September 10, 2011 --- Click Here
http://paul.kedrosky.com/archives/2011/09/debt-the-first-5000-years.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+InfectiousGreed+%28Paul+Kedrosky%27s+Infectious+Greed%29

Jensen Questions
How did the accounting system account for debt 5,000 years ago?
Does care and nurturing human children create debt to parents?

"When Debt Gets in the Way of Growth," Harvard Business Review Blog, September 13, 2011 --- Click Here
http://blogs.hbr.org/hbr/hbreditors/2011/09/when_debt_gets_in_the_way_of_g.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

Bob Jensen's threads on accounting history ---
http://www.trinity.edu/rjensen/Theory01.htm#AccountingHistory


The booked National Debt over $14 trillion ---
U.S. National Debt Clock --- http://www.brillig.com/debt_clock/

The January 2010 Booked National Debt Plus Unbooked Entitlements Debt
The GAO estimated $76 trillion Present Value in January 2010  unless something drastic is done.
Click Here |
 http://www.pgpf.org/~/media/PGPF/Media/PDF/2010/03/fiscalsustainabilityGAONationsLongTermFiscalOutlook03032010.ashx?pid={97E10657-8193-4455-871C-4E7A6A9EE084}
 

There are many ways to describe the federal government’s long-term fiscal challenge. One method for capturing the challenge in a single number is to measure the “fiscal gap.” The fiscal gap represents the difference, or gap, between revenue and spending in present value terms over a certain period, such as 75 years, that would need to be closed in order to achieve a specified debt level (e.g., today’s debt to GDP ratio) at the end of the period.2 From the fiscal gap, one can calculate the size of action needed—in terms of tax increases, spending reductions, or, more likely, some combination of the two—to close the gap; that is, for debt as a share of GDP to equal today’s ratio at the end of the period. For example, under our Alternative simulation, the fiscal gap is 9.0 percent of GDP (or a little over $76 trillion in present value dollars) (see table 2). This means that revenue would have to increase by about 50 percent or noninterest spending would have to be reduced by 34 percent on average over the next 75 years (or some combination of the two) to keep debt at the end of the period from exceeding its level at the beginning of 2010 (53 percent of GDP).

This report looks at the federal government as if it were a business, with the goal of informing the debate about our nation’s financial situation and outlook.
"About USA Inc.," by Mary Meeker, Scribd, February 2011 ---
http://www.scribd.com/doc/49434520/USA-Inc-A-Basic-Summary-of-America-s-Financial-Statements

This report looks at the federal government as if it were a business, with the goal of informing the debate about our nation’s financial situation and outlook. In it, we examine USA Inc.’s income statement and balance sheet. We aim to interpret the underlying data and facts and illustrate patterns and trends in easy-to-understand ways. We analyze the drivers of federal revenue and the history of expense growth, and we examine basic scenarios for how America might move toward positive cash flow.

Thanks go out to Liang Wu and Fred Miller and former Morgan Stanley colleagues whose contributions to this report were invaluable. In addition, Richard Ravitch, Emil Henry, Laura Tyson, Al Gore, Meg Whitman, John Cogan, Peter Orszag and Chris Liddell provided inspiration and insights as the report developed. It includes a 2-page foreword; a 12-page text summary; and 460 PowerPoint slides containing data-rich observations. There’s a lot of material – think of it as a book that happens to be a slide presentation.

We hope the slides in particular provide relevant context for the debate about America’s financials. To kick-start the dialogue, we are making the entire slide portion of the report available as a single work for non-commercial distribution (but not for excerpting, or modifying orcreating derivatives) under the Creative Commons license. The spirit of connectivity and sharing has become the essence of the Internet, and we encourage interested parties to use the slides to advance the discussion of America’s financial present and future. If you would like to add yourown data-driven observations, contribute your insights, improve or clarify ours, please contact usto request permission and provide your suggestions. This document is only a starting point for discussion; the information in it will benefit greatly from your thoughtful input

Jensen Comment
The high quality graphs are especially frightening.

Bob Jensen's threads on entitlements ---
http://www.trinity.edu/rjensen/Entitlements.htm


Watch for the other possible solutions in the 30-minute summary video ---
http://www.pgpf.org/newsroom/press/IOUSA-Solutions-Premiers-on-CNN/
(Scroll Down a bit)

Here is the original (and somewhat dated video that does not delve into solutions very much)
IOUSA (the most frightening movie in American history) ---
(see a 30-minute version of the documentary at www.iousathemovie.com )

Now the IOUSA Bipartisan Solutions
I suggest that as many people as possible divert their attention from the Tiger Woods at the Masters Tournament today (April 11) to watch bipartisan proposals (‘Solutions”) on how to delay the Fall of the United States Empire. By the way, Bill Bradley was one of the most liberal Democratic senators in the History of the United States Senate.

Watch the World Premiere of I.O.U.S.A.: Solutions on CNN
Saturday, April 10, 1:00-3:00 p.m. EST or Sunday, April 11, 3:00-5:00 p.m. EST

Featured Panelists Include:

  • Peter G. Peterson, Founder and Chairman, Peter G. Peterson Foundation
  • David Walker, President & CEO, Peter G. Peterson Foundation
  • Sen. Bill Bradley
  • Maya MacGuineas, President of the Committee for a Responsible Federal Budget
  • Amy Holmes, political contributor for CNN
  • Joe Johns, CNN Congressional Correspondent
  • Diane Lim Rodgers, Chief Economist, Concord Coalition
  • Jeanne Sahadi, senior writer and columnist for CNNMoney.com

Watch for the other possible solutions in the 30-minute summary video ---
http://www.pgpf.org/newsroom/press/IOUSA-Solutions-Premiers-on-CNN/
(Scroll Down a bit)

 

CBS Sixty minutes has a great video on the enormous cost of keeping dying people artificially alive:
High Cost of Dying --- http://www.cbsnews.com/video/watch/?id=5737437n&tag=mncol;lst;3
(wait for the commercials to play out)

"The Looming Entitlement Fiscal Burden," by Gary Becker, The Becker-Posner Blog, April 11, 2010 ---
http://uchicagolaw.typepad.com/beckerposner/2010/04/the-looming-entitlement-fiscal-burdenbecker.html

"The Entitlement Quandary," by Richard Posner, The Becker-Posner Blog, April 11, 2010 ---
http://uchicagolaw.typepad.com/beckerposner/2010/04/the-entitlement-quandaryposner.html

The "Burning Platform" of the United States Empire
Former Chief Accountant of the United States, David Walker, is spreading the word as widely as possible in the United States about the looming threat of our unbooked entitlements. Two videos that feature David Walker's warnings are as follows:

David Walker claims the U.S. economy is on a "burning platform" but does not go into specifics as to what will be left in the ashes.

The US government is on a “burning platform” of unsustainable policies and practices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon.
David M. Walker, Former Chief Accountant of the United States --- http://www.financialsense.com/editorials/quinn/2009/0218.html
 

 

U.S. Debt/Deficit Clock --- http://www.usdebtclock.org/

The $61 Trillion Margin of Error, and What "Empire Decline" Means in Layman's Terms
This is a bipartisan disaster from the beginning and will be until the end

David Walker --- http://en.wikipedia.org/wiki/David_M._Walker_(U.S._Comptroller_General)

Harvard Professor Niall Ferguson --- http://en.wikipedia.org/wiki/Niall_Ferguson

Harvard Profession Video:   Niall Ferguson: Empires on the Edge of Chaos ---
http://fora.tv/2010/07/28/Niall_Ferguson_Empires_on_the_Edge_of_Chaos

Paul Johnson --- http://en.wikipedia.org/wiki/Paul_Johnson_%28writer%29

Eminent United Kingdom historian Paul Johnson on the roots and outcomes of U.S. deficit spending
Modern Times:  1920s to the 1990s, by Paul Johnson
There's a paperback version for $13.90 --- Click Here


"SOCIAL SECURITY IS A PONZI SCHEME," by Anthony H. Catanach and J.Edward Ketz, Grumpy Old Accountants, September 27, 2011 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/321#more-321

Jensen Comment
Many state worker pension systems and many private sector systems are funded so badly that they are indeed Ponzi schemes unless they are bailed out. However, the federal government pension systems and medical benefits are not Ponzi schemes because the federal government has the power to create as much money for itself as it wants. This is sometimes called printing more money whenever the central government needs it, but technically governments do not usually create money be simply printing more money. Instead they simply create more credit in a way that is tantamount to printing more money. However, governments that do so without economic constraints become highly inflationary. One million Zimbabwe dollars to day will not buy one chicken egg. Because of unfunded obligations for Social Security, Medicare, Military Pensions, Medicaid, and other entitlements we may well reach a stage where $1,000 will not even buy a cup of coffee. But federal pensions will be paid under contract even if the amount of dollars deposited in a retirees bank won't buy two cups of coffee.


Newsweek Magazine is a relative liberal, anti-conservative news magazine. Since Tina Brown became editor the magazine is no less liberal, but it is a much thinner magazine now with mostly shallow articles that rarely excite me at all. However, the January 30, 2012 edition is an exception that appeals to my academic nature. Academics generally like to read about opposing sides of most any issue, especially a political issue. The article below attacks back at a previous edition's cover story where Andrew Sullivan's praises of President Obama's performance to date.

Thank you Tina for being willing to show both sides of this debate.

"David Frum Strikes Back at Andrew Sullivan on Barack Obama," by David Frum, Newsweek Magazine, January 23, 2012 ---
 http://www.thedailybeast.com/newsweek/2012/01/22/david-frum-strikes-back-at-andrew-sullivan-on-barack-obama.html

Now let’s move to the real debate. You don’t have to succumb to ideological fever or paranoid fantasy to see that the Obama administration is dragging America to the wrong future: a future of higher taxes and reduced freedom, a future in which entrepreneurs will innovate less and lobbyists will influence more, a future in which individuals and communities will make fewer choices for themselves and remote bureaucracies will dictate more answers to us all.

The intentions are not malign. But it’s not intentions that matter—it’s results.

You begin to see those results in the small hearing rooms in which Social Security disability cases are decided. In the months since the financial crisis, the Social Security Administration has been awarding more and more disability pensions: almost 100,000 in the last month of 2011, 50 percent more than before the financial crisis.

Not much surprise there. Applications for disability have jumped even more steeply. It’s not very likely that Americans are suddenly suffering a lot more accidents than they used to suffer, back when many more of them were working. More likely: with unemployment higher, more people are seeking help—and with jobs scarce, more judges are saying yes.

It’s easy to sympathize with the thinking of the individual Social Security judges. Here’s a worker who has lost her job as a forklift operator. Five years ago, a judge might have told her: forget the pension, Walmart is hiring. But now Walmart isn’t hiring—or anyway, not hiring enough. So the judge relents. Why not give the applicant just a little something? An extra $12,000 a year (the size of the average award) won’t break the federal budget. The country can figure out later how to pay for it. Which is how it happened that we’re on the verge of enrolling the 9 millionth American on disability—almost double the number of the late 1990s.

Of course, as the federal government manages more and more disability pensions, it must hire more judges and administrators to hear and process those requests. Employment at the Social Security Administration is up by more than 6,000 since 2007, or 10 percent. In fact, hiring is up across the federal government, by 15 percent since 2007. Federal hiring has been more than offset by layoffs at the state and local level. But when the economy recovers, as it will, the states and localities will hire again—and at the rate we’re going, an upswing in state and local hiring won’t be balanced by commensurate reductions in federal staffing.

You don’t have to vilify President Obama as a Kenyan socialist to recognize that his policies are reorienting the country toward more dependence on the federal government. Through most of the past half century, the federal government has spent about one dollar in five of national income. Right now, it’s spending about one in four. If Barack Obama is reelected and his policies are continued, that one-dollar-in-four ratio will harden into permanent reality, on the way to one dollar in three, with state and local spending on top of that.

Every president since the late 1970s has struggled to contain the growth of government, Democrats as well as Republicans. Jimmy Carter battled Democrats in Congress to stop wasteful construction projects. He signed the deregulation of airlines, trucking, and rail. Bill Clinton announced that “the age of big government is over,” signed welfare reform, and accepted budgets that reduced government spending as a share of national income.

Barack Obama is the first president since Lyndon Johnson to push aggressively for bigger and more interventionist government—and not merely as an emergency measure against the recession.

Look at the president’s energy policy, for example. We need to reduce our use of oil; every president since Richard Nixon has agreed to that. We know how to do it, too: raise the price. When oil prices jumped in the late 1970s, American oil use tumbled. As late as 1995, Americans were using less oil than in 1978. Not less per person. Less oil, period.

When oil prices jumped in the 2000s, Americans again changed their behavior. For the first time in a century, they drove fewer miles, year over year.

Want to reduce oil use even more? Tax it, and then let Americans decide for themselves how to conserve: whether to move closer to work, invest in a hybrid car, or buy fewer consumer products shipped from half the world away.

Instead, Obama has resorted to direct intervention in the energy marketplace. Solyndra, the failed solar-energy company that got $500 million–plus in direct government aid, is one example. Maybe a more important one is the Keystone pipeline from Canada, canceled to conciliate the president’s environmental backers. Those backers apparently prefer to change consumption habits by brute force rather than through the mechanisms of the market, as we can see from their thus-far-successful efforts to scuttle oil projects one by one—drilling in Alaska, drilling in the Gulf of Mexico, Keystone.

You see the same reliance on brute force, not market force, in health care. I am one of the few Republicans who will still defend the Heritage Foundation’s idea of regulated insurance exchanges in which customers are mandated to buy pri-vate insurance, with subsidies for those who need subsidies: Romneycare, in a word. Leaving tens of millions of Americans uninsured is both inhumane and inefficient.

But it is striking that the main engine of coverage expansion under the president’s health-care reform is actually not the mandate you hear so much about. The Congressional Budget Office projects that half of all the net gain in insurance coverage under the president’s health-care proposal will be due to higher enrollment in government programs: Medicaid and the CHIP program for poor children.

Even before Obama took office, half of all the health-care dollars spent in the U.S. were spent by government in one way or another. We’re on our way to government spending much more. And that means that health-care cost control—also urgently needed—will not come via market competition. It will come by direct government order.

Why does the president so favor the expansion of government? There’s no need to resort to paranoid theories. In his characteristically lucid way, he has already told us.

In December, Obama traveled to the Kansas town of Osawatomie to deliver one of the most important speeches of his presidency to date. There he poignantly described the dimming prospects of the American middle class—and then offered the following policy response: “The over 1 million construction workers who lost their jobs when the housing market collapsed, they shouldn’t be sitting at home with nothing to do. They should be rebuilding our roads and our bridges, laying down faster railroads and broadband, modernizing our schools—all the things other countries are already doing to attract good jobs and businesses to their shores ... Of course, those productive investments cost money. They’re not free. And so we’ve also paid for these investments by asking everybody to do their fair share.”

In other words, the president is championing a more active government, not as a way to meet social needs but as a permanent and growing source of middle-class employment. Some of us will work directly for the public sector. Others will be contractors. Either way, many more of us will be working in jobs from which it will be difficult to fire us—and where the government sets more of the terms of employment.

Something like this approach was tried in Britain under the Labour governments of Tony Blair and Gordon Brown. Between 1997 and 2008, Blair and his successor Brown used rapidly rising government revenues to finance new public-sector jobs in depressed old industrial areas. Over the decade, the public sector provided more than half of all the net new jobs in three of the four main economic regions of England—and 80 percent of the net new jobs for women.

They piled more and more taxes on a smaller and smaller slice of the economy. Meanwhile, the expanded public sector did not spark the benefits it was supposed to. The depressed areas remained depressed. The gap between rich and poor grew instead of shrinking.

Obama becomes impatient when his policies are compared to Blair’s or Brown’s. But it’s hard to see the basis for that reaction. A reelected President Obama would want to see the Bush tax rates lapse, federal revenues rise, and the proceeds used to fund a permanently higher level of federal spending and government employment.

. . .

Yes, much of the criticism of the Obama administration has been hysterical and deluded. Yes, many of the attacks on the president and his family have been ugly and hateful. But in rejecting the extremism of some critics, we shouldn’t race to the opposite and equally invalid extreme of denying all criticism.

There is much to admire in Barack Obama the man. But his presidency, especially on the domestic front, has been a bitter disappointment to almost everybody—perhaps above all to those who most desperately needed help from the government he led. It’s time for a new way forward.

Jensen Comment
Social Security was intended originally to be an actuarially sound pension system for retired workers where benefits varied depending upon when a person commenced to draw on the trust funds after becoming 62 years of age or older.. Over the years it became damaged when Congress commenced to fund social benefits from Social Security rather fund those benefits from general revenues on a pay-as-you-go plan to set up separate trust funds for those social benefits. By far the biggest disaster was adding monthly payments for disabled persons at any age they are declared disabled. For example, my wife commenced to collect Social Security Disability Payments at age 53 or thereabouts after she had several unsuccessful spine surgeries.

In this great land there should be benefits for disabled persons. But the decision by President Johnson and his Congress at the time to tack disability onto the Social Security system, because the SS system was never actuarially funded for disability. Sure enough over the years the Social Security trust funds are now depleted and Congress adding to trillion dollar deficits to fund both SS retirement entitlements and disability retirement benefits.

But the story gets worse. At Age 65 or older, persons who have paid into the Medicare system while they were working are eligible for Medicare health benefits that are really quite generous compared to many private medical insurance plans. But unlike retired workers, disabled persons do not have to wait until age 65 to begin collecting Medicare benefits. My wife, for example, became eligible for Medicare the instant she was declared disabled and became eligible for social security disability benefits.

And the story gets even worse as alluded to in the article above. Being fraudulently declared disabled and becoming eligible for disability payments and Medicare has been spreading across the United States like wildfire. Doctors and lawyers everywhere are cooperating in frauds to declare perfectly healthy people disabled.

Of course we could have disability fraud if disability was funded in ways other than Social Security and Medicare systems. But other alternatives might be less overwhelmed with fraud. For example, if the disability was funded by state governments or even the private sector perhaps more local level internal controls would be more effective than the total ineffective controls in place at this point in time. Fraud in the system did not begin with President Obama. But delays in economic recovery and reduced unemployment have fanned the fires of disability fraud.

What happens when we have more "disabled persons" on the dole for the rest of their lives than persons admittedly are able to work?

Audit Failure: The GAO Reported No Problems Amidst All This Massive Fraud|
Note that most of these particular workers retire long before age 65 and are fraudulently collecting full Social Security and Medicare benefits intended for truly disabled persons
"The Public-Union Albatross What it means when 90% of an agency's workers (fraudulently)  retire with disability benefits (before age 65)," by Philip K. Howard, The Wall Street Journal, November 9, 2011 ---
http://online.wsj.com/article/SB10001424052970204190704577024321510926692.html?mod=djemEditorialPage_t

The indictment of seven Long Island Rail Road workers for disability fraud last week cast a spotlight on a troubled government agency. Until recently, over 90% of LIRR workers retired with a disability—even those who worked desk jobs—adding about $36,000 to their annual pensions. The cost to New York taxpayers over the past decade was $300 million.

As one investigator put it, fraud of this kind "became a culture of sorts among the LIRR workers, who took to gathering in doctor's waiting rooms bragging to each [other] about their disabilities while simultaneously talking about their golf game." How could almost every employee think fraud was the right thing to do?

The LIRR disability epidemic is hardly unique—82% of senior California state troopers are "disabled" in their last year before retirement. Pension abuses are so common—for example, "spiking" pensions with excess overtime in the last year of employment—that they're taken for granted.

Governors in Wisconsin and Ohio this year have led well-publicized showdowns with public unions. Union leaders argue they are "decimat[ing] the collective bargaining rights of public employees." What are these so-called "rights"? The dispute has focused on rich benefit packages that are drowning public budgets. Far more important is the lack of productivity.

"I've never seen anyone terminated for incompetence," observed a long-time human relations official in New York City. In Cincinnati, police personnel records must be expunged every few years—making periodic misconduct essentially unaccountable. Over the past decade, Los Angeles succeeded in firing five teachers (out of 33,000), at a cost of $3.5 million.

Collective-bargaining rights have made government virtually unmanageable. Promotions, reassignments and layoffs are dictated by rigid rules, without any opportunity for managerial judgment. In 2010, shortly after receiving an award as best first-year teacher in Wisconsin, Megan Sampson had to be let go under "last in, first out" provisions of the union contract.

Even what task someone should do on a given day is subject to detailed rules. Last year, when a virus disabled two computers in a shared federal office in Washington, D.C., the IT technician fixed one but said he was unable to fix the other because it wasn't listed on his form.

Making things work better is an affront to union prerogatives. The refuse-collection union in Toledo sued when the city proposed consolidating garbage collection with the surrounding county. (Toledo ended up making a cash settlement.) In Wisconsin, when budget cuts eliminated funding to mow the grass along the roads, the union sued to stop the county executive from giving the job to inmates.

No decision is too small for union micromanagement. Under the New York City union contract, when new equipment is installed the city must reopen collective bargaining "for the sole purpose of negotiating with the union on the practical impact, if any, such equipment has on the affected employees." Trying to get ideas from public employees can be illegal. A deputy mayor of New York City was "warned not to talk with employees in order to get suggestions" because it might violate the "direct dealing law."

How inefficient is this system? Ten percent? Thirty percent? Pause on the math here. Over 20 million people work for federal, state and local government, or one in seven workers in America. Their salaries and benefits total roughly $1.5 trillion of taxpayer funds each year (about 10% of GDP). They spend another $2 trillion. If government could be run more efficiently by 30%, that would result in annual savings worth $1 trillion.

What's amazing is that anything gets done in government. This is a tribute to countless public employees who render public service, against all odds, by their personal pride and willpower, despite having to wrestle daily choices through a slimy bureaucracy.

One huge hurdle stands in the way of making government manageable: public unions. The head of the American Federation of State, County and Municipal Employees recently bragged that the union had contributed $90 million in the 2010 off-year election alone. Where did the unions get all that money? The power is imbedded in an artificial legal construct—a "collective-bargaining right" that deducts union dues from all public employees, whether or not they want to belong to the union.

Some states, such as Indiana, have succeeded in eliminating this requirement. I would go further: America should ban political contributions by public unions, by constitutional amendment if necessary. Government is supposed to serve the public, not public employees.

America must bulldoze the current system and start over. Only then can we balance budgets and restore competence, dignity and purpose to public service.

 


The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance.
Taylor Caldwell, A Pillar of Iron (wrongly attributed to Cicero in 55 B.C.)

 

The Rising Burden of Government Debt [Flash Player] --- http://www.brookings.edu/articles/2010/1101_government_debt_prasad.aspx

Entitlements Warnings --- http://www.cs.trinity.edu/~rjensen/temp/Entitlements7-21-10%20-%20EOTM%20-%20Twilight.pdf
Thank you for giving me permission to post this Michael Cembalest [michael.cembalest@jpmorgan.com]
Michael Cembalest, Chief Investment Officer, J.P. Morgan Private Banking

Peter G. Peterson Website on Deficit/Debt Solutions ---
http://www.pgpf.org/

The Government' Recipe for Off-Budget Debt
"US Government 'hiding true amount of debt'," by Gregory Bresiger, news,com ---
http://www.news.com.au/business/breaking-news/us-government-hiding-true-amount-of-debt/story-e6frfkur-1225926567256#ixzz106MjZzOz 

The Congressional Budget Office estimates the debt will be at $US16.5 trillion in two years, or 100.6 per cent of GDP.

But these numbers are incomplete.

They do not count off-budget obligations such as required spending for Social Security and Medicare, whose programs represent a balloon payment for the Government as more Americans retire and collect benefits.

In the case of Social Security, beginning in 2016, the US Government will be paying out more than it is collecting in taxes.

Without basic measures - such as payment cuts or higher payroll taxes - the system could be on the road to bankruptcy,

Jensen Comment
Governments don't declare bankruptcy that would leave allow them to default on debt obligations. Instead they print money wholesale an pay off their debts in hyper-inflated dollars.

Bob Jensen's threads on the sad state of government accounting and accountability ---
http://www.trinity.edu/rjensen/theory01.htm#GovernmentalAccounting

"Downhill With the G.O.P.," by Paul Krugman, The New York Times, September 25, 2010 ---
http://www.nytimes.com/2010/09/24/opinion/24krugman.html?src=ISMR_HP_LO_MST_FB
Jensen Comment
I agree with some of Krugman's assessment, but I strongly disagree that the solution to saving the United States is to massive more deficit financing. Does this Nobel Laureate know how to compute interest cash flow on the nearly $100 trillion of debt?

 

Video on IOUSA Bipartisan Solutions to Saving the USA

If you missed Sunday afternoon CNN’s two-hour IOUSA Solutions broadcast, you can watch a 30-minute version at
http://www.pgpf.org/newsroom/press/IOUSA-Solutions-Premiers-on-CNN/   (Scroll Down a bit)
Note that great efforts were made to keep this a bipartisan panel along with the occasional video clips of President Obama discussing the debt crisis. The problem is a build up over spending for most of our nation’s history, It landed at the feet of President Obama, but he’s certainly not the cause nor is his the recent expansion of health care coverage the real cause. 

One take home from the CNN show was that over 60% of the booked National Debt increases are funded off shore (largely in Asia and the Middle East).
This going to greatly constrain the global influence and economic choices of the United States.

By 2016 the interest payments on the National Debt will be the biggest single item in the Federal Budget, more than national defense or social security. And an enormous portion of this interest cash flow will be flowing to foreign nations that may begin to put all sorts of strings on their decisions  to roll over funding our National Debt.

The unbooked entitlement obligations that are not part of the National Debt are over $60 trillion and exploding exponentially. The Medicare D entitlements to retirees like me added over $8 trillion of entitlements under the Bush Presidency.

Most of the problems are solvable except for the Number 1 entitlements problem --- Medicare.
Drastic measures must be taken to keep Medicare sustainable.

I thought the show was pretty balanced from a bipartisan standpoint and from the standpoint of possible solutions.

 

Many of the possible “solutions” are really too small to really make a dent in the problem. For example, medical costs can be reduced by one of my favorite solutions of limiting (like they do in Texas) punitive damage recoveries in malpractice lawsuits. However, the cost savings are a mere drop in the bucket. Another drop in the bucket will be the achievable increased savings from decreasing medical and disability-claim frauds. These are is important solutions, but they are not solutions that will save the USA.

The big possible solutions to save the USA are as follows (you and I won’t particularly like these solutions):

 


"The Road to a Downgrade:  A short history of the entitlement state," The Wall Street Journal, July 28, 2011 ---
http://online.wsj.com/article/SB10001424053111903999904576470551476951590.html?mod=djemEditorialPage_t

Even without a debt default, it looks increasingly possible that the world's credit rating agencies will soon downgrade U.S. debt from the AAA standing it has enjoyed for decades.

A downgrade isn't catastrophic because global financial markets decide the creditworthiness of U.S. securities, not Moody's and Standard & Poor's. The good news is that investors still regard Treasury bonds, which carry the full faith and credit of the U.S. government, as a near zero-risk investment. But a downgrade will raise the cost of credit, especially for states and institutions whose debt is pegged to Treasurys. Above all a downgrade is a symbol of fiscal mismanagement and an omen of worse to come if we continue the same habits.

President Obama will deserve much of the blame for the spending blowout of his first two years (see the nearby chart). But the origins of this downgrade go back decades, and so this is a good time to review the policies that brought us to this sad chapter and $14.3 trillion of debt.

FDR began the entitlement era with the New Deal and Social Security, but for decades it remained relatively limited. Spending fell dramatically after the end of World War II and the U.S. debt burden fell rapidly from 100% of GDP. That changed in the mid-1960s with LBJ's Great Society and the dawn of the health-care state. Medicare and Medicaid were launched in 1965 with fairy tale estimates of future costs.

Medicare, the program for the elderly, was supposed to cost $12 billion by 1990 but instead spent $110 billion. The costs of Medicaid, the program for the poor, have exploded as politicians like California Democrat Henry Waxman expanded eligibility and coverage. In inflation-adjusted dollars, Medicaid cost $4 billion in 1966, $41 billion in 1986 and $243 billion last year. Rather than bending the cost curve down, the government as third-party payer led to a medical price spiral.

LBJ launched other welfare programs—public housing, food stamps and many more—that have also grown over time. Last year, the panoply of welfare programs spent about $20,000 for every man, woman and child in poverty, according to Robert Rector of the Heritage Foundation.

Social Security's fiscal trouble began in earnest in 1972 with bills that increased benefits immediately by 20%, added an annual cost of living adjustment, and created a benefit escalator requiring payments to rise with wages, not inflation. This and other tweaks by Democrat Wilbur Mills added trillions of dollars to the program's unfunded liabilities. Believe it or not, these 1972 amendments were added to a debt-ceiling bill.

None of these benefit expansions were subject to annual budget review and thus they grew by automatic pilot. They are sometimes called "mandatory spending" because Congress is required by law to make payments to those who meet eligibility standards, regardless of other spending needs or tax revenues.

According to the most recent government data, today some 50.5 million Americans are on Medicaid, 46.5 million are on Medicare, 52 million on Social Security, five million on SSI, 7.5 million on unemployment insurance, and 44.6 million on food stamps and other nutrition programs. Some 24 million get the earned-income tax credit, a cash income supplement.

By 2010 such payments to individuals were 66% of the federal budget, up from 28% in 1965. (See the second chart.) We now spend $2.1 trillion a year on these redistribution programs, and the 75 million baby boomers are only starting to retire.

We suspect that in the 1960s as now—with ObamaCare—liberals knew they had created fiscal time-bombs. They simply assumed that taxes would keep rising to pay for it all, as they have in Europe.

On Monday night Mr. Obama blamed President George W. Bush's "two wars" for the debt buildup. But national defense spending was 7.4% of GDP and 42.8% of outlays in 1965, and only 4.8% of GDP and 20.1% of federal outlays in 2010. Defense has not caused the debt crisis.

Many on the left still blame Ronald Reagan, but the debt increase in the 1980s financed a robust economic expansion and victory in the Cold War. Debt held by the public at the end of the Reagan years was much lower as a share of GDP (41% in 1988 and still only 40.3% in 2008) compared to the estimated 72% in fiscal 2011. That Cold War victory made possible the peace dividend that allowed Bill Clinton to balance the budget in the 1990s by cutting defense spending to 3% of GDP from nearly 6% in 1988.

Mr. Bush and Republicans did prove after 9/11 that the Washington urge to spend and borrow is bipartisan. Republicans launched a Medicare drug benefit, record outlays on education, the most expensive transportation bill in history, and home ownership aid that contributed to the housing bubble. The GOP's blunder was refusing to cut domestic spending to finance the war on terrorism. Guns and butter blowouts never last.

Then came Mr. Obama, arguably the most spendthrift president in history. He inherited a recession and responded by blowing up the U.S. balance sheet. Spending as a share of GDP in the last three years is higher than at any time since 1946. In three years the debt has increased by more than $4 trillion thanks to stimulus, cash for clunkers, mortgage modification programs, 99 weeks of jobless benefits, record expansions in Medicaid, and more.

The forecast is for $8 trillion to $10 trillion more in red ink through 2021. Mr. Obama hinted in a press conference earlier this month that if it weren't for Republicans, he'd want another stimulus. Scary thought: None of this includes the ObamaCare entitlement that will place 30 million more Americans on government health rolls.

Continued in article

Jensen Comment
In my opinion the most spendthrift president was George W. Bush, He was too chicken to veto lavish spending bills put forth by Congress, including the outrageously expensive and underfunded entitlement program for Medicare Drug subsidies for seniors and disabled people.

A BRIC nation at the moment is a nation that has vast resources and virtually no entitlement obligations that drag down economic growth --- http://en.wikipedia.org/wiki/BRIC

In economics, BRIC (typically rendered as "the BRICs" or "the BRIC countries") is an acronym that refers to the fast-growing developing economies of Brazil, Russia, India, and China. The acronym was first coined and prominently used by Goldman Sachs in 2001. According to a paper published in 2005, Mexico and South Korea are the only other countries comparable to the BRICs, but their economies were excluded initially because they were considered already more developed. Goldman Sachs argued that, since they are developing rapidly, by 2050 the combined economies of the BRICs could eclipse the combined economies of the current richest countries of the world. The four countries, combined, currently account for more than a quarter of the world's land area and more than 40% of the world's population.

Brazil, Russia, India and China, (the BRICs) sometimes lumped together as BRIC to represent fast-growing developing economies, are selling off their U.S. Treasury Bond holdings. Russia announced earlier this month it will sell U.S. Treasury Bonds, while China and Brazil have announced plans to cut the amount of U.S. Treasury Bonds in their foreign currency reserves and buy bonds issued by the International Monetary Fund instead. The BRICs are also soliciting public support for a "super currency" capable of replacing what they see as the ailing U.S. dollar. The four countries account for 22 percent of the global economy, and their defection could deal a severe blow to the greenback. If the BRICs sell their U.S. Treasury Bond holdings, the price will drop and yields rise, and that could prompt the central banks of other countries to start selling their holdings to avoid losses too. A sell-off on a grand scale could trigger a collapse in the value of the dollar, ending the appeal of both dollars and bonds as safe-haven assets. The moves are a challenge to the power of the dollar in international financial markets. Goldman Sachs economist Alberto Ramos in an interview with Bloomberg News on Thursday said the decision by the BRICs to buy IMF bonds should not be seen simply as a desire to diversify their foreign currency portfolios but as a show of muscle.
"BRICs Launch Assault on Dollar's Global Status," The Chosun IIbo, June 14, 2009 ---
http://english.chosun.com/site/data/html_dir/2009/06/12/2009061200855.html

Their report, "Dreaming with BRICs: The Path to 2050," predicted that within 40 years, the economies of Brazil, Russia, India and China - the BRICs - would be larger than the US, Germany, Japan, Britain, France and Italy combined. China would overtake the US as the world's largest economy and India would be third, outpacing all other industrialised nations. 
"Out of the shadows," Sydney Morning Herald, February 5, 2005 --- http://www.smh.com.au/text/articles/2005/02/04/1107476799248.html 

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 



From the Crazy Economist Who Wants No Limit on Government Borrowing Supposedly to Get Us Out of the Deficit
That's analogous to digging deeper into the whole to get yourself out of the hole
Eat Drink and Make Merry Without Fiscal Responsibility
The question is how long the Chinese will keep lending for lavish and unrestrained spending by Congress?

""Paul Krugman on Ryan's Budget Plan : Ludicrous and Cruel," by Paul Krugman, The New York Times, April 7, 2011 ---
http://www.nytimes.com/2011/04/08/opinion/08krugman.html?_r=3&hp

Many commentators swooned earlier this week after House Republicans, led by the Budget Committee chairman, Paul Ryan, unveiled their budget proposals. They lavished praise on Mr. Ryan, asserting that his plan set a new standard of fiscal seriousness.

Well, they should have waited until people who know how to read budget numbers had a chance to study the proposal. For the G.O.P. plan turns out not to be serious at all. Instead, it’s simultaneously ridiculous and heartless.

How ridiculous is it? Let me count the ways — or rather a few of the ways, because there are more howlers in the plan than I can cover in one column.

First, Republicans have once again gone all in for voodoo economics — the claim, refuted by experience, that tax cuts pay for themselves.

Specifically, the Ryan proposal trumpets the results of an economic projection from the Heritage Foundation, which claims that the plan’s tax cuts would set off a gigantic boom. Indeed, the foundation initially predicted that the G.O.P. plan would bring the unemployment rate down to 2.8 percent — a number we haven’t achieved since the Korean War. After widespread jeering, the unemployment projection vanished from the Heritage Foundation’s Web site, but voodoo still permeates the rest of the analysis.

In particular, the original voodoo proposition — the claim that lower taxes mean higher revenue — is still very much there. The Heritage Foundation projection has large tax cuts actually increasing revenue by almost $600 billion over the next 10 years.

A more sober assessment from the nonpartisan Congressional Budget Office tells a different story. It finds that a large part of the supposed savings from spending cuts would go, not to reduce the deficit, but to pay for tax cuts. In fact, the budget office finds that over the next decade the plan would lead to bigger deficits and more debt than current law.

And about those spending cuts: leave health care on one side for a moment and focus on the rest of the proposal. It turns out that Mr. Ryan and his colleagues are assuming drastic cuts in nonhealth spending without explaining how that is supposed to happen.

How drastic? According to the budget office, which analyzed the plan using assumptions dictated by House Republicans, the proposal calls for spending on items other than Social Security, Medicare and Medicaid — but including defense — to fall from 12 percent of G.D.P. last year to 6 percent of G.D.P. in 2022, and just 3.5 percent of G.D.P. in the long run.

That last number is less than we currently spend on defense alone; it’s not much bigger than federal spending when Calvin Coolidge was president, and the United States, among other things, had only a tiny military establishment. How could such a drastic shrinking of government take place without crippling essential public functions? The plan doesn’t say.

And then there’s the much-ballyhooed proposal to abolish Medicare and replace it with vouchers that can be used to buy private health insurance.

The point here is that privatizing Medicare does nothing, in itself, to limit health-care costs. In fact, it almost surely raises them by adding a layer of middlemen. Yet the House plan assumes that we can cut health-care spending as a percentage of G.D.P. despite an aging population and rising health care costs.

The only way that can happen is if those vouchers are worth much less than the cost of health insurance. In fact, the Congressional Budget Office estimates that by 2030 the value of a voucher would cover only a third of the cost of a private insurance policy equivalent to Medicare as we know it. So the plan would deprive many and probably most seniors of adequate health care.

And that neither should nor will happen. Mr. Ryan and his colleagues can write down whatever numbers they like, but seniors vote. And when they find that their health-care vouchers are grossly inadequate, they’ll demand and get bigger vouchers — wiping out the plan’s supposed savings.

In short, this plan isn’t remotely serious; on the contrary, it’s ludicrous.

And it’s also cruel.

In the past, Mr. Ryan has talked a good game about taking care of those in need. But as the Center on Budget and Policy Priorities points out, of the $4 trillion in spending cuts he proposes over the next decade, two-thirds involve cutting programs that mainly serve low-income Americans. And by repealing last year’s health reform, without any replacement, the plan would also deprive an estimated 34 million nonelderly Americans of health insurance.

So the pundits who praised this proposal when it was released were punked. The G.O.P. budget plan isn’t a good-faith effort to put America’s fiscal house in order; it’s voodoo economics, with an extra dose of fantasy, and a large helping of mean-spiritedness.

"Paul Krugman: The Prophet of Socialism A prophet who has been consistently wrong," by Donald Luskin )Editor’s Note: This article is excerpted from Donald Luskin’s new book, I Am John Galt,, National Review, June 13, 2011 ---
http://www.nationalreview.com/articles/269428/paul-krugman-prophet-socialism-donald-luskin

Christiane Amanpour’s eyes darted back and forth in fear, and her mouth twisted in disgust, because she could see where this was going. A guest on her Sunday-morning political talk show, ABC’s This Week, was getting dangerously overexcited, and something very regrettable was about to happen.

She could see that he was winding himself up as he talked about how a recent deficit-reduction panel hadn’t been “brave enough” — because it failed to endorse the idea of expert panels that would determine what medical services government-funded care wouldn’t pay for. When Obamacare was still being debated in Congress, Sarah Palin had created a media sensation by calling them “death panels,” causing most liberals who supported Obamacare to quickly distance themselves from any idea of rationing care as being tantamount to murder.

The guest said, “Some years down the pike, we’re going to get the real solution, which is going to be a combination of death panels and sales taxes.”

It was all the more horrifying because the guest was not a conservative, not an opponent of Obamacare. This guest was an avid liberal, a partisan Democrat, and an enthusiastic supporter of government-run health care. He was endorsing death panels, not warning about them. He was saying death panels are a good thing. And it was even more horrifying because of who this guest was. This was no fringe lefty wearing a tinfoil hat, churning out underground newspapers in his parents’ basement. This was an economics professor at Princeton, one of the country’s most prestigious universities. This was the winner of the Nobel Prize in economics, the highest honor the profession can bestow. This was a columnist for the New York Times, the most influential newspaper in the world. This was Paul Krugman, live, on national television, endorsing government control over life and death. And while we’re at it, let’s raise taxes on those who are permitted to live.

Who exactly does Paul Krugman think he is? He’d like to think he’s John Maynard Keynes, the venerated British economist who created the intellectual framework for modern government intervention in the economy. Keynes is something of a cult figure for modern liberal economists like Krugman, who read his texts with exegetical fervor. But Krugman will never live up to Keynes. However politicized his economic theories, Keynes’s predictions were so astute that he made himself wealthy as a speculator. Economics is called “the dismal science,” but as we’ll see, Krugman’s predictions are so laughably bad his economics should be called the abysmal pseudo-science.

Most critiques of Krugman as a public intellectual begin with what is apparently an obligatory disclaimer, usually in the very first sentence — something to the effect that Krugman is a very accomplished and well-respected economist. Then comes the “But . . .” and the critique proceeds in earnest, often scathingly.

But why concede this honor to Krugman? So what if he won the Nobel Prize? The real test of Krugman’s mettle as an economist is the accuracy of his economic forecasting. The fact is that, with about three decades of evidence now in, Krugman’s track record, to use a technical term favored by economists, sucks.

He’s not always candid about this. But once, under the pressure of a televised debate with conservative talk-show host Bill O’Reilly, Krugman blurted out an understated if truthful self-evaluation: “Compare me . . . compare me, uh, with anyone else, and I think you’ll see that my forecasting record is not great.”

The most egregious example of “not great” is Krugman’s utterly incorrect 1982 prediction that inflation would soar. He made this prediction from no less lofty a perch than the White House, as staff member of the Council of Economic Advisers in the first Reagan administration. In a memo titled “The Inflation Time Bomb” Krugman wrote with co-author Lawrence Summers, “We believe that it is reasonable to expect a significant reacceleration of inflation . . . at least 5 percentage points to future increases in consumer prices. . . . This estimate is conservative.”

It also turned out to be hilariously, side-splittingly, knee-slappingly, rolling-on-the-floor wrong. Except for a tiny uptick the very next month, inflation didn’t rise; it fell. Four years later, it had fallen to 1.18 percent, a rate so low as to border on deflation.

In late February 2000, two weeks before the peak of the dot-com stock bubble at Nasdaq 5,000, Krugman wrote in his Times column that the Dow Jones Industrial Average was overvalued, saying, “Let the blue chips fall where they may.” As for the Nasdaq — which at that point had almost doubled over the prior year, and more than tripled over the prior three years — Krugman said soothingly, “I’m not sure that the current value of the Nasdaq is justified, but I’m not sure that it isn’t.”

We all know what happened. As of this writing, the Dow is about 20 percent higher than when Krugman wrote those words — and that’s not including a decade of dividends. The Nasdaq is about 42 percent lower. It hit bottom in October 2002, a 75.7 percent loss from where Krugman said not to worry about it. After something of a recovery, stocks fell again. They hit a real bottom — about a week after Krugman wrote a Times column asking the rhetorical question, “Is there any relief in sight?” His wrong answer: “No.”

Perfect bookends: He missed the top, and then three years later, he missed the bottom. But then he outdid himself. In June 2003, with the Nasdaq up 20 percent since Krugman’s “No,” did he recognize his error and reverse course? Again, no. Krugman wrote that “the current surge in stocks looks like another bubble.” From there the Nasdaq was to rally another 75 percent.

At around the same time, afraid of what he called a “fiscal train wreck” that would lead to disastrously high interest rates, he announced in the lead paragraph of a March 2003 Times column: “So last week I switched to a fixed-rate mortgage. It means higher monthly payments, but I’m terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits.” In fact, rates didn’t rise, even when budget deficits skyrocketed beyond anything he could have imagined then, driven by government “stimulus” spending that he himself urged. Nowadays, on his New York Times blog, he regularly chides deficit-wary Republicans by using today’s low interest rates to prove that the U.S. faces no financial difficulties.

In 2003, I set out to expose Krugman’s various distortions, and to force the New York Times to correct them. I started first on my blog, and soon afterward in a series of columns for National Review Online called “The Krugman Truth Squad” (KTS). The inaugural KTS column appeared on March 20, 2003. The series of columns was structured as what is now called “crowdsourcing”: Within several hours of a Krugman column’s appearing on the Times website, I and a network of fellow bloggers would put it under a microscope and discover all the filthy microbes hiding in every crack. We’d fact-check every claim, confirm every quotation, run down every source, and compare every statement for consistency with statements made in the past. The KTS called Krugman “America’s most dangerous liberal pundit,” and our promise to readers was: “We’ll read Paul Krugman so you don’t have to.”

I won’t cite here very many of the dozens upon dozens of prevarications that my Krugman Truth Squad exposed in 94 columns over five years. If you are interested, look up my name in the NRO author archives, where most of the KTS columns can still be seen. Or you can download a PDF file with the entire collection of KTS columns here.

Continued in article

Jensen Comment
Of course Professor Krugman has no solution other than to keep printing money and borrowing, borrowing, and ultimately printing money like Zimbabwe. Yeah right! Zimbabwe's inflationary economic policies have not been cruel to its people!

Paul Krugman's recommended solution for the economic crisis in Europe ---
Print trillions of Euros and then to fly over drops of fluttering currency, especially in the south ---
http://www.nytimes.com/2012/04/16/opinion/krugman-europes-economic-suicide.html?hpw

Bob Jensen's threads on the entitlements disaster ---
http://www.trinity.edu/rjensen/Entitlements.htm


"America's Deeper Debt Crisis," by Hamair Qaeue, Harvard Business Review Blog, July 26, 2011 --- Click Here
http://blogs.hbr.org/haque/2011/07/americas_deeper_debt_crisis.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

How big would America's "debt crisis" be if we looked not merely at (largely artificial) financial costs, but at real economic — social, human, natural, personal, emotional, and more — costs? You probably don't want to know.

But grit your teeth and let's do a quick back-of-the-envelope calculation just for fun.

To begin with, America's gross public debt as a percentage of its GDP is around 98ish (aka, its debt/GDP ratio). But there's a whole lot of costs that measure doesn't begin to count. They're the costs of restoring and rebooting the bare beginnings of an authentic, meaningful prosperity. They mean we might begin to have meaningful work and play (instead of work that destroys our souls and leisure that dumbifies us), a thriving environment (instead of one that's withering), markets that work (instead of blow up), society that connects (instead of fractures and polarizes) and infrastructure that works (instead of crumbling airports, battered buildings, and roads that, at this point, look like the set for an end-of-days zombie apocalypse flick). How high would America's debt/GDP ratio be if we added these costs?

Here are some mildly educated guesses (please note: since this isn't a 300-page book or even a 5,000 word article, I won't fully explicate them, but leave them open for discussion and for future blog posts. You're more than welcome to challenge them, add your own, or even add or subtract entire categories).

Now, let me emphasize that I've made plenty of simplifications on the quick and dirty napkin of a worksheet above. But the not-so-secret dirty secret is that, well, so does GDP itself. The point is in the thought experiment itself: you can swap in or out whatever categories you like, but the point is that the "debt" we owe, if real prosperity is the destination we seek, is bigger than we think. For the above are essentially off-balance-sheet liabilities — a set of hidden costs brushed under the rug in the economic equivalent of a ginormous, ongoing national Enron.

By these rough estimates, while the official debt to GDP ratio is approaching 100%, our debt-to-prosperity ratio is probably higher — maybe much higher. Just by considering an incomplete set of real economic costs very imperfectly, we've arrived at a number closer to 145%. I'd say just a slightly fuller, more nuanced, less conservative take could easily the push "the number" closer to 200% — if not past it.

America's real economic crisis is one of what, in the Manifesto, I call deep debt.

Think about it this way. 100% debt as a percentage of GDP is a number that's got the (mostly) old (mostly) dudes that run the world in brow-beating hysterics, crying: "Armageddon!!" But they're missing the point. A large portion of the 100% of GDP that's financial debt is public debt — which for all its many sins, is mostly covered.

While there's talk of America "defaulting," no one takes seriously the idea that America's going to leave financial creditors without a penny on the dollar — just that it might have liquidity issues for a brief while. Yet, real default — a few pennies on the dollar of debt — is exactly what America's been doing to its economic creditors, parties who I'd argue should have, at least in some cases, self-evident priority over financial markets: people, communities, society, and tomorrow's generations. For the very real, human, natural, and social costs owed them — at least if a higher level of prosperity is what you're after — have been pushed aside and left largely unfunded and underpaid, when they're paid for at all. Result? This Great Stagnation: not merely a financial crisis, but deep in it's heart, a crisis of squandering and underinvesting in human potential itself.

Consider it a tiny, imprecise exercise in what I call "eudaimonics" — the art and science of rebuilding a prosperity that matters in human terms: the pursuit not merely of mass-made, lowest-common-McDenominator, faux-designer opulence, but of lives meaningfully well lived. If we conceive of "debt" not merely as an accounting device meaningless in human terms, a financial fiction owed to nominal creditors — but as a real economic burden owed to the eudaimonic promise of a meaningfully good life, then our economy isn't just underperforming: it's dysfunctional.

Igniting eudaimonic prosperity isn't about paying off financial debt. We can manage that perfectly for decades and never get any closer to mastering the art of lives lived meaningfully well. Rather, it's about the ability of a nation to pay down and pay off its deep debt to the authentic creditors that create and sustain that nation.

So here's my conclusion — and my catch.

America might never master eudaimonics. But here's what's for certain: there are nations, perhaps wiser, perhaps just hungrier — who will. It's to them that a meaningful prosperity will accrue — and from them the lion's roar of advantage will be heard.

Continued in article


Population Growth --- http://en.wikipedia.org/wiki/Population_growth
Population Growth from 10000 BC to 2000 AD

Population Growth from 10000 BC to 2000 AD

 

The 1970s has many ugly legacies. Surely, however, the cruelest was this leading Western export: the idea that the Earth has reached its limit with us, and that the solution is to persuade other folks who don't yet have what we do to lower both their populations and their expectations.
"The Return of the Population Bomb: When the experts tell you there are too many people, they don't mean too many Swedes," by William McGurn, The Wall Street Journal, June 13, 2011 ---
http://online.wsj.com/article/SB10001424052702303714704576383764019676614.html?mod=djemEditorialPage_t

When Marx wrote that history repeats itself, first as tragedy, then as farce, he had it half correct. In our day, it comes back as the 1970s.

All around us we see its manifestation in the revival of floppy hats, platform shoes and maxi dresses. We can, however, also detect this same retro fashion sense on the op-ed page of the New York Times. There last week Tom Friedman's column carried one of the sentiments most in vogue in the 1970s: "The Earth Is Full."

Mr. Friedman invokes the usual grim specters so beloved of a certain kind of intellectual: natural disasters (tornadoes, floods and droughts); rising prices (food and energy); the threat to stability; and of course the kicker—that there are just too many darn people around these days.

It's a familiar meme, and it comes bearing the familiar scientific credentials. In this case the authority is, Mr. Friedman tells us, "an alliance of scientists" called the Global Footprint Network, "which calculates how many 'planet Earths' we need to sustain our growth rates." Right now they say it is 1.5. Which can mean only one thing unless we cut way, way back: We're doomed.

Back in the days of bad hair and Jimmy Carter, this kind of report was a staple of enlightened thought. Here is but a tiny sampling:

• On the eve of that decade, Stanford University biologist Paul Ehrlich opened his best-selling book "The Population Bomb" with this sunny declaration: "The battle to feed all humanity is over. In the 1970s, the world will undergo famines—hundreds of millions of people are going to starve to death." Of course, nothing of the kind happened.

• The Club of Rome, an international group of academics, scientists and global citizens, commissioned a now-infamous 1972 report called "The Limits to Growth." Like so many others, these scientists informed us that we were running out of . . . well . . . everything.

• Or take Robert McNamara, the "whiz kid" president of Ford Motor Co. Later, as chief of the World Bank, he would throw tens of millions of development dollars into population control because he said—sounding much like Mr. Friedman—the alternative was a world no one would want. If voluntary methods failed, he warned, nations would resort to coercion.

All these things were the received orthodoxies of their day, endorsed by the experts, sustained by the scientists, and challenged by only a few brave souls such as economist Julian Simon. From these pet orthodoxies two clear implications flowed.

First, when the experts tell you there are too many people, they don't mean too many Swedes. They mean too many poor people, mostly brown or black or yellow. In Hong Kong, I stumbled across a 1959 book written by an American entitled "Too Many Asians." Today the focus has shifted from Asia—but the theme remains. Early last month, the New York Times ran a page-one story citing United Nations warnings about the growing population of Africa.

Second, if the experts continue to tell countries they need to control their population or else, Mr. McNamara is absolutely right: That "or else" is going to mean coercion.

We saw that throughout the 1970s as well.

In India, the government of Indira Gandhi launched a massive and brutal sterilization campaign. In China, women's monthly periods were charted on blackboards at their places of work—and even today women are sometimes hunted down and forced to abort if they become pregnant without permission. Meanwhile, in the early 1980s, black women in Namibia complained about being forcibly injected with contraceptives after having their first babies. From Peru to the Philippines, the poor and vulnerable were subject to similar outrages.

Continued in the article

"Current World Population," by Matt Rosenberg, About.com Geography, May 11, 2011 ---
http://geography.about.com/od/obtainpopulationdata/a/worldpopulation.htm

World Population Growth

Year Population
1 200 million
1000 275 million
1500 450 million
1650 500 million
1750 700 million
1804 1 billion
1850 1.2 billion
1900 1.6 billion
1927 2 billion
1950 2.55 billion
1955 2.8 billion
1960 3 billion
1965 3.3 billion
1970 3.7 billion
1975 4 billion
1980 4.5 billion
1985 4.85 billion
1990 5.3 billion
1995 5.7 billion
1999 6 billion
2006 6.5 billion
2009 6.8 billion
2011 7 billion
2025 8 billion
2043 9 billion
2083 10 billion

Bob Jensen's threads on the entitlements bomb ---
http://www.trinity.edu/rjensen/Entitlements.htm

 

 

 


Cash Flow versus Accrual Accounting
A Secret That Will Never Be Revealed on MSNBC
"Cooking the Books: The 2010 Deficit Was $2.1 trillion," by Bruce Bartlett, The Fiscal Times, December 24, 2010 ---
http://www.thefiscaltimes.com/Issues/Budget-Impact/2010/12/24/Cooking-the-Books-The-2010-Deficit-Was-2trillion.aspx

When federal finances are discussed, it is almost always in terms of the difference between expenditures and revenues. Usually, the former exceed the latter and we have a deficit. The cumulative total of deficits less the occasional surpluses is what we call the national debt. When we analyze the debt in terms of its burden, it is usually by looking at it in terms of the gross domestic product. Presently, debt held by the public, the most common measure of federal debt, is $9.3 trillion, or about 60 percent of GDP.

If the federal government was a corporation and one was contemplating buying shares of its stock, however, one would certainly want to know much more about its finances. One would want to know about the government’s assets as well as its liabilities. And one would want to know whether there are any liabilities other than those included in the figures for debt held by the public, among other things.

These data are not easy to come by. For many years they appeared only in an obscure mimeographed document called the Statement of Liabilities and Other Financial Commitments of the United States that the Treasury Department produced only because it was required by a 1966 law to do so. The reason is that the financial statement showed vast government liabilities not included in the usual figures for the national debt. Since 1998, these data have been published in a document called the Financial Report of the U.S. Government. The fiscal year 2010 edition was released on Dec. 21.

The most important difference between the Financial Report and the federal budget is that the former calculates costs on an accrual basis, whereas the latter only measures cash flow. Thus if the federal government incurred a debt that would not be paid until some time in the future, that cost would not be part of the conventionally measured national debt. It would only add to the debt when cash had to be expended to cover the expense that had been incurred. It’s worth remembering that private corporations are required to use accrual accounting and corporate executives would be jailed for using the sort of accounting that the federal government routinely uses.

The difference in accounting methods is most easily grasped in terms of Social Security. It has a liability over the next 75 years of $8 trillion more than the projected revenue from payroll taxes and interest on the Social Security trust fund. In every meaningful sense of the term, this is part of the national debt, but is excluded from the official debt figures.

Another consequence of ignoring future liabilities in calculating the national debt is that programmatic changes that save money in the future are similarly ignored. Thus, according to the Financial Report, Medicare had estimated liabilities in excess of future revenues over the next 75 years of $38 trillion at the end of fiscal year 2009. However, in the meantime, Congress enacted the Affordable Care Act, which contains significant cost controls on future Medicare spending. As a consequence, Medicare’s long-term liabilities fell by $15 trillion in 2010.

 

Financial Report of the U.S. Government --- http://www.fms.treas.gov/fr/index.html

Bob Jensen's threads on the sad state of governmental accounting ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting


"The Only Reform That Will Restrain Spending:  All 47 Senate Republicans now support changing the Constitution to balance the federal budget," by Olympia Snowe and Jim Demint, The Wall Street Journal, July 7, 2011 ---
http://online.wsj.com/article/SB10001424052702304760604576428273248743348.html#mod=djemEditorialPage_t

Whatever happens when President Obama meets with congressional leaders of both parties at the White House today, no long-term solution is on the table for the spending habits in Washington that have endangered the prosperity of future generations. With our federal debt exceeding $14 trillion—nearly 100% of our gross domestic product—fiscal calamity is jeopardizing our standard of living and undermining our national security. And President Obama recently requested that we add an additional $2.4 trillion to our debt.

There has to be another way, and there is. Republicans in the Senate are united in our concern about our nation's fiscal future. Before we consider saddling our children with even more debt, we must enact significant spending cuts and enforceable caps on future spending. For the long term, to prevent both this Congress and its successors from hijacking the promise of American prosperity, we also need a balanced budget amendment to the Constitution, like the one we and all 47 Senate Republicans have introduced.

The American people who will vote on such an amendment understand the basic financial rules that Washington has been breaking. In the real world, if a household brought in $44,000 annually but spent $74,000 by borrowing $30,000 each year to sustain its spending habits, such behavior would be considered reckless and irresponsible.

Nonetheless, the federal government is doing exactly that on an unimaginable scale, running historic deficits in excess of a trillion dollars for three consecutive years and borrowing 40 cents for every dollar spent. Our government has balanced its budget only five times in half a century.

The U.S. currently spends an astounding $200 billion per year just to pay interest on its debt, an annual amount projected to reach nearly $1 trillion by 2021. Money spent on debt-interest payments is money not invested in our economy, jobs, infrastructure or education. Economists Carmen Reinhart and Kenneth Rogoff have found that gross debt levels above 90% of GDP slow economic growth by 1% per year. First-quarter GDP growth this year was already abysmal at 1.9%. At that rate, China would surpass the U.S. economy in size even before 2016, the year recently forecast by the International Monetary Fund.

If Congress increases our national debt ceiling next month without permanent, structural budget reforms, we will signal to taxpayers and bond markets alike that Washington is still in denial. Whatever agreement is reached, everyone will know that future Congresses are not obligated to follow it. As a result, the only way to compel lawmakers to maintain their responsibility forever is a balanced budget amendment to the Constitution.

Why will this approach work where others have failed? For one single reason: As senators and representatives, we take an oath to uphold the Constitution. By amending the Constitution, Congress will be forever bound to match our nation's expenditures with our revenues. Toothless resolutions and statutory speed bumps have proven easy to evade or ignore. Indeed, the reason many lawmakers don't want a balanced budget amendment is the exact reason why we need it: It would permanently end the types of legislative trickery that have now brought our country to the fiscal brink.

The last time the Senate considered a balanced budget amendment was on March 4, 1997—and it failed to pass by one vote. On that day 14 years ago, the nation's outstanding debt was $5.36 trillion. Today it is $14.3 trillion, or nearly three times that amount.

Continued in article

Jensen Comment
Even if the the GOP wins a majority of seats in the Senate and the House, an amendment like this has zero chances of being passed among the liberal states like California, New York, and Vermont.


How Accountants Hide the Pension Bomb in the Public Sectors

"The Hidden State Financial Crisis:  My latest research into opaque state financial statements suggests taxpayers will be surprised by how much pensions are underfunded.," by Meredith Whitney, The Wall Street Journal, May 18, 2011 ---
http://online.wsj.com/article/SB10001424052748703421204576329134261805612.html?mod=djemEditorialPage_t

Next month will be pivotal for most states, as it marks the fiscal year end and is when balanced budgets are due. The states have racked up over $1.8 trillion in taxpayer-supported obligations in large part by underfunding their pension and other post-employment benefits. Yet over the past three years, there still has been a cumulative excess of $400 billion in state budget shortfalls. States have already been forced to raise taxes and cut programs to bridge those gaps.

Next month will also mark the end of the American Recovery and Reinvestment Act's $480 billion in federal stimulus, which has subsidized states through the economic downturn. States have grown more dependent on federal subsidies, relying on them for almost 30% of their budgets.

The condition of state finances threatens the economic recovery. States employ over 19 million Americans, or 15% of the U.S. work force, and state spending accounts for 12% of U.S. gross domestic product. The process of reining in state finances will be painful for us all.

The rapid deterioration of state finances must be addressed immediately. Some dismiss these concerns, because they believe states will be able to grow their way out of these challenges. The reality is that while state revenues have improved, they have done so in part from tax hikes. However, state tax revenues still remain at roughly 2006 levels.

Expenses are near the highest they have ever been due to built-in annual cost escalators that have no correlation to revenue growth (or decline, as has been the case recently). Even as states have made deep cuts in some social programs, their fixed expenses of debt service and the actuarially recommended minimum pension and other retirement payments have skyrocketed. While over the past 10 years state and local government spending has grown by 65%, tax receipts have grown only by 32%.

Off balance sheet debt is the legal obligation of the state to its current and past employees in the form of pension and other retirement benefits. Today, off balance sheet debt totals over $1.3 trillion, as measured by current accounting standards, and it accounts for almost 75% of taxpayer-supported state debt obligations. Only recently have states been under pressure to disclose more information about these liabilities, because it is clear that their debt burdens are grossly understated.

Since January, some of my colleagues focused exclusively on finding the most up-to-date information on ballooning tax-supported state obligations. This meant going to each state and local government's website for current data, which we found was truly opaque and without uniform standards.

What concerned us the most was the fact that fixed debt-service costs are increasingly crowding out state monies for essential services. For example, New Jersey's ratio of total tax-supported state obligations to gross state product is over 30%, and the fixed costs to service those obligations eat up 16% of the total budget. Even these numbers are skewed, because they represent only the bare minimum paid into funding pension and retirement plans. We calculate that if New Jersey were to pay the actuarially recommended contribution, fixed costs would absorb 37% of the budget. New Jersey is not alone.

The real issue here is the enormous over-leveraging of taxpayer-supported obligations at a time when taxpayers are already paying more and receiving less. In the states most affected by skyrocketing debt and fiscal imbalances, social services continue to be cut the most. Taxpayers have the ultimate voting right—with their feet. Corporations are relocating, or at a minimum moving large portions of their businesses to more tax-friendly states.

Boeing is in the political cross-hairs as it is trying to set up a facility in the more business-friendly state of South Carolina, away from its current hub of Washington. California legislators recently went to Texas to learn best practices as a result of a rising tide of businesses that are building operations outside of their state. Over time, individuals will migrate to more tax-friendly states as well, and job seekers will follow corporations.

Continued in article

Jensen Comment
Some accountants naively assume that the new IASB-FASB agreement on fair value accounting will make pension obligations more transparent, especially if the GASB follows suit. What they don't really understand is that obligations that are not recognized in the first place are not going to be made more transparent with fair value accounting if they're hidden in the first place. For ten years Arnold Swartzenagger disclosed four kids and hid a fifth kid from his wife and the rest of the world. With pensions it's more like disclosing one kid and hiding four from the world.

Arnold pretty well ruined parts of his life when the that which was hidden was finally revealed. The same thing will happen to local, state, and national governments in the U.S. if hidden pension obligations are ever revealed. It will ruin everything in future elections if voters really understand how bad the hidden entitlements have really become ---
http://www.trinity.edu/rjensen/Entitlements.htm

Questions
Although all 50 states are in deep financial troubles, what state is in the worst shape at the moment and is unable to pay its bills?
Hint: The state in deepest trouble is not California, although California is in dire straights!

How did accountants hide the pending disaster?

Watch the Video
This module on 60 Minutes on December 19 was one of the most worrisome episodes I've ever watched
It appears that a huge number of cities and towns and some states will default on bonds within12 months from now
"State Budgets: The Day of Reckoning Steve Kroft Reports On The Growing Financial Woes States Are Facing," CBS Sixty Minutes, December 19, 2010 ---
http://www.cbsnews.com/stories/2010/12/19/60minutes/main7166220.shtml

The problem with that, according to Wall Street analyst Meredith Whitney, is that no one really knows how deep the holes are. She and her staff spent two years and thousands of man hours trying to analyze the financial condition of the 15 largest states. She wanted to find out if they would be able to pay back the money they've borrowed and what kind of risk they pose to the $3 trillion municipal bond market, where state and local governments go to finance their schools, highways, and other projects.

"How accurate is the financial information that's public on the states? And municipalities," Kroft asked.

"The lack of transparency with the state disclosure is the worst I have ever seen," Whitney said. "Ultimately we have to use what's publicly available data and a lot of it is as old as June 2008. So that's before the financial collapse in the fall of 2008."

Whitney believes the states will find a way to honor their debts, but she's afraid some local governments which depend on their state for a third of their revenues will get squeezed as the states are forced to tighten their belts. She's convinced that some cities and counties will be unable to meet their obligations to municipal bond holders who financed their debt. Earlier this year, the state of Pennsylvania had to rescue the city of Harrisburg, its capital, from defaulting on hundreds of millions of dollars in debt for an incinerator project.

"There's not a doubt in my mind that you will see a spate of municipal bond defaults," Whitney predicted.

Asked how many is a "spate," Whitney said, "You could see 50 sizeable defaults. Fifty to 100 sizeable defaults. More. This will amount to hundreds of billions of dollars' worth of defaults."

Municipal bonds have long been considered to be among the safest investments, bought by small investors saving for retirement, and held in huge numbers by big banks. Even a few defaults could affect the entire market. Right now the big bond rating agencies like Standard & Poor's and Moody's, who got everything wrong in the housing collapse, say there's no cause for concern, but Meredith Whitney doesn't believe it.

"When individual investors look to people that are supposed to know better, they're patted on the head and told, 'It's not something you need to worry about.' It'll be something to worry about within the next 12 months," she said.

No one is talking about it now, but the big test will come this spring. That's when $160 billion in federal stimulus money, that has helped states and local governments limp through the great recession, will run out.

The states are going to need some more cash and will almost certainly ask for another bailout. Only this time there are no guarantees that Washington will ride to the rescue.

Continued in article

"Public Pensions Cook the Books:  Some plans want to hide the truth from taxpayers," by Andrew Biggs, The Wall Street Journal, July 6, 2009 --- http://online.wsj.com/article/SB124683573382697889.html

Here's a dilemma: You manage a public employee pension plan and your actuary tells you it is significantly underfunded. You don't want to raise contributions. Cutting benefits is out of the question. To be honest, you'd really rather not even admit there's a problem, lest taxpayers get upset.

What to do? For the administrators of two Montana pension plans, the answer is obvious: Get a new actuary. Or at least that's the essence of the managers' recent solicitations for actuarial services, which warn that actuaries who favor reporting the full market value of pension liabilities probably shouldn't bother applying.

Public employee pension plans are plagued by overgenerous benefits, chronic underfunding, and now trillion dollar stock-market losses. Based on their preferred accounting methods -- which discount future liabilities based on high but uncertain returns projected for investments -- these plans are underfunded nationally by around $310 billion.

The numbers are worse using market valuation methods (the methods private-sector plans must use), which discount benefit liabilities at lower interest rates to reflect the chance that the expected returns won't be realized. Using that method, University of Chicago economists Robert Novy-Marx and Joshua Rauh calculate that, even prior to the market collapse, public pensions were actually short by nearly $2 trillion. That's nearly $87,000 per plan participant. With employee benefits guaranteed by law and sometimes even by state constitutions, it's likely these gargantuan shortfalls will have to be borne by unsuspecting taxpayers.

Some public pension administrators have a strategy, though: Keep taxpayers unsuspecting. The Montana Public Employees' Retirement Board and the Montana Teachers' Retirement System declare in a recent solicitation for actuarial services that "If the Primary Actuary or the Actuarial Firm supports [market valuation] for public pension plans, their proposal may be disqualified from further consideration."

Scott Miller, legal counsel of the Montana Public Employees Board, was more straightforward: "The point is we aren't interested in bringing in an actuary to pressure the board to adopt market value of liabilities theory."

While corporate pension funds are required by law to use low, risk-adjusted discount rates to calculate the market value of their liabilities, public employee pensions are not. However, financial economists are united in believing that market-based techniques for valuing private sector investments should also be applied to public pensions.

Because the power of compound interest is so strong, discounting future benefit costs using a pension plan's high expected return rather than a low riskless return can significantly reduce the plan's measured funding shortfall. But it does so only by ignoring risk. The expected return implies only the "expectation" -- meaning, at least a 50% chance, not a guarantee -- that the plan's assets will be sufficient to meet its liabilities. But when future benefits are considered to be riskless by plan participants and have been ruled to be so by state courts, a 51% chance that the returns will actually be there when they are needed hardly constitutes full funding.

Public pension administrators argue that government plans fundamentally differ from private sector pensions, since the government cannot go out of business. Even so, the only true advantage public pensions have over private plans is the ability to raise taxes. But as the Congressional Budget Office has pointed out in 2004, "The government does not have a capacity to bear risk on its own" -- rather, government merely redistributes risk between taxpayers and beneficiaries, present and future.

Market valuation makes the costs of these potential tax increases explicit, while the public pension administrators' approach, which obscures the possibility that the investment returns won't achieve their goals, leaves taxpayers in the dark.

For these reasons, the Public Interest Committee of the American Academy of Actuaries recently stated, "it is in the public interest for retirement plans to disclose consistent measures of the economic value of plan assets and liabilities in order to provide the benefits promised by plan sponsors."

Nevertheless, the National Association of State Retirement Administrators, an umbrella group representing government employee pension funds, effectively wants other public plans to take the same low road that the two Montana plans want to take. It argues against reporting the market valuation of pension shortfalls. But the association's objections seem less against market valuation itself than against the fact that higher reported underfunding "could encourage public sector plan sponsors to abandon their traditional pension plans in lieu of defined contribution plans."

The Government Accounting Standards Board, which sets guidelines for public pension reporting, does not currently call for reporting the market value of public pension liabilities. The board announced last year a review of its position regarding market valuation but says the review may not be completed until 2013.

This is too long for state taxpayers to wait to find out how many trillions they owe.

"Whither Berkeley? Whither California?" by J. Edward Ketz, SmartPros, November 2009 ---
http://accounting.smartpros.com/x68185.xml

When people ignore economic realities and are foolish enough to make and adhere to ill-conceived and faulty budgets, well, they get what they deserve. Take California, for example.

The state has greatly reduced its cash infusions to the University of California system, and recently the university’s regents voted to increase fees (California’s code word for “tuition”) 32%. This has led to a strike at Berkeley and to student demonstrations and to the take-over of some buildings there and at Santa Cruz. This planned tuition hike comes on the heels of layoffs and furloughs and salary cutbacks of many university employees.

Recently, the Academic Senate at Berkeley voted to end financial support for the Department of Intercollegiate Athletics. The Senate even had the gall to ask the Athletics department to repay a loan of $5.8 million. Nothing is sacred anymore! But nothing to fear—I bet the regents will save Berkeley football before it saves the classics department.

The state of affairs at Berkeley will be watched all over because many other public universities are not much different. It is only a matter of time when they too will be faced with the question of how to endure economic sacrifice.

But, it won’t be all bad. Such difficult times provide moments when society can rethink its goals and strategic priorities. How many research universities do we really need in this country? How many administrators do we really need to protect the interests of Croatian students or to assist those who wish to preserve the heritage of Bon Jovi or to supply counselors for those trying to give up Law and Order? And does every town with a population of at least 1,000 really need a branch campus?

The state of California itself is much worse off than Berkeley. Given the state’s penchant to provide welfare to everybody who can generate a creative excuse for an entitlement, it was only a matter of time before the state’s budget was so out of whack even Alec Baldwin and Barbara Streisand could acknowledge it.

State legislators and governors over the last 10 to 20 years are to blame. Not only do they not understand the word “NO” when it comes to spending, they were very short-sighted when it came to revenue generation. They thought the dot-com slush funds would continue to be created out of nothing, though physics and economics indicate otherwise. They then did want virtually every politician does—they are so without original ideas!—they raised taxes on corporations and rich people. Unfortunately, the legislators and governors forgot that corporations and rich people can move, and indeed enough of them have left the state, leaving California in serious trouble.

The woes are so great that it is easy to predict that California will become the first state in U.S. history to declare bankruptcy. I put the odds at least at 50 percent in 2010.

Then the fun begins. California, before or shortly after entering Chapter 11, will ask for help from Washington. While the Obama administration and the Congress likely will administer CPR to the state finances, they really should just admit that the state is insolvent. The moral hazard is huge. If Washington provides assistance, there will be 49 states that will quickly follow suit.

The bankruptcy process itself will be interesting because nobody will know what to do with a state. Creditors might try to win concessions about the state’s budgeting process or membership to state agencies that make economic decisions. They will also attempt to rewrite existing contracts.

The biggest effect will be on bond yields. Any bankruptcy will shoot rates up and this will make future governmental borrowing hard and expensive for all governmental units.

Taxpayers will face a major nightmare. Taxes will skyrocket for those who are not fortunate enough to be retired. Maybe taxpayers will even wake up and realize that they have elected nothing but economic idiots for quite some time. But what do you expect from a state that thinks actors actually know something?

I just love California dreamin’.

Bob Jensen's threads on the sad state of government accounting and accountability ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting

Bob Jensen's threads on pension schemes to hide debt ---
http://www.trinity.edu/rjensen/theory02.htm#Pensions


In the United Kingdom
 "State pension age 'rises' to 70 for anyone under 30: Anyone under the age of 30 will not receive the state pension until they reach 70 years old under Government plans to increase the retirement age," by Myra Butterworth By Myra Butterworth, The Telegraph, March 24, 2011 ---
 http://www.telegraph.co.uk/finance/budget/8404788/State-pension-age-rises-to-70-for-anyone-under-30.html


"America's Financial Future: Our Choice... But Not For Long," by Ken Blackwell, Townhall, December 23, 2010 ---
http://townhall.com/columnists/KenBlackwell/2010/12/23/americas_financial_future_our_choice_but_not_for_long

In August of this year, Admiral Michael Mullens, Chairman of the Joint Chiefs of Staff, advised Congress that “The National debt is the biggest threat to our national security.” In November, voter sentiment against the debt and deficit led to an historic rebuke of Congressional incumbents. In December, the President’s Debt Commission laid out in stark terms the imminent economic impact of continued deficit spending.

Apparently rejecting these clarion calls, the President and Congress acted in the lame-duck session to cut not one dime of federal spending, while increasing the national debt by nearly $1 trillion. They are ignoring a glaring problem that, if not addressed soon, will cause a panoply of other problems.

Some insist that the problem with increasing the debt by nearly $1 trillion is that the borrowed money will be loaned to us by China. Concerning as it is that we have become the world’s largest debtor to a foreign sovereign whose interests are (to put it mildly) not always in harmony with our own, that's not the biggest problem. What ought to be of even greater, more immediate concern is the fact that China will refuse to loan us the money.

From October 2009 to October 2010, we financed $734 billion of our $1.690 trillion deficit through loans from foreign entities. And while China remains our largest creditor, China actually reduced the amount of U.S. debt it holds by $32 billion over the last year—from $938 billion to $906 billion. Through its actions, China has indicated that it will no longer fund the U.S. government's practice of perpetual deficit spending.

So if not China, then who? That's the problem.

The largest increase in U.S. debt holdings over the past year was a near five-fold increase by the U.K.—from $108 billion to $477 billion — and a near three-fold increase by Canada — from $44 billion to $125 billion.

The reality is that the U.K. and Canada do not have another half-trillion dollars to loan the U.S. in 2011. According to the World Bank, the entire economic output of the U.K. and Canada combined is only about $3.5 trillion annually.

So if China won't and the U.K. and Canada can't, who is going to loan us a trillion dollars in the next 12 months? Nobody knows.

The economic threat from China and other foreign countries loaning us trillions of dollars is like falling off the Empire State Building. It isn't the fall itself that kills you ... it's the sudden stop.

Commonwealth investors increased their U.S. holdings last year as they fled debt holdings in the Eurozone, nearly collapsing several E.U. government-bond markets derisively referred to as the PIIGS—Portugal, Italy, Ireland, Greece and Spain.

Continued in article

Jensen Comment
We're worrying about a paper tiger here. Zimbabwe has shown us the light. We simply print trillions of dollars to make up for the deficits. Ben Bernanke listed when he took a continuing education course from Robert Mugabe.


Preliminary draft of President Obama's long-awaited bipartisan National Commission on Fiscal Responsibility and Reform report

Jensen Comment
A very preliminary draft of President Obama's long-awaited bipartisan National Commission on Fiscal Responsibility and Reform report was released as a Co-Chairs' Proposal on November 10, 2010
Very Brief Summary --- http://pnhp.org/blog/2010/11/10/deficit-commission-co-chairs-proposal/
Huffington Post Slide Show --- http://big.assets.huffingtonpost.com/CoChairDraft.pdf
Full Report --- http://www.fiscalcommission.gov/news/cochairs-proposal

It's probably a time when accounting professors and students should have more scholarly debates on comprehensive tax reform alternatives. Such debates should be civil and as well-informed as possible. Tax reforms could possibly have an enormous impact on the accounting profession in terms of tax services, course content, employment alternatives for graduates, software development, AIS content, and scholarly research reported in accounting and tax journals.

 

Initial Reactions on the Left ---
"Deficit panel leaders propose curbs on Social Security, major cuts in spending, tax breaks," The Washington Post, November 11, 2010 ---
http://www.washingtonpost.com/wp-dyn/content/article/2010/11/10/AR2010111004029.html
Initial Reactions on the Right ---
"A Deficit of Nerve," The Wall Street Journal, November 11, 2010 ---
http://online.wsj.com/article/SB10001424052748703848204575608610971091280.html?mod=djemEditorialPage_t

Jensen Opinion
The conservative right always has knee jerking opposition to increased taxes and new taxes of any kind. The liberal media objects to increasing burdens on the middle income class and labor. Nancy Pelosi has already commenced all out war against the deficit commission's preliminary recommendations. Democrats, Republicans, and everybody else agree that the incomprehensible tax system of the United States needs to be drastically reformed but Congress probably will never agree to drastic reforms. Trying for comprehensive tax reforms will be an absolute political dogfight.

Personally, I lean toward eliminating the corporate income tax entirely and replacing the personal income tax code with a flat tax. But in order to keep the flat tax rate relatively low, I support introducing a Value Added Tax (VAT) sales tax that is now common in other parts of the world, especially in Europe. Businesses in the U.S. will fight a VAT tax tooth and nail, and the VAT tax will seriously increase prices of consumer and industrial goods. But serious deficit reductions cannot be financed without pain and sacrifice in all economic sectors These are my personal thoughts and are not all included in the Co-Chair's Report..

More importantly, the VAT tax should be the primary tax that is used to gradually put Social Security, Medicare, Medicaid, and the new "Affordable" Health Care law on a pay-as-you-go basis that no longer will keep piling on to deficits and unfunded entitlements. These are my personal thoughts and are not all included in the Co-Chair's Report..

But the most important thing to do immediately is to extend the retirement age to current average life expectancy averaged across race and gender categories. Persons that elect early retirement should take a heavy hit in benefits and not be eligible for Medicare before reaching the established retirement age.

Of course any increases in taxes will probably slow economic growth. But the insanity of simply printing money (read that buying back Treasury notes by the Fed) and borrowing that increases deficit by well over a trillion each year will eventually destroy the the economy and standard of living of the entire United States ---
http://www.trinity.edu/rjensen/entitlements.htm

From the Left
"Deficit panel leaders propose curbs on Social Security, major cuts in spending, tax breaks," The Washington Post, November 11, 2010 ---
http://www.washingtonpost.com/wp-dyn/content/article/2010/11/10/AR2010111004029.html

The chairmen of President Obama's bipartisan deficit commission on Wednesday offered an aggressive plan to rebalance the federal budget by curbing increases in Social Security benefits, slashing spending at the Pentagon and other agencies, and wiping out more than $100 billion a year in popular tax breaks for individuals and businesses.

The blueprint drafted by former Clinton White House chief of staff Erskine Bowles and former senator Alan K. Simpson (R-Wyo.) would slice more than $3.8 trillion from deficits over the next decade, reversing a rapid run-up in the national debt that many fear has the country headed for crisis.

To meet that goal, Bowles and Simpson are proposing to slay a herd of sacred cows, including the tax deduction for mortgage interest claimed by many homeowners, the tax-free treatment of employer-provided health insurance and the practice of letting retirees claim Social Security benefits starting at age 62. The blueprint would raise the early retirement age to 64 and the standard retirement age to 69 for today's toddlers.

During a briefing for reporters, Bowles and Simpson stressed that the plan is theirs alone and acknowledged that it is unlikely to win support from a majority of the commission's 18 members, many of whom seemed startled Wednesday by its breadth and scope. Bowles called it "a starting point" as the panel attempts to forge an agreement by Dec. 1.

Obama, speaking Thursday at a news conference in Seoul where he is attending the G-20 conference, cautioned that "before anybody starts shooting down proposals, I think we need to listen, we need to gather up all the facts."

"If people are, in fact, concerned about spending, debt, deficits and the future of our country, then they're going to need to be armed with the information about the kinds of choices that are going to be involved, and we can't just engage in political rhetoric," the president said.

"I set up this commission precisely because I'm prepared to make some tough decisions," Obama said, adding that "I'm going to need Congress to work with me."

Balanced-budget advocates praised the seriousness of the effort, saying it has the potential to reframe the debate over taxes and spending that dominated this month's congressional elections, regardless of how many commission members ultimately support it.

"A White House commission has put out a credible plan to eliminate the deficit and debt. This has changed the rules of the game and, for the first time, things are serious," said Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget, who hailed the blueprint as "a breakthrough."

"After this," she said, "the debate simply cannot go back to silly games where people pretend that eliminating earmarks will solve the problem."

Still, the reaction was harsh in some quarters, particularly among liberals who have vowed to protect retirees from any reduction in benefits. House Speaker Nancy Pelosi (D-Calif.) called the plan "simply unacceptable."

Speaker-in-waiting John A. Boehner (R-Ohio) declined to comment, saying he would discuss the plan with his three representatives on the panel. But Republican anti-tax activist Grover Norquist was not happy and warned that Republicans who support the proposal would be breaking their pledge not to raise taxes.

Continued in article

Jensen Comment
Many far more hostile reactions are pouring forth to support Pelosi's resistance plan. It's unlikely that a sharply divided House versus Senate over the next two years will accomplish a single recommendation in the deficit commission's preliminary report.  Much depends on reducing the Congressional divide in the 2012 election, and at this point we don't know whether the 2013 Congress will be sipping on tea or vodka.

From the Right
"A Deficit of Nerve," The Wall Street Journal, November 11, 2010 ---
http://online.wsj.com/article/SB10001424052748703848204575608610971091280.html?mod=djemEditorialPage_t

We've been expecting to dislike the report of President Obama's deficit commission, so count us as pleasantly surprised by the draft outline released on Wednesday by its two chairmen. There's plenty to oppose but also something for the next Congress to build on, not least the plea for a more efficient, competitive tax code.

Neither Democrat Erskine Bowles nor Republican Alan Simpson are trusted by their respective parties these days, so the duo seem to have decided to roil everybody. Fair enough. Even if their proposals fail to gain the 14 commission votes out of 18 needed for a consensus judgment by December 1, they've at least shown that restraining the federal Leviathan is possible.

Before we pound the details, it's important to understand why we have had deficits of 10% and 8.9% of GDP for the past two years, with another 10% or so anticipated in fiscal 2011. The most important reason is the burst of spending from the 111th Congress that has taken federal outlays as a share of GDP to 25% in 2009, 23.8% in 2010 and back to an estimated 25% in 2011. This is unheard of in the modern era, when the average has been under 21%.

The second reason is a revenue shortfall due to the recession and feeble economic recovery. Revenues have averaged about 18.5% of GDP in recent decades, but in 2009 and 2010 they were only 14.9% with little improvement expected this fiscal year. The single least painful way to reduce the deficit is to get the economy growing at a healthy pace again, which would cut the deficit by 3.5% of GDP a year without a dime of spending cuts.

This is where the chairmen's draft is both wrong and useful. Its mistake is proposing new taxes—notably on Social Security payroll taxes—that it claims would raise revenues as a share of GDP to no more than 21%. But this is an accountant's-eye view of taxation. The conceit is that Washington can raise taxes and, voila, revenue will follow on demand. But revenue will only follow if the economy grows, and higher taxes will restrain growth to some extent, depending on the timing and incidence of the tax increases.

The chairmen are on better ground arguing for fundamental tax reform that would swap lower rates for fewer loopholes and "tax expenditures." On the latter, the draft is right to put the mortgage interest deduction on the table, as taboo as that is in Washington. If we've learned anything from the last decade, it ought to be that our many housing subsidies have led to a misallocation of capital with few benefits. Canada has no such deduction but a higher rate of home ownership.

Ditto for the employer deduction for health insurance, which costs some $200 billion a year and has also distorted incentives by creating a system of third-party payments. Individuals who bear little responsibility for their health-care expenses have little incentive to reduce costs, much less lead a healthier life-style that would save money over time. Refocusing this tax benefit on the needy while encouraging wealthier consumers to economize would help health markets and the federal budget.

The chairmen also take aim at the corporate tax rate, proposing in one option a reduction to 26%. Everyone to the right of MoveOn.org knows that the 35% corporate tax rate is a disincentive to invest in America and has sent businesses pleading to Congress for this or that loophole. This is the second Obama-appointed outfit to recommend a cut in the corporate tax rate, following Paul Volcker's economic advisory group this year, and it ought to be one basis for bipartisan agreement.

The draft also proposes spending cuts, albeit far too timidly. Its discretionary spending proposals would take outlays down only to 2010 levels, though Republicans have already promised to take them back to 2008. We wonder if this is a bow to Democrats who think that spending at 25% of GDP should be the new normal.

More egregiously, the chairmen tiptoe around ObamaCare, which has led some on the right and left to claim that the commission is essentially endorsing the largest new entitlement in 40 years. We're told the chairmen mostly dodged the subject because Democrats on the commission made that a nonnegotiable demand. A truly bold report would consider Congressman Paul Ryan's model to make Medicare a defined contribution program. Instead, the chairmen settle for the familiar likes of "payment reforms," which never work because of Medicare's flawed political price-control model.

Medicaid also gets a near total pass, probably because ObamaCare is expanding that program more than at any time since its inception in 1965. Worse, the federal Medicaid formula rewards states for spending more. If the commission's goal is to spur debate, it ought to propose making Medicaid an annual block grant that would force state politicians to better manage what is often the biggest expense line in their budgets. The status quo will lead to huge state tax increases over the next two decades.

The chairmen are braver on Social Security, though again not brave enough. They propose to raise the retirement age for receiving full benefits to 68 from 67 by—brace yourself—2050, and 69 by 2075. For context, consider that the average American woman born today will live to be 80.

The draft also suggests a payroll tax increase, in particular on upper-middle-class earners, even as it proposes to cut their benefits to a greater extent than lower earners. Republicans should rule out a tax increase, while accepting that some benefit cuts on the basis of need will be required.

Mr. Obama conceived the deficit commission as a form of political cover for his spending blowout—and to coax Republicans into a tax increase. So it's notable that Democrats and liberals have been more critical of the chairmen's draft than have Republicans. Having put the U.S. in a fiscal hole, Nancy Pelosi's minority wants to oppose all spending cuts or entitlement reform to climb out.

House Republicans should react accordingly, which means taking what they like from the commission report and making it part of their own budget proposals. If Senate Democrats and Mr. Obama want to regain any fiscal credibility, they'll be willing to listen and talk. If not, the voters will certainly have a choice in 2012.

Jensen Comment
Meanwhile the United States will continue to both print more money supported by neither taxes nor borrowing plus continued to borrow over a trillion dollars each year to finance the cash flow deficit differences between what the government takes in in revenue and what the government pays out. At this point voters are simply numb to the difference between a billion dollars and a trillion dollars, but in terms of economic survival the difference is crucial.


The Unresolved Debate on Why Inequality of Income is Increasing in the United States

 

The Gini Coefficient for increasing inequality in the United States economy points to dramatic increases in inequality between the wealthy people and the non-wealthy citizens of the U.S. See the third graph at
http://en.wikipedia.org/wiki/Gini_coefficient
Note that there are huge limitations in interpreting the Gini Coefficient that over decades that has equated North Korea with Canada and Bulgaria with Norway in terms of income equality. The Gini Coefficient points to equality without giving regard to differences in the amount wealth/income being shared among citizens. Hence people in North Korea may be equal in their starvation existence to the same degree that Canadians may be equal in sharing a much more bounteous bag of goods and services.

These's a huge difference when comparing nations as to poverty versus comparing nations in terms of Gini Coefficients ---
http://en.wikipedia.org/wiki/Poverty    versus http://en.wikipedia.org/wiki/Gini_coefficient
It is almost impossible to avoid poverty in the most lawless nations (like Somalia) , whereas some of the nations with the worst Gini Coefficients (like Brazil) have laws and tough law enforcement.

Thus is it virtually meaningless to compare the Gini Coefficients of different nations. It is, however, a different story when comparing the trend lines across time for any given nation. In doing so, huge problems in measurement must still be taken into account ---
http://en.wikipedia.org/wiki/Gini_coefficient

Two of the best known books on the subject of inequiality are as follows:
I find them lacking in making recommendations on how best to a increase bounteous bag of goods to be divided in a nation. These are not books on capitalism versus socialism. Rather they are books about unjust economic inequality.

 

Capitalism is given credit in the dramatic reduction of poverty in Chile ---
http://en.wikipedia.org/wiki/Chicago_Boys
Also see http://en.wikipedia.org/wiki/Miracle_of_Chile
But capitalism is not given credit for the relatively high inequality in Chile.

Socialism is given credit for the dramatic increase in equality in Cuba. But it is not given credit for reducing poverty.

 

In the 21st Century Some Scholars (notably Nobel Laureate Joseph Stiglitz) Blame the Wealthy for the Increased Inequality in the United States
This leads to various proposals of increasing the marginal tax rates on the wealthy (at a time when most other nations have reduced such rates)

"Morning Advantage: The Rich Are Making It Harder for the Rest to Get Ahead," by Paul Michelman, Harvard Review Blog, June 13, 2012 --- "
http://blogs.hbr.org/morning-advantage/2012/06/morning-advantage-the-rich-are.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

"The Price of Inequality," by Nobel Laureate George E. Stiglitz, Project Syndicate ---
http://www.project-syndicate.org/commentary/the-price-of-inequality

In the 21st Century Other Scholars Are Asserting That the Rise in Inequality is Much More Complicated Than Pinning the Blame of the Wealthy

Some blame the F grade of K-12 education for failing to prepare our young people for the demands of working and earning in the 21st Century ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#HomeworkDeclining
On television I watched a middle school teacher complaining that they raised her working hours from three to six hours each school day. My own daughter gets 16 weeks away from teaching each year while earning more than she made from her previous medial lab technician job that only had two weeks per year vacation (and lab techs have lots of on-call time on nights and weekends).

Some like me claim the biggest disgrace in education is nearly universal grade inflation K-20 ---
http://www.trinity.edu/rjensen/Assess.htm#RateMyProfessor
Our graduates are given false hopes about their abilities to enter the working world. And many of them eventually become discouraged from even trying to get skills needed for prosperity in work and future study. Meanwhile we export jobs or import better educated graduates from outside the United States.

Some blame the curse of drug addiction and an explosion of crime infested buying and selling illegal drugs. Most certainly this has led to a rise in family instability, failing parental responsibility, mental disabilities, prostitution, and falling motivation to learn and work rather than join drug gangs. This has added greatly to inequality.

Some blame government interference with mortgage markets (such as forcing Fannie and Freddie to buy mortgages way in excess of property values) caused the housing bubble which in turn had ripple effects on destroying the poor and middle class savings in their homes, their job opportunities, and business opportunities ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze

Some blame millions of local, state, and Federal government regulations, especially EPA, OSHA, ADA, and FDA regulations, for inhibiting business firms from investing and hiring.

Some blame business firms, local governments, state governments, and the federal government in good times for agreeing to long-term wage contracts (e.g., those union wages at GM in the 1980s) and underfunded pension and disability plans (e.g., unfunded Medicare benefits to disabled citizens) for creating and unsustainable economy in terms of wages and entitlements ---
http://www.trinity.edu/rjensen/Entitlements.htm
Most noteworthy here is the Social Security drug benefits championed by President Bush that added enormously to our trillion dollar deficits. This may seem like a huge move to greater equality except that many of those retirees like me receiving thousands of dollars of annual benefits can afford our own medications such that it made us more wealthy when many of us really did not need the benefits.

It's popular these days to blame our troubles on the sinking economies outside the United States --- notably those of the European Uniion

The list goes on and on in the blame game that mostly leads to nowhere and a gridlocked Congress.

It's clear that economists and politicians are mostly clueless about how to attack both the inequality, unfunded entitlements, and monumental spending deficits at all levels of government. It's also clear that just blaming the wealthy for our rising inequality is a cop out. Inequality will probably get worse even if we tax away all the wealth of the wealthy, because the fundamental problems in our society cannot be overcome with mere distribution of wealth.

Everybody claims we need one kind of tax reform or another, but the tax reform proposals themselves are superficial and may be dysfunctional in solving any of our inequality problems:
Case Studies in Gaming the Income Tax Laws ---
http://www.cs.trinity.edu/~rjensen/temp/TaxNoTax.htm

Many claim we need to make a high equality nation like Denmark our ideal rather than cling to The American Dream. I disagree ---
The American Dream ---
http://www.cs.trinity.edu/~rjensen/temp/SunsetHillHouse/SunsetHillHouse.htm

The time has come for virtually all citizens of the United States from the richest to the poorest to be willing to make the sacrifices that our ancestors made while seeking The American Dream. We must take responsibility for our children and be willing to make huge sacrifices on their behalf, including working longer hours, learning more to improve knowledge and skills, starting our own ventures, paying more taxes, refusing to let criminals take over our streets, searching for innovations, etc. The good life will not come from the Denmark Dream. It will come from The American Dream.
http://www.cs.trinity.edu/~rjensen/temp/SunsetHillHouse/SunsetHillHouse.htm

"The endangered public company:  The rise and fall of a great invention, and why it matters," The Economist, May 19, 2012 ---
http://www.economist.com/node/21555562

AS THIS newspaper went to press, Facebook was about to become a public company. It will be one of the biggest stockmarket flotations ever: the social-networking giant expects investors to value it at $100 billion or so. The news raises several questions, from “Is it worth that much?” to “What will it do next?” But the most intriguing question is what Facebook’s flotation tells us about the state of the public company itself.

At first glance, all is well. The public company was invented in the mid-19th century to provide the giants of the industrial age with capital. That Facebook is joining Microsoft and Google on the stockmarket suggests that public listings are performing the same miracle for the internet age. Not every 19th-century invention has weathered so well.

But look closer and the picture changes (see article). Mark Zuckerberg, Facebook’s young founder, resisted going public for as long as he could, not least because so many heads of listed companies advised him to. He is taking the plunge only because American law requires any firm with more than a certain number of shareholders to publish quarterly accounts just as if it were listed. Like Google before it, Facebook has structured itself more like a private firm than a public one: Mr Zuckerberg will keep most of the voting rights, for example.

The number of public companies has fallen dramatically over the past decade—by 38% in America since 1997 and 48% in Britain. The number of initial public offerings (IPOs) in America has declined from an average of 311 a year in 1980-2000 to 99 a year in 2001-11. Small companies, those with annual sales of less than $50m before their IPOs—have been hardest hit. In 1980-2000 an average of 165 small companies undertook IPOs in America each year. In 2001-09 that number fell to 30. Facebook will probably give the IPO market a temporary boost—several other companies are queuing up to follow its lead—but they will do little to offset the long-term decline.

Companies are like jets; the elite go private

Mr Zuckerberg will be joining a troubled club. The burden of regulation has grown heavier for public companies since the collapse of Enron in 2001. Corporate chiefs complain that the combination of fussy regulators and demanding money managers makes it impossible to focus on long-term growth. Shareholders are also angry. Their interests seldom seem to be properly aligned at public companies with those of the managers, who often waste squillions on empire-building and sumptuous perks. Shareholders are typically too dispersed to monitor the men on the spot. Attempts to solve the problem by giving managers shares have largely failed.

At the same time, alternative corporate forms are flourishing. Once “going public” was every CEO’s dream; now it is perfectly respectable to “go private”, like Burger King, Boots and countless other famous names. State-run enterprises have recovered from the wreck of communism and now include the world’s biggest mobile-phone company (China Mobile), its most successful port operator (Dubai World), its fastest-growing big airline (Emirates) and its 13 biggest oil companies.

No doubt the sluggish public equity markets have played a role in this. But these alternative corporate forms have addressed some of the structural weaknesses that once held them back. Access to capital? Private-equity firms, helped by tax breaks, and venture capitalists both have cash to spare, and there are private markets such as SecondMarket (where $1 billion-worth of shares has changed hands since 2008). Limited liability? Partners need no longer be fully liable, and firms can have as many partners as they want. Professional managers? Family firms employ them by the HBS-load and state-owned ones are no longer just sinecures for the well-connected.

Make capitalism popular again

Does all this matter? The increase in the number of corporate forms is a good thing: a varied ecosystem is more robust. But there are reasons to worry about the decline of an organisation that has spread prosperity for 150 years.

First, public companies have been central to innovation and job creation. One reason why entrepreneurs work so hard, and why venture capitalists place so many risky bets, is because they hope to make a fortune by going public. IPOs provide young firms with cash to hire new hands and disrupt established markets. The alternative is to sell themselves to established firms—hardly a recipe for creative destruction. Imagine if the fledgling Apple and Google had been bought by IBM.

Second, public companies let in daylight. They have to publish quarterly reports, hold shareholder meetings (which have grown acrimonious of late), deal with analysts and generally conduct themselves in an open manner. By contrast, private companies and family firms operate in a fog of secrecy.

Third, public companies give ordinary people a chance to invest directly in capitalism’s most important wealth-creating machines. The 20th century saw shareholding broadened, as state firms were privatised and mutual funds proliferated. But today popular capitalism is in retreat. Fewer IPOs mean fewer chances for ordinary people to put their money into a future Google. The rise of private equity and the spread of private markets are returning power to a club of privileged investors.

All this argues for a change in thinking—especially among the politicians who have heaped regulations onto Western public companies, blithely assuming that businessfolk have no choice but to go public in the long run. Many firms now go (or stay) private to avoid red tape. The result is that ever more business is conducted in the dark, with rich insiders playing a more powerful role.

Public companies built the railroads of the 19th century. They filled the world with cars and televisions and computers. They brought transparency to business life and opportunities to small investors. Because public companies sell shares to the unsophisticated, policymakers are right to regulate them more tightly than other forms of corporate organisation. But not so tightly that entrepreneurs start to dread the prospect of a public listing. The public company has long been the locomotive of capitalism. Governments should not derail it.

 

 


"How to Live Freer in New Hampshire:  With all eyes on Wisconsin this past week, overlooked has been the conservative policy changes that are moving ahead in New Hampshire," by Stephen Moore, The Wall Street Journal, February 25, 2011 ---
http://online.wsj.com/article/SB10001424052748704150604576166452052715900.html?mod=djemEditorialPage_t

With all eyes on Wisconsin this past week, overlooked has been the conservative policy changes that are moving ahead in New Hampshire. In recent days the New Hampshire House, where the GOP controls nearly three-quarters of the 400 seats, passed a bill to repeal the state cap-and-trade law that imposes a tax on energy use and a bill to make New Hampshire a right-to-work state.

Democratic Gov. John Lynch has vowed to veto both bills, but my sources in Concord say there's a chance that the vetoes could be overridden. Meanwhile, Republicans are also set to pass a spending reduction bill with the kinds of public sector pension reforms that have incited protests from the labor unions in the Midwest.

New Hampshire has always been the island of liberty and low taxes surrounded by a sea of Northeastern-style socialism. It's the only state in the region without an income tax or statewide sales tax, and per-capita spending is about half of what's found in New York and New Jersey. Republicans won huge majorities in both houses in November after turning blue in 2008 and voting for President Obama.

If New Hampshire becomes a right-to-work state, it would be the only New England state that does not force workers to join a union and pay dues. The bill passed by 221-131 but still lacks the two-thirds majority that's needed for a veto override. House Deputy Speaker Pamela Tucker said that becoming a right-to-work state "would help us become a haven for employers seeking a pro-business environment." She added: "Freedom is a core New Hampshire belief, and freedom of association and choice is a fundamental right of every New Hampshire citizen."

In 2008, New Hampshire joined something called the Regional Greenhouse Gas Initiative, a region-wide cap-and-trade system for state utilities. So far, it's resulted in about $27 million in higher electric costs for consumers, and the environmental benefits have been dubious. "It does nothing to reduce greenhouse gases because jobs and businesses just move to other states," says Corey Lewandowski, the New Hampshire director of Americans for Prosperity. His group is working to make New Hampshire the first state in the nation to repeal an existing global warming law. The repeal bill passed with a two-thirds majority, and the state Senate is expected to follow suit with the necessary margin to override a veto.

Jensen Comment
In spite of now being labeled a conservative Yankee state, New Hampshire is surprisingly liberal on many issues. It has had a succession of senators and representatives that it sent to Washington DC prior to the 2008 election. Governors have be Democrats for decades. And New Hampshire is not only one of the few states sanctifying gay marriage, the Republican-controlled legislature just turn down an effort to repeal the gay marriage law.

More notably, New Hampshire is one of the least friendly states to private sector corporate businesses in terms of business taxes and fees.


Medicare is the real killer. According to Eugene Steuerle of the Urban Institute, an average couple retiring last year can look forward to consuming Medicare benefits with a present value of $343,000, having paid Medicare taxes with a present value of $109,000.
Holman W. Jenkins, Jr.  

"Let's Begin Obama's 'Conversation' on Entitlements:  A couple retiring last year paid $109,000 into Medicare but can expect $343,000 back from the system," by Holman W. Jenkins, Jr., The Wall Street Journal, February 26, 2011 ---
http://online.wsj.com/article/SB10001424052748703408604576164172865528158.html

Nobody should be surprised that public-sector workers in Wisconsin and elsewhere are fighting to preserve every penny of their promised benefits.

Nobody should be surprised that state governors—and it doesn't matter which party—are trying to trim those privileges and benefits.

Nobody should be surprised by anything.

News reporters may be naïve, and some of the protesters may pretend to be. But this fight was penciled in long ago, when politicians and union leaders made the strategic decision to negotiate benefits without negotiating for the funding to make good on them. The mock shock and horror is all the more laughable given that events in Wisconsin are a perfect microcosm of the battle that every sentient American knows, and has known for a generation, awaits Medicare and Social Security.

In keeping with the theatrics of naïveté, President Obama now calls for "beginning a conversation on entitlements." One wonders what it was, then, that G.W. Bush began at the 2004 Republican convention, or what thinkers and activist groups that have been pushing visions of entitlement reform for decades have been doing.

Has the president not heard of the private sector's pioneering work on "defined contributions"? Or Bill Clinton's landmark Medicare commission in 1999? One might as well wonder what pain is coming to those Obama followers who have yet to suspect their thoughtful liberal might be a visionless apparatchik.

Don't doubt that Mr. Obama's real impulse, like that of most Democrats, is to let things ride and then simply, amid a crisis, start slashing benefits for the "rich" while also raising taxes on "the rich." Unspoken has been a Democratic assumption that an aging electorate, in a crisis, would be willing to tax itself to the hilt to prop up an unreformed or barely reformed Social Security and Medicare.

Even if this assumption were electorally sound, economics won't oblige in the crisis that's coming. The necessary tax hikes would kill any hope of growth. The economy would continue its free fall without root-and-branch entitlement cuts all the more painful for having been delayed.

Let's lay down a couple of markers for "the conversation" Mr. Obama pretends he wants to have. The transition to a new system, in which workers save for their own retirement consumption, will have to be financed—that is, we'll have to borrow to settle the claims of those who are retired or nearing retirement and can't be left in the lurch.

Medicare is the real killer. According to Eugene Steuerle of the Urban Institute, an average couple retiring last year can look forward to consuming Medicare benefits with a present value of $343,000, having paid Medicare taxes with a present value of $109,000.

And don't let that figure get your hopes up, because even that $109,000 is not available today. That money was spent long ago. The government's trust funds are a fraud. Indeed, by some large amount, society missed out over many decades on domestic savings and investment that would have taken place had workers not been relying on unfunded government promises to support them in retirement.

The flip side of this depressing consideration, though, is a happier one. Moving toward a system of real savings, in which payroll taxes would flow into some version of personal accounts controlled by the worker, would bring a big improvement to incentives. We could expect a sizeable growth dividend to help finance the transition.

By "finance the transition," of course, we mean today's workers having to reach into their own pockets twice, paying for their own retirement while also making up for the saving their parents and grandparents didn't do. When people talk about generational injustice, this is what they mean. But the pain can be lightened and spread more evenly with borrowing. Here's where we should not be afraid of debt. The bond market can be trusted to distinguish between good debt and bad debt—between borrowing to fix the system and borrowing to prop it up.

Continued in article

Bob Jensen's threads on entitlements are at
http://www.trinity.edu/rjensen/Entitlements.htm

Bob Jensen's threads on health care are at
http://www.trinity.edu/rjensen/Health.htm


Audit Failure: The GAO Reported No Problems Amidst All This Massive Fraud

Note that most of these particular workers retire long before age 65 and are fraudulently collecting full Social Security and Medicare benefits intended for truly disabled persons
"The Public-Union Albatross What it means when 90% of an agency's workers (fraudulently)  retire with disability benefits," by Philip K. Howard, The Wall Street Journal, November 9, 2011 ---
http://online.wsj.com/article/SB10001424052970204190704577024321510926692.html?mod=djemEditorialPage_t

The indictment of seven Long Island Rail Road workers for disability fraud last week cast a spotlight on a troubled government agency. Until recently, over 90% of LIRR workers retired with a disability—even those who worked desk jobs—adding about $36,000 to their annual pensions. The cost to New York taxpayers over the past decade was $300 million.

As one investigator put it, fraud of this kind "became a culture of sorts among the LIRR workers, who took to gathering in doctor's waiting rooms bragging to each [other] about their disabilities while simultaneously talking about their golf game." How could almost every employee think fraud was the right thing to do?

The LIRR disability epidemic is hardly unique—82% of senior California state troopers are "disabled" in their last year before retirement. Pension abuses are so common—for example, "spiking" pensions with excess overtime in the last year of employment—that they're taken for granted.

Governors in Wisconsin and Ohio this year have led well-publicized showdowns with public unions. Union leaders argue they are "decimat[ing] the collective bargaining rights of public employees." What are these so-called "rights"? The dispute has focused on rich benefit packages that are drowning public budgets. Far more important is the lack of productivity.

"I've never seen anyone terminated for incompetence," observed a long-time human relations official in New York City. In Cincinnati, police personnel records must be expunged every few years—making periodic misconduct essentially unaccountable. Over the past decade, Los Angeles succeeded in firing five teachers (out of 33,000), at a cost of $3.5 million.

Collective-bargaining rights have made government virtually unmanageable. Promotions, reassignments and layoffs are dictated by rigid rules, without any opportunity for managerial judgment. In 2010, shortly after receiving an award as best first-year teacher in Wisconsin, Megan Sampson had to be let go under "last in, first out" provisions of the union contract.

Even what task someone should do on a given day is subject to detailed rules. Last year, when a virus disabled two computers in a shared federal office in Washington, D.C., the IT technician fixed one but said he was unable to fix the other because it wasn't listed on his form.

Making things work better is an affront to union prerogatives. The refuse-collection union in Toledo sued when the city proposed consolidating garbage collection with the surrounding county. (Toledo ended up making a cash settlement.) In Wisconsin, when budget cuts eliminated funding to mow the grass along the roads, the union sued to stop the county executive from giving the job to inmates.

No decision is too small for union micromanagement. Under the New York City union contract, when new equipment is installed the city must reopen collective bargaining "for the sole purpose of negotiating with the union on the practical impact, if any, such equipment has on the affected employees." Trying to get ideas from public employees can be illegal. A deputy mayor of New York City was "warned not to talk with employees in order to get suggestions" because it might violate the "direct dealing law."

How inefficient is this system? Ten percent? Thirty percent? Pause on the math here. Over 20 million people work for federal, state and local government, or one in seven workers in America. Their salaries and benefits total roughly $1.5 trillion of taxpayer funds each year (about 10% of GDP). They spend another $2 trillion. If government could be run more efficiently by 30%, that would result in annual savings worth $1 trillion.

What's amazing is that anything gets done in government. This is a tribute to countless public employees who render public service, against all odds, by their personal pride and willpower, despite having to wrestle daily choices through a slimy bureaucracy.

One huge hurdle stands in the way of making government manageable: public unions. The head of the American Federation of State, County and Municipal Employees recently bragged that the union had contributed $90 million in the 2010 off-year election alone. Where did the unions get all that money? The power is imbedded in an artificial legal construct—a "collective-bargaining right" that deducts union dues from all public employees, whether or not they want to belong to the union.

Some states, such as Indiana, have succeeded in eliminating this requirement. I would go further: America should ban political contributions by public unions, by constitutional amendment if necessary. Government is supposed to serve the public, not public employees.

America must bulldoze the current system and start over. Only then can we balance budgets and restore competence, dignity and purpose to public service.

Bob Jensen's threads on the entitlements disaster are at
http://www.trinity.edu/rjensen/Entitlements.htm

Audit Failure:  The GAO Reported No Problems Amidst All This Fraud
This is what a union site claims about the Long Island Rail Road workers for disability ---
http://www.railroad.net/forums/viewtopic.php?f=63&t=55668&start=300

What you won't read in Newsday or the New York Times from non-copyrighted labor source:

GAO Audit Gives Railroad Occupational Disability Program a Clean Bill of Health

The United States Government Accountability Office (GAO) just issued its second review of the Railroad Retirement Board Occupational Disability Program. And once again it found no problems.

“This was a major accomplishment for rail labor,” says TCU President Bob Scardelletti. “Occupational Disability is a vitally important program for members who need it. It’s the best in the country, and this Report will help keep it that way.”

The increased government attention on Occupational Disability began when New York politicians and newspapers began a full scale campaign targeting Long Island Rail Road workers’ alleged abuse of the program. After extensive scandalous press reports, public hearings, wild allegations, and a congressionally requested GAO investigation, no improprieties were found.

The Railroad Retirement Board did institute some oversight measures specific to Long Island Rail Road to make sure that no abuses were occurring, reflecting the fact that the rate of applications for occupational disability were higher than on any other railroad. But these oversight procedures wound up finding that all Long Island applications that were approved were properly reviewed, legitimate and in accordance with existing law and regulations. And that fact was endorsed by the first GAO audit of Long Island Rail Road claims in a report released in September, 2009.

Not satisfied with the GAO’s findings, two Congressman – John Mica of Florida and Bill Shuster of Pennsylvania – on March 18, 2009 formally requested the GAO to “conduct a systematic review of RRB’s occupational disability program”, not just limited to Long Island Rail Road.

The Congressmen’ request prompted yet another GAO review of the occupational disability program. In their just-issued response to the two Congressmen, the GAO reported they found no improprieties and made no recommendations.

Once again efforts to find fault with the occupational disability have come up empty,” says President Scardelletti. “That’s because the program is functioning as it was intended – to be a last resort for rail workers who because of illness or injury can no longer perform their jobs. It is a necessary benefit and it is not abused by those who unfortunately must apply for it. We will continue to do everything in our power to preserve it as is.

Jensen Comment
The program seems to be "working as intended." Either 90% of all the railroad's workers are becoming disabled on the job or the system is "intended" to defraud the taxpayers. One sign of that it was a fraud is that the same doctor (now indicted) was receiving millions of dollars from the union to sign phony disability claims.

And there are some who advocate that the GAO take over the private sector auditing because there will be less fraud, greater independence, and more competent auditors than anything the Big Four and other auditing firms can come up with. Baloney!


"Europe's Entitlement Reckoning From Greece to Italy to France, the welfare state is in crisis," The Wall Street Journal, November 9, 2011 ---

In the European economic crisis, all roads lead through Rome. The markets have raised the price of financing Italy's mammoth debt to new highs, and on Tuesday Silvio Berlusconi became the second euro-zone prime minister, after Greece's George Papandreou, to resign this week. His departure may keep the world's eighth largest economy solvent for the time being, but it hardly addresses the root of the problem.

In Italy, as in Greece, Spain and Portugal and eventually France, the welfare-entitlement state has hit a wall. Successive governments on the Continent, right and left, have financed generous entitlements with high taxes and towering piles of debt. Their economies have failed to grow fast enough to keep up, and last year the money started to run out. The reckoning has arrived.

If the first step in curing an addiction is to acknowledge it, there is little sign of that in Europe. The solutions on offer are to spend still more money, to have the Germans bail out everybody else, or to ditch the euro so bankrupt countries can again devalue their own currencies. France's latest debt solution includes raising corporate, capitals gains and sales taxes.

Yet Europe's problem isn't the euro. If it were, Hungary, Iceland and Latvia—none of which use the euro—would have been spared their painful days of reckoning. The same applies for Britain. Europe is in a debt spiral brought about by spendthrift, overweening and inefficient governments.

This is a crisis of the welfare state, and Italy is a model basket case. Mario Monti, who is tipped to lead a new government of technocrats, once described the Italian economy as a case of "self-inflicted strangulation." Government debt is 120% of GDP, making Italy the world's third largest borrower after the U.S. and Japan. Its economy last grew at more than 2% a year in 2000.

An aging and shrinking population is a symptom, but not a leading cause, of the eurosclerosis. A fifth of Italy's 60 million people are 65 or older and make increasingly expensive claims on state-paid pensions and other benefits. In fast-growing Turkey, only 6.3% fit that demographic. Italian women have on average 1.2 children, putting the country's birth rate at 207th out of 221 countries.

But the bulk of the responsibility lies with politicians. Mr. Berlusconi, Italy's richest man, promised a shake up each time he ran for office (in 1994, 1996, 2001, 2006 and 2008). He was the longest serving premier in post-war Italy, from 2001 to 2006, controlled parliament and could have pushed through reforms. He didn't. Promises to lower taxes and hack away at regulations and protections for Italy's powerful guilds—from taxi drivers to pharmacists to journalists—were broken.

"It is not difficult to rule Italy," Benito Mussolini once said, "it is useless." The so-called concertazione, or concert, of Italian coalition politics that brings together numerous parties in the Parliament makes for unstable and indecisive governments. So does the fear prominent in many European countries that any serious reform will provoke street protests. An unhappy byproduct of a welfare state is that it creates powerful interests that will fight to the last to preserve their free lunch, no matter the cost to the country.

But now hard choices can no longer be postponed. And the solution to Europe's debt crisis must begin with reforming, if not dismantling, the welfare state. Europe rose from the economic grave in the 1960s, it rode the Reagan-Thatcher reform wave to more modest growth in the 1980s-'90s, and it can grow again. A decade ago, Germany was called the "sick man of Europe," bedeviled by Italian-like economic problems. But a center-left coalition, supported by trade unions and German society, overhauled labor and welfare codes and set the stage for the current (if still modest) export-led revival in Germany.

The road from Rome may now lead to Paris, Madrid and other debt-ridden European countries. But this is no cause for U.S. chortling, because that same road also leads to Sacramento, Albany and Washington. America's federal debt was 35.7% of GDP in 2007, but it was 61.3% last year and is rising on an Italian trajectory. The lesson of Italy, and most of the rest of Europe, is never to become a high-tax, slow-growth entitlement state, because the inevitable reckoning is nasty, brutish and not short.

 

 


Japan Adopted the Worst Entitlements Practices of the United States (and the same baby boomer mistakes following WW II)

"The Italy of Asia:  Japan's entitlement dilemmas are a warning to Washington," The Wall Street Journal, January 6, 2011 ---
http://online.wsj.com/article/SB10001424052748704723104576061332542456172.html#mod=djemEditorialPage_t

Japanese politics is once again in turmoil, with the government's approval ratings around 20%. Prime Minister Naoto Kan is trying to force out his rival within the Democratic Party of Japan, Ichiro Ozawa, which might boost his own popularity but would probably cause enough defections to destroy a precarious majority. And he has chosen as his New Year initiative an increase in the consumption tax—a hugely unpopular policy that cost him the upper house election last year and would surely harm the economy.

Looks like it's almost time for another change of leader in Tokyo, which is becoming the Italy of Asia. Whoever it is, he will have to tackle Japan's problems before unpleasant outcomes are forced upon it. Without cuts to entitlements and tax cuts to promote growth, Tokyo will continue turning into Athens.

Mr. Kan's claims to fiscal rectitude are belied by the draft fiscal 2011 budget released late last month. It calls for another year of near-record addition to a national debt already approaching 200% of GDP. The budget includes $867 billion of spending, though total government revenue amounts to just $501 billion. The budget proposes trimming discretionary spending only marginally, cuts that are overwhelmed by the uncontrolled growth of entitlement programs, which make up 53% of total spending.

Japan is foundering on the promises made by past generations of politicians that are coming due in a rapidly aging society. These include unfunded pensions and medical care for the elderly. And it will only get worse—2012 is expected to be a watershed year when the biggest wave of baby boomers begins to retire.

As two lost decades since the bursting of the bubble show, Japan's consensus-based political system seizes up when it comes to allocating societal losses. In the 1990s, that meant that the government encouraged banks to sit on bad loans rather than undergo the kind of cathartic restructuring the U.S. is now undergoing, at least in some parts of the economy. That made Japan appear more stable, but without creative destruction the economy was unable to return to growth. This time the leverage is spread across generations, with the lack of growth making the promises to the old a bigger burden, which in turn makes it impossible to pursue pro-growth policies.

Payments on the national debt next year are projected at an already substantial $263 billion, but this assumes a payout of no more than 2% on 10-year bonds. Yields may remain well below this level for now, but in recent auctions signs have emerged that investors are losing their appetite for government bonds. The national debt is forecast to exceed household savings in the next year, as retirees continue to spend down savings. As long as growth remains slow, corporations will probably continue to save. But if Tokyo is forced to look abroad for funding, it will have to pay much higher rates.

That has the potential to blow out the budget in spectacular fashion. With central and local government debt now estimated at over $11 trillion, each one percentage point increase in yields will cost $110 billion. Adding in its unfunded liabilities, Japan has already reached the point at which its debt load will continue to increase regardless of how much it cuts spending or raises taxes.

In other words, Japan is about to run into the late economist Herb Stein's obvious but oft-overlooked law, which states that if something cannot continue it won't. The crunch is coming in one form or another.

Continued in article

Bob Jensen's threads on entitlements are at
http://www.trinity.edu/rjensen/Entitlements.htm


Watch for the other possible solutions in the 30-minute summary video ---
http://www.pgpf.org/newsroom/press/IOUSA-Solutions-Premiers-on-CNN/
(Scroll Down a bit)

Here is the original (and somewhat dated video that does not delve into solutions very much)
IOUSA (the most frightening movie in American history) ---
(see a 30-minute version of the documentary at www.iousathemovie.com )

Now the IOUSA Bipartisan Solutions
I suggest that as many people as possible divert their attention from the Tiger Woods at the Masters Tournament today (April 11) to watch bipartisan proposals (‘Solutions”) on how to delay the Fall of the United States Empire. By the way, Bill Bradley was one of the most liberal Democratic senators in the History of the United States Senate.

Watch the World Premiere of I.O.U.S.A.: Solutions on CNN
Saturday, April 10, 1:00-3:00 p.m. EST or Sunday, April 11, 3:00-5:00 p.m. EST

Featured Panelists Include:

  • Peter G. Peterson, Founder and Chairman, Peter G. Peterson Foundation
  • David Walker, President & CEO, Peter G. Peterson Foundation
  • Sen. Bill Bradley
  • Maya MacGuineas, President of the Committee for a Responsible Federal Budget
  • Amy Holmes, political contributor for CNN
  • Joe Johns, CNN Congressional Correspondent
  • Diane Lim Rodgers, Chief Economist, Concord Coalition
  • Jeanne Sahadi, senior writer and columnist for CNNMoney.com

Watch for the other possible solutions in the 30-minute summary video ---
http://www.pgpf.org/newsroom/press/IOUSA-Solutions-Premiers-on-CNN/
(Scroll Down a bit)

 

CBS Sixty minutes has a great video on the enormous cost of keeping dying people artificially alive:
High Cost of Dying --- http://www.cbsnews.com/video/watch/?id=5737437n&tag=mncol;lst;3
(wait for the commercials to play out)

"The Looming Entitlement Fiscal Burden," by Gary Becker, The Becker-Posner Blog, April 11, 2010 ---
http://uchicagolaw.typepad.com/beckerposner/2010/04/the-looming-entitlement-fiscal-burdenbecker.html

"The Entitlement Quandary," by Richard Posner, The Becker-Posner Blog, April 11, 2010 ---
http://uchicagolaw.typepad.com/beckerposner/2010/04/the-entitlement-quandaryposner.html

The "Burning Platform" of the United States Empire
Former Chief Accountant of the United States, David Walker, is spreading the word as widely as possible in the United States about the looming threat of our unbooked entitlements. Two videos that feature David Walker's warnings are as follows:

David Walker claims the U.S. economy is on a "burning platform" but does not go into specifics as to what will be left in the ashes.

The US government is on a “burning platform” of unsustainable policies and practices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon.
David M. Walker, Former Chief Accountant of the United States --- http://www.financialsense.com/editorials/quinn/2009/0218.html
 

 

U.S. Debt/Deficit Clock --- http://www.usdebtclock.org/

The $61 Trillion Margin of Error, and What "Empire Decline" Means in Layman's Terms
This is a bipartisan disaster from the beginning and will be until the end

David Walker --- http://en.wikipedia.org/wiki/David_M._Walker_(U.S._Comptroller_General)

Harvard Professor Niall Ferguson --- http://en.wikipedia.org/wiki/Niall_Ferguson

Harvard Profession Video:   Niall Ferguson: Empires on the Edge of Chaos ---
http://fora.tv/2010/07/28/Niall_Ferguson_Empires_on_the_Edge_of_Chaos

Paul Johnson --- http://en.wikipedia.org/wiki/Paul_Johnson_%28writer%29

Eminent United Kingdom historian Paul Johnson on the roots and outcomes of U.S. deficit spending
Modern Times:  1920s to the 1990s, by Paul Johnson
There's a paperback version for $13.90 --- Click Here

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"Why America Will Stay on Top," by Brian M. Carney, The Wall Street Journal, March 5, 2011 ---
http://online.wsj.com/article/SB10001424052748703559604576175881248268272.html?mod=djemEditorialPage_t

In his best-selling history of the 20th century, "Modern Times," British historian Paul Johnson describes "a significant turning-point in American history: the first time the Great Republic, the richest nation on earth, came up against the limits of its financial resources." Until the 1960s, he writes in a chapter titled "America's Suicide Attempt," "public finance was run in all essentials on conventional lines"—that is to say, with budgets more or less in balance outside of exceptional circumstances.

"The big change in principle came under Kennedy," Mr. Johnson writes. "In the autumn of 1962 the Administration committed itself to a new and radical principle of creating budgetary deficits even when there was no economic emergency." Removing this constraint on government spending allowed Kennedy to introduce "a new concept of 'big government': the 'problem-eliminator.' Every area of human misery could be classified as a 'problem'; then the Federal government could be armed to 'eliminate' it."

Twenty-eight years after "Modern Times" first appeared, Mr. Johnson is perhaps the most eminent living British historian, and big government as problem-eliminator is back with a vengeance—along with trillion-dollar deficits as far as the eye can see. I visited the 82-year-old Mr. Johnson in his West London home this week to ask him whether America has once again set off down the path to self-destruction. Is he worried about America's future?

"Of course I worry about America," he says. "The whole world depends on America ultimately, particularly Britain. And also, I love America—a marvelous country. But in a sense I don't worry about America because I think America has such huge strengths—particularly its freedom of thought and expression—that it's going to survive as a top nation for the foreseeable future. And therefore take care of the world."

Pessimists, he points out, have been predicting America's decline "since the 18th century." But whenever things are looking bad, America "suddenly produces these wonderful things—like the tea party movement. That's cheered me up no end. Because it's done more for women in politics than anything else—all the feminists? Nuts! It's brought a lot of very clever and quite young women into mainstream politics and got them elected. A very good little movement, that. I like it." Then he deepens his voice for effect and adds: "And I like that lady—Sarah Palin. She's great. I like the cut of her jib."

The former governor of Alaska, he says, "is in the good tradition of America, which this awful political correctness business goes against." Plus: "She's got courage. That's very important in politics. You can have all the right ideas and the ability to express them. But if you haven't got guts, if you haven't got courage the way Margaret Thatcher had courage—and [Ronald] Reagan, come to think of it. Your last president had courage too—if you haven't got courage, all the other virtues are no good at all. It's the central virtue." ***

Mr. Johnson, decked out in a tweed jacket, green cardigan and velvet house slippers, speaks in full and lengthy paragraphs that manage to be at once well-formed and sprinkled with a healthy dose of free association. He has a full shock of white hair and a quick smile. He has, he allows, gone a bit deaf, but his mind remains sharp and he continues to write prolifically. His main concession to age, he says, is "I don't write huge books any more. I used to write 1,000 printed pages, but now I write short books. I did one on Napoleon, 50,000 words—enjoyed doing that. He was a baddie. I did one on Churchill, which was a bestseller in New York, I'm glad to say. 50,000 words. He was a goodie." He's also written short forthcoming biographies of Socrates (another "goodie") and Charles Darwin (an "interesting figure").

Mr. Johnson says he doesn't follow politics closely anymore, but he quickly warms to the subject of the Middle East. The rash of uprisings across the Arab world right now is "a very interesting phenomenon," he says.

"It's something that we knew all about in Europe in the 19th century. First of all we had the French Revolution and its repercussions in places like Germany and so on. Then, much like this current phenomenon, in 1830 we had a series of revolutions in Europe which worked like a chain reaction. And then in 1848, on a much bigger scale—that was known as the year of revolutions."

In 1848, he explains, "Practically every country in Europe, except England of course . . . had a revolution and overthrew the government, at any rate for a time. So that is something which historically is well-attested and the same thing has happened here in the Middle East."

Here he injects a note of caution: "But I notice it's much more likely that a so-called dictatorship will be overthrown if it's not a real dictatorship. The one in Tunisia wasn't very much. Mubarak didn't run a real dictatorship [in Egypt]. Real dictatorships in that part of the world," such as Libya, are a different story.

As for Moammar Gadhafi, "We'll see if he goes or not. I think he's a real baddie, so we hope he will." The Syrian regime, he adds, "not so long ago in Hama . . . killed 33,000 people because they rose up." Then, "above all," there is Iran. "If we can get rid of that horrible regime in Iran," he says, "that will be a major triumph for the world."

Frank judgments like these are a hallmark of Mr. Johnson's work, delivered with almost child-like glee. Of Mahatma Gandhi, he wrote in "Modern Times": "About the Gandhi phenomenon there was always a strong aroma of twentieth-century humbug."

Socrates is much more to Mr. Johnson's liking. Whereas, in Mr. Johnson's telling, Gandhi led hundreds of thousands to death by stirring up civil unrest in India, all the while maintaining a pretense of nonviolence, Socrates "thought people mattered more than ideas. . . . He loved people, and his ideas came from people, and he thought ideas existed for the benefit of people," not the other way around.

In the popular imagination, Socrates may be the first deep thinker in Western civilization, but in Mr. Johnson's view he was also an anti-intellectual. Which is what makes him one of the good guys. "One of the categories of people I don't like much are intellectuals," Mr. Johnson says. "People say, 'Oh, you're an intellectual,' and I say, 'No!' What is an intellectual? An intellectual is somebody who thinks ideas are more important than people."

And indeed, Mr. Johnson's work and thought are characterized by concern for the human qualities of people. Cicero, he tells me, was not a man "one would have liked to have been friends with." But even so the Roman statesman is "often very well worth reading."

His concern with the human dimension of history is reflected as well in his attitude toward humor, the subject of another recent book, "Humorists." "The older I get," he tells me, "the more important I think it is to stress jokes." Which is another reason he loves America. "One of the great contributions that America has made to civilization," he deadpans, "is the one-liner." The one-liner, he says, was "invented, or at any rate brought to the forefront, by Benjamin Franklin." Mark Twain's were the "greatest of all."

And then there was Ronald Reagan. "Mr. Reagan had thousands of one-liners." Here a grin spreads across Mr. Johnson's face: "That's what made him a great president."

Jokes, he argues, were a vital communication tool for President Reagan "because he could illustrate points with them." Mr. Johnson adopts a remarkable vocal impression of America's 40th president and delivers an example: "You know, he said, 'I'm not too worried about the deficit. It's big enough to take care of itself.'" Recovering from his own laughter, he adds: "Of course, that's an excellent one-liner, but it's also a perfectly valid economic point." Then his expression grows serious again and he concludes: "You don't get that from Obama. He talks in paragraphs." ***

Mr. Johnson has written about the famous and notorious around the world and across centuries, but he's not above telling of his personal encounters with history. He is, he says, "one of a dwindling band of people who actually met" Winston Churchill.

Continued in article

Jensen Comment
I think the entitlements crisis in American is currently too unique and too serious to justify such optimism.

 I lean more to the prognosis of Harvard historian Niall Ferguson.

Harvard Profession Video:   Niall Ferguson: Empires on the Edge of Chaos ---
http://fora.tv/2010/07/28/Niall_Ferguson_Empires_on_the_Edge_of_Chaos

Call it the fatal arithmetic of imperial decline. Without radical fiscal reform, it could apply to America next.
Niall Ferguson, "An Empire at Risk:  How Great Powers Fail," Newsweek Magazine Cover Story, November 26, 2009 --- http://www.newsweek.com/id/224694/page/1
Please note that this is NBC’s liberal Newsweek Magazine and not Fox News or The Wall Street Journal.

. . .

In other words, there is no end in sight to the borrowing binge. Unless entitlements are cut or taxes are raised, there will never be another balanced budget. Let's assume I live another 30 years and follow my grandfathers to the grave at about 75. By 2039, when I shuffle off this mortal coil, the federal debt held by the public will have reached 91 percent of GDP, according to the CBO's extended baseline projections. Nothing to worry about, retort -deficit-loving economists like Paul Krugman.

. . .

Another way of doing this kind of exercise is to calculate the net present value of the unfunded liabilities of the Social Security and Medicare systems. One recent estimate puts them at about $104 trillion, 10 times the stated federal debt.

Continued in article --- http://www.newsweek.com/id/224694/page/1

Call it the fatal arithmetic of imperial decline. Without radical fiscal reform, it could apply to America next.
Niall Ferguson, "An Empire at Risk:  How Great Powers Fail," Newsweek Magazine Cover Story, November 26, 2009 --- http://www.newsweek.com/id/224694/page/1
Please note that this is NBC’s liberal Newsweek Magazine and not Fox News or The Wall Street Journal.

. . .

In other words, there is no end in sight to the borrowing binge. Unless entitlements are cut or taxes are raised, there will never be another balanced budget. Let's assume I live another 30 years and follow my grandfathers to the grave at about 75. By 2039, when I shuffle off this mortal coil, the federal debt held by the public will have reached 91 percent of GDP, according to the CBO's extended baseline projections. Nothing to worry about, retort -deficit-loving economists like Paul Krugman.

. . .

Another way of doing this kind of exercise is to calculate the net present value of the unfunded liabilities of the Social Security and Medicare systems. One recent estimate puts them at about $104 trillion, 10 times the stated federal debt.

Continued in article --- http://www.newsweek.com/id/224694/page/1

 

Niall Ferguson is the Laurence A. Tisch professor of history at Harvard University and the author of The Ascent of Money. In late 2009 he puts forth an unbooked discounted present value liability of $104 trillion for Social Security plus Medicare. In late 2008, the former Chief Accountant of the United States Government, placed this estimate at$43 trillion. We can hardly attribute the $104-$43=$61 trillion difference to President Obama's first year in office. We must accordingly attribute the $61 trillion to margin of error and most economists would probably put a present value of unbooked (off-balance-sheet) present value of Social Security and Medicare debt to be somewhere between $43 trillion and $107 trillion To this we must add other unbooked present value of entitlement debt estimates which range from $13 trillion to $40 trillion. If Obamacare passes it will add untold trillions to trillions more because our legislators are not looking at entitlements beyond 2019.

 

The Meaning of "Unbooked" versus "Booked" National Debt
By "unbooked" we mean that the debt is not included in the current "booked" National Debt of $12 trillion. The booked debt is debt of the United States for which interest is now being paid daily at slightly under a million dollars a minute. Cash must be raised daily for interest payments. Cash is raised from taxes, borrowing, and/or (shudder) the current Fed approach to simply printing money. Interest is not yet being paid on the unbooked debt for which retirement and medical bills have not yet arrived in Washington DC for payment. The unbooked debt is by far the most frightening because our leaders keep adding to this debt without realizing how it may bring down the entire American Dream to say nothing of reducing the U.S. Military to almost nothing.


Niall Ferguson,
"An Empire at Risk:  How Great Powers Fail," Newsweek Magazine Cover Story, November 26, 2009 --- http://www.newsweek.com/id/224694/page/1

This matters more for a superpower than for a small Atlantic island for one very simple reason. As interest payments eat into the budget, something has to give—and that something is nearly always defense expenditure. According to the CBO, a significant decline in the relative share of national security in the federal budget is already baked into the cake. On the Pentagon's present plan, defense spending is set to fall from above 4 percent now to 3.2 percent of GDP in 2015 and to 2.6 percent of GDP by 2028.

Over the longer run, to my own estimated departure date of 2039, spending on health care rises from 16 percent to 33 percent of GDP (some of the money presumably is going to keep me from expiring even sooner). But spending on everything other than health, Social Security, and interest payments drops from 12 percent to 8.4 percent.

This is how empires decline. It begins with a debt explosion. It ends with an inexorable reduction in the resources available for the Army, Navy, and Air Force. Which is why voters are right to worry about America's debt crisis. According to a recent Rasmussen report, 42 percent of Americans now say that cutting the deficit in half by the end of the president's first term should be the administration's most important task—significantly more than the 24 percent who see health-care reform as the No. 1 priority. But cutting the deficit in half is simply not enough. If the United States doesn't come up soon with a credible plan to restore the federal budget to balance over the next five to 10 years, the danger is very real that a debt crisis could lead to a major weakening of American power.

 

The Meaning of Present Value
Initially it might help to explain what present value means. When I moved from Florida State University to Trinity University in 1982, current mortgage rates were about 18%. As part of my compensation package, President Calgaard agreed to have Trinity University carry my mortgage. I purchased a home at 9010 Village Drive for $300,000 by paying $100,000 down and signing a 240 month mortgage at 12% APR and a 1982 present value of $200,000. At payments of $2,202 per month my total cash obligation (had I not refinanced from a bank when mortgage rates went below 12%) would've been $528,521. However, since money has time value, the present value of that $528,521 was only $200,000.

In a similar manner, Professor Ferguson's $104 trillion present value translates to over $300 trillion in cash obligations of Social Security and Medicare before being tinkered with changed entitlement obligations.

 

The "Burning Platform" of the United States Empire
Former Chief Accountant of the United States, David Walker, is spreading the word as widely as possible in the United States about the looming threat of our unbooked entitlements. Two videos that feature David Walker's warnings are as follows:

David Walker claims the U.S. economy is on a "burning platform" but does not go into specifics as to what will be left in the ashes.

The US government is on a “burning platform” of unsustainable policies and practices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon.
David M. Walker, Former Chief Accountant of the United States --- http://www.financialsense.com/editorials/quinn/2009/0218.html
 

 

An "Empire at Risk"
Harvard's Professor Niall Ferguson is equally vague about what will happen if the U.S. Empire collapses from its entitlement burdens.
Niall Ferguson, "An Empire at Risk:  How Great Powers Fail," Newsweek Magazine Cover Story, November 26, 2009 --- http://www.newsweek.com/id/224694/page/1

This is how empires decline. It begins with a debt explosion. It ends with an inexorable reduction in the resources available for the Army, Navy, and Air Force. Which is why voters are right to worry about America's debt crisis. According to a recent Rasmussen report, 42 percent of Americans now say that cutting the deficit in half by the end of the president's first term should be the administration's most important task—significantly more than the 24 percent who see health-care reform as the No. 1 priority. But cutting the deficit in half is simply not enough. If the United States doesn't come up soon with a credible plan to restore the federal budget to balance over the next five to 10 years, the danger is very real that a debt crisis could lead to a major weakening of American power.

The precedents are certainly there. Habsburg Spain defaulted on all or part of its debt 14 times between 1557 and 1696 and also succumbed to inflation due to a surfeit of New World silver. Prerevolutionary France was spending 62 percent of royal revenue on debt service by 1788. The Ottoman Empire went the same way: interest payments and amortization rose from 15 percent of the budget in 1860 to 50 percent in 1875. And don't forget the last great English-speaking empire. By the interwar years, interest payments were consuming 44 percent of the British budget, making it intensely difficult to rearm in the face of a new German threat.

Call it the fatal arithmetic of imperial decline. Without radical fiscal reform, it could apply to America next.

 

Empire Collapse in Layman's Terms
In 2010, hundreds upon hundreds of people will daily sneak across the U.S. border illegally in search of a job, medical care, education, and a better life under the American Dream. By 2050 Americans will instead be exiting in attempts to escape the American Nightmare and sneak illegally into BRIC nations for a job, medical care, education, and a better life under the BRIC Dream.

A BRIC nation at the moment is a nation that has vast resources and virtually no entitlement obligations that drag down economic growth --- http://en.wikipedia.org/wiki/BRIC

In economics, BRIC (typically rendered as "the BRICs" or "the BRIC countries") is an acronym that refers to the fast-growing developing economies of Brazil, Russia, India, and China. The acronym was first coined and prominently used by Goldman Sachs in 2001. According to a paper published in 2005, Mexico and South Korea are the only other countries comparable to the BRICs, but their economies were excluded initially because they were considered already more developed. Goldman Sachs argued that, since they are developing rapidly, by 2050 the combined economies of the BRICs could eclipse the combined economies of the current richest countries of the world. The four countries, combined, currently account for more than a quarter of the world's land area and more than 40% of the world's population.

Brazil, Russia, India and China, (the BRICs) sometimes lumped together as BRIC to represent fast-growing developing economies, are selling off their U.S. Treasury Bond holdings. Russia announced earlier this month it will sell U.S. Treasury Bonds, while China and Brazil have announced plans to cut the amount of U.S. Treasury Bonds in their foreign currency reserves and buy bonds issued by the International Monetary Fund instead. The BRICs are also soliciting public support for a "super currency" capable of replacing what they see as the ailing U.S. dollar. The four countries account for 22 percent of the global economy, and their defection could deal a severe blow to the greenback. If the BRICs sell their U.S. Treasury Bond holdings, the price will drop and yields rise, and that could prompt the central banks of other countries to start selling their holdings to avoid losses too. A sell-off on a grand scale could trigger a collapse in the value of the dollar, ending the appeal of both dollars and bonds as safe-haven assets. The moves are a challenge to the power of the dollar in international financial markets. Goldman Sachs economist Alberto Ramos in an interview with Bloomberg News on Thursday said the decision by the BRICs to buy IMF bonds should not be seen simply as a desire to diversify their foreign currency portfolios but as a show of muscle.
"BRICs Launch Assault on Dollar's Global Status," The Chosun IIbo, June 14, 2009 ---
http://english.chosun.com/site/data/html_dir/2009/06/12/2009061200855.html

Their report, "Dreaming with BRICs: The Path to 2050," predicted that within 40 years, the economies of Brazil, Russia, India and China - the BRICs - would be larger than the US, Germany, Japan, Britain, France and Italy combined. China would overtake the US as the world's largest economy and India would be third, outpacing all other industrialised nations. 
"Out of the shadows," Sydney Morning Herald, February 5, 2005 --- http://www.smh.com.au/text/articles/2005/02/04/1107476799248.html 

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 


"Toward a Different Fiscal Future:  Tax increases can't plausibly address the coming entitlement crisis," Glen R. Hubbard, Dean of the Columbia University College of Business, The Wall Street Journal, February 8, 2010 ---
http://online.wsj.com/article/SB10001424052748704041504575045250168889076.html?mod=djemEditorialPage_t

Moody's Investors Service's warning last week that the AAA credit rating of the United States is in jeopardy raises fresh concern about the nation's fiscal health. The question to ask about the president's eye-popping budget, also rolled out last week, is whether it prepares the country for its future—or shackles it to past decisions that our leaders would rather not confront.

President Obama's blueprint gave us a federal budget deficit for fiscal year 2010 of $1.6 trillion, about 10.6% of GDP. While one expects bigger budget deficits in a downturn, the administration expects the deficit and debt buildup to persist. By 2013, it forecasts that deficits will bring about a debt-to-GDP ratio of 72%, unprecedented in our experience except during a major war.

The problem is spending. Despite Mr. Obama's words about restraint, the new budget proposes more spending—1.8% of GDP for 2011 to be precise—and a higher level, roughly one percentage point of GDP higher, in subsequent years.

Debates about the budget traditionally revolve around these numbers. There is another way to look at the federal budget, however, and that is to focus on its effect on our economic health, not just the government's fiscal health. Focusing on economic health means setting our sights on productivity growth—our future living standards.

To understand what this means, consider the famous "kitchen debates" between Soviet President Nikita Khruschev and Vice President Richard Nixon in 1959 about the merits of capitalism and socialism. Nixon famously pointed to color television as a milestone in American innovation. The Soviet leader replied by trumpeting his nation's lead in rocket thrust. The issue resurfaced in the televised 1960 presidential debates, when Sen. John F. Kennedy attacked Nixon for wanting to lead a nation No. 1 in color TV, but not in rockets.

Nixon's response was essentially nothing. But the correct response was obvious: The nation with the higher present and future productivity growth—the U.S.—could lead in both color TV and rockets.

Today our productivity growth is imperiled by the anti-investment tilt of the president's budget plan for escalating federal debt. Even conservative estimates of effects of federal debt on interest rates (by Eric Engen of the Federal Reserve and me in the 2004 National Bureau of Economic Research Macroeconomics Annual) suggest that the last Obama budget blueprint would lead to a one-percentage-point rise in Treasury interest rates as the economic recovery takes hold. The consequence—lower business investment and real GDP 4% lower than it would otherwise be by the next presidential election—compromises our future.

But there is more bad news. The Congressional Budget Office (CBO) estimates that, without policy changes, by 2050 spending on Social Security, Medicare and Medicaid alone would be 10 percentage points of GDP more than today. Total federal spending would exceed 30% of GDP. ObamaCare would only exacerbate the problem. This means government spending for national defense, education, research and other priorities would be dramatically constrained.

This brings us to the reason we need a real budget debate today: Tax increases cannot plausibly make these problems go away. If taxes were increased sufficiently to accommodate the CBO's projected increase in entitlement spending, long-term U.S. GDP growth rates would be reduced between a half and a full percentage point (an estimate derived from widely cited research by Mr. Engen and Jonathan Skinner of Dartmouth), unacceptably lowering our future living standards. This would be equivalent to erasing all the "growth dividend" gains of the great productivity boom of the 1990s.

There is a better way forward. In the present economic situation, attempting to reduce the deficit drastically could spell another economic contraction. One can even make cogent arguments for cutting taxes on business investment and corporate profits, given the importance of an improved investment climate for the recovery.

Rather, the president and the Congress need to present a credible path toward lower deficits and more effective government. Such a plan should have three elements.

First, introduce specific targets for reducing discretionary spending. The administration has set too easy a goal for a putative President's Fiscal Commission, likely requiring deficit reduction of only 1% of GDP by 2015, to stabilize the debt-to-GDP ratio at more than 70%. But this level is even higher than in 1950, when we were paying off debt from World War II.

The discretionary spending binge in both the Bush and Obama years offer many opportunities for further cuts. Indeed, holding growth in the nondefense discretionary spending to 2% per year, well under present levels, is achievable and would free up funds for our future priorities.

Second, slow the growth of entitlement spending on Social Security and Medicare. A good way would be to shave 1% per year from projected entitlement growth.

It is possible to do so progressively, lowering the growth in benefits for middle- and upper-income households, while strengthening support for lower-income households. Expanded saving incentives and health saving accounts can be used to help more affluent households prepare for retirement. Taken together, these changes offer the greatest chance for reducing long-term spending while holding fast to government's legitimate social insurance role.

Third, if the administration wants to maintain the spending path on which its budget blueprint places us, it must confront and propose significant, broad-based tax increases. Let's be clear what this means.

Our present income tax already relies very heavily on revenue from high earners; the top 1% pay well over one-third of federal income taxes. Mr. Obama's budget increases the reliance. But we cannot count "taxes on the rich" for deficit reduction, health-care expansion and funding entitlements while ignoring the effect of those tax increases on investment, innovation and growth.

To raise the revenue for the president's welfare-state ambitions, the tax increases must necessarily be broad-based, as, for example, with a broad-based consumption tax. A useful start would be to calculate—and present to the public each year—the broad-based consumption tax required to pay for higher spending.

In the end, the reason to get the nation's fiscal house in order is less about deficits or debt as percentage points of GDP than about our future. We need a healthy, dynamic and innovative economy. We need a safety net for those buffeted by change. And we need the flexibility to increase support for national defense and other new domestic priorities.

Mr. Hubbard, dean of Columbia Business School, was chairman of the Council of Economic Advisers under President George W. Bush.


"Go To the Back of the CLASS," by Ed Feulner, Townhall, August 17, 2010 ---
http://townhall.com/columnists/EdFeulner/2010/08/18/go_to_the_back_of_the_class

In Washington, politicians often give their bills clever names designed more to obscure than to reveal.

Consider the CLASS Act. It sounds like yet another federal attempt to meddle in local schools. Instead, it stands for “Community Living Assistance Services and Support.”

CLASS was a little-noticed part of the massive Obamacare bill that the president signed in March. It’s supposed to provide affordable long-term care insurance to American workers. In reality, it creates another entitlement likely to increase our exploding federal deficit.

Starting next year CLASS is scheduled to begin enrolling people and collecting premiums. If CLASS was a normal insurance program, it would invest these premiums to build reserves. These reserves would later be tapped to provide benefits for those individuals in need of long-term care services.

But CLASS doesn’t work that way.

Similar to Social Security, all premiums that CLASS collects will be spent immediately. Its trust fund will be filled with government IOUs. Since participants need to pay five years of premiums before they’re eligible to collect any benefits, a sizeable amount of short-term revenue will be raised from CLASS. This aspect was especially useful when lawmakers were trying to find tricks to reduce the projected cost of Obamacare. By including the revenues from CLASS, politicians were able to pretend they’d reduced the cost of the bill by $70 billion.

But even Uncle Sam can’t spend your money twice. It’s impossible to spend the money today on government programs and invest the money to fund eventual benefits.

Eventually 2017 will arrive. That’s when CLASS starts paying benefits. It’s difficult to predict how soon after that the program would dive into the red and pay out more in benefits than it collects in premiums. Actuaries at the Centers for Medicare & Medicaid Services estimate it could be as soon as 2025.

Continued in article


"Principles for Economic Revival Our prosperity has faded because policies have moved away from those that have proven to work. Here are the priorities that should guide policy makers as they seek to restore more rapid growth,"
by GEORGE P. SHULTZ, MICHAEL J. BOSKIN, JOHN F. COGAN, ALLAN MELTZER AND JOHN B. TAYLOR
The Wall Street Journal, September 16, 2010 ---
http://online.wsj.com/article/SB10001424052748703466704575489830041633508.html

America's financial crisis, deep recession and anemic recovery have largely been driven by economic policies that have deviated from proven fact-based principles. To return to prosperity we must get back to these principles.

The most fundamental starting point is that people respond to incentives and disincentives. Tax rates are a great example because the data are so clear and the results so powerful. A wealth of evidence shows that high tax rates reduce work effort, retard investment and lower productivity growth. Raise taxes, and living standards stagnate.

Nobel Prize-winning economist Edward Prescott examined international labor market data and showed that changes in tax rates on labor are associated with changes in employment and hours worked. From the 1970s to the 1990s, the effective tax rate on work increased by an average of 28% in Germany, France and Italy. Over that same period, work hours fell by an average of 22% in those three countries. When higher taxes reduce the reward for work, you get

Long-lasting economic policies based on a long-term strategy work; temporary policies don't. The difference between the effect of permanent tax rate cuts and one-time temporary tax rebates is also well-documented. The former creates a sustainable increase in economic output, the latter at best only a transitory blip. Temporary policies create uncertainty that dampen economic output as market participants, unsure about whether and how policies might change, delay their decisions.

Having "skin in the game," unsurprisingly, leads to superior outcomes. As Milton Friedman famously observed: "Nobody spends somebody else's money as wisely as they spend their own." When legislators put other people's money at risk—as when Fannie Mae and Freddie Mac bought risky mortgages—crisis and economic hardship inevitably result. When minimal co-payments and low deductibles are mandated in the insurance market, wasteful health-care spending balloons.

Rule-based policies provide the foundation of a high-growth market economy. Abiding by such policies minimizes capricious discretionary actions, such as the recent ad hoc bailouts, which too often had deleterious consequences. For most of the 1980s and '90s monetary policy was conducted in a predictable rule-like manner. As a result, the economy was far more stable. We avoided lengthy economic contractions like the Great Depression of the 1930s and the rapid inflation of the 1970s.

The history of recent economic policy is one of massive deviations from these basic tenets. The result has been a crippling recession and now a weak, nearly nonexistent recovery. The deviations began with policies—like the Federal Reserve holding interest rates too low for too long—that fueled the unsustainable housing boom. Federal housing policies allowed down payments on home loans as low as zero. Banks were encouraged to make risky loans, and securitization separated lenders from their loans. Neither borrower nor lender had sufficient skin in the game. Lax enforcement of existing regulations allowed both investment and commercial banks to circumvent long-established banking rules to take on far too much leverage. Regulators, not regulations, failed.

The departures from sound principles continued when the Fed and the Treasury responded with arbitrary and unpredictable bailouts of banks, auto companies and financial institutions. They financed their actions with unprecedented money creation and massive issuance of debt. These frantic moves spooked already turbulent markets and led to the financial panic.

More deviations occurred when the government responded with ineffective temporary stimulus packages. The 2008 tax rebate and the 2009 spending stimulus bills failed to improve the economy. Cash for clunkers and the first-time home buyers tax credit merely moved purchases forward by a few months.

Then there's the recent health-care legislation, which imposes taxes on savings and investment and gives the government control over health-care decisions. Fannie Mae and Freddie Mac now sit with an estimated $400 billion cost to taxpayers and no path to resolution. Hundreds of new complex regulations lurk in the 2010 financial reform bill with most of the critical details left to regulators. So uncertainty reigns and nearly $2 trillion in cash sits in corporate coffers.

Since the onset of the financial crisis, annual federal spending has increased by an extraordinary $800 billion—more than $10,000 for every American family. This has driven the budget deficit to 10% of GDP, far above the previous peacetime record. The Obama administration has proposed to lock a sizable portion of that additional spending into government programs and to finance it with higher taxes and debt. The Fed recently announced it would continue buying long-term Treasury debt, adding to the risk of future inflation.

There is perhaps no better indicator of the destructive path that these policy deviations have put us on than the federal budget. The nearby chart puts the fiscal problem in perspective. It shows federal spending as a percent of GDP, which is now at 24%, up sharply from 18.2% in 2000.

Future federal spending, driven mainly by retirement and health-care promises, is likely to increase beyond 30% of GDP in 20 years and then keep rising, according to the Congressional Budget Office. The reckless expansions of both entitlements and discretionary programs in recent years have only added to our long-term fiscal problem.

As the chart shows, in all of U.S. history, there has been only one period of sustained decline in federal spending relative to GDP. From 1983 to 2001, federal spending relative to GDP declined by five percentage points. Two factors dominated this remarkable period. First was strong economic growth. Second was modest spending restraint—on domestic spending in the 1980s and on defense in the 1990s.

The good news is that we can change these destructive policies by adopting a strategy based on proven economic principles:

• First, take tax increases off the table. Higher tax rates are destructive to growth and would ratify the recent spending excesses. Our complex tax code is badly in need of overhaul to make America more competitive. For example, the U.S. corporate tax is one of the highest in the world. That's why many tax reform proposals integrate personal and corporate income taxes with fewer special tax breaks and lower tax rates.

But in the current climate, with the very credit-worthiness of the United States at stake, our program keeps the present tax regime in place while avoiding the severe economic drag of higher tax rates.

• Second, balance the federal budget by reducing spending. The publicly held debt must be brought down to the pre-crisis safety zone. To do this, the excessive spending of recent years must be removed before it becomes a permanent budget fixture. The government should begin by rescinding unspent "stimulus" and TARP funds, ratcheting down domestic appropriations to their pre-binge levels, and repealing entitlement expansions, most notably the subsidies in the health-care bill.

The next step is restructuring public activities between federal and state governments. The federal government has taken on more responsibilities than it can properly manage and efficiently finance. The 1996 welfare reform, which transferred authority and financing for welfare from the federal to the state level, should serve as the model. This reform reduced welfare dependency and lowered costs, benefiting taxpayers and welfare recipients.

• Third, modify Social Security and health-care entitlements to reduce their explosive future growth. Social Security now promises much higher benefits to future retirees than to today's retirees. The typical 30-year-old today is scheduled to get an inflation-adjusted retirement benefit that is 50% higher than the benefit for a typical current retiree.

Benefits paid to future retirees should remain at the same level, in terms of purchasing power, that today's retirees receive. A combination of indexing initial benefits to prices rather than to wages and increasing the program's retirement age would achieve this goal. They should be phased-in gradually so that current retirees and those nearing retirement are not affected.

Health care is far too important to the American economy to be left in its current state. In markets other than health care, the legendary American shopper, armed with money and information, has kept quality high and costs low. In health care, service providers, unaided by consumers with sufficient skin in the game, make the purchasing decisions. Third-party payers—employers, governments and insurance companies—have resorted to regulatory schemes and price controls to stem the resulting cost growth.

The key to making Medicare affordable while maintaining the quality of health care is more patient involvement, more choices among Medicare health plans, and more competition. Co-payments should be raised to make patients and their physicians more cost-conscious. Monthly premiums should be lowered to provide seniors with more disposable income to make these choices. A menu of additional Medicare plans, some with lower premiums, higher co-payments and improved catastrophic coverage, should be added to the current one-size-fits-all program to encourage competition.

Similarly for Medicaid, modest co-payments should be introduced except for preventive services. The program should be turned over entirely to the states with federal financing supplied by a "no strings attached" block grant. States should then allow Medicaid recipients to purchase a health plan of their choosing with a risk-adjusted Medicaid grant that phases out as income rises.

The 2010 health-care law undermined positive reforms underway since the late 1990s, including higher co-payments and health savings accounts. The law should be repealed before its regulations and price controls further damage availability and quality of care. It should be replaced with policies that target specific health market concerns: quality, affordability and access. Making out-of-pocket expenditures and individual purchases of health insurance tax deductible, enhancing health savings accounts, and improving access to medical information are keys to more consumer involvement. Allowing consumers to buy insurance across state lines will lower the cost of insurance.

• Fourth, enact a moratorium on all new regulations for the next three years, with an exception for national security and public safety. Going forward, regulations should be transparent and simple, pass rigorous cost-benefit tests, and rely to a maximum extent on market-based incentives instead of command and control. Direct and indirect cost estimates of regulations and subsidies should be published before new regulations are put into law.

Off-budget financing should end by closing Fannie Mae and Freddie Mac. The Bureau of Consumer Finance Protection and all other government agencies should be on the budget that Congress annually approves. An enhanced bankruptcy process for failing financial firms should be enacted in order to end the need for bailouts. Higher bank capital requirements that rise with the size of the bank should be phased in.

• Fifth, monetary policy should be less discretionary and more rule-like. The Federal Reserve should announce and follow a monetary policy rule, such as the Taylor rule, in which the short-term interest rate is determined by the supply and demand for money and is adjusted through changes in the money supply when inflation rises above or falls below the target, or when the economy goes into a recession. When monetary policy decisions follow such a rule, economic stability and growth increase.

In order to reduce the size of the Fed's bloated balance sheet without causing more market disruption, the Fed should announce and follow a clear and predictable exit rule, which describes a contingency path for bringing bank reserves back to normal levels. It should also announce and follow a lender-of-last-resort rule designed to protect the payment system and the economy—not failing banks. Such a rule would end the erratic bailout policy that leads to crises.

The United States should, along with other countries, agree to a target for inflation in order to increase expected price stability and exchange rate stability. A new accord between the Federal Reserve and Treasury should re-establish the Fed's independence and accountability so that it is not called on to monetize the debt or engage in credit allocation. A monetary rule is a requisite for restoring the Fed's independence.

These pro-growth policies provide the surest path back to prosperity.

Mr. Shultz, a former secretary of labor, secretary of Treasury and secretary of state, is a fellow at Stanford University's Hoover Institution. Mr. Boskin, a professor of economics at Stanford University and a senior fellow at the Hoover Institution, chaired the Council of Economic Advisers under President George H.W. Bush. Mr. Cogan, a senior fellow at the Hoover Institution, was deputy director of the Office of Management and Budget under President Ronald Reagan. Mr. Meltzer is professor of political economy at Carnegie Mellon University. Mr. Taylor, an economics professor at Stanford and a senior fellow at the Hoover Institution, was undersecretary of Treasury under President George W. Bush.

Bob Jensen's threads on the bailout are at
http://www.trinity.edu/rjensen/2008bailout.htm


"Harder to buy US Treasuries," Shangai Daily, December 18, 2009 ---
http://www.shanghaidaily.com/article/print.asp?id=423054

IT is getting harder for governments to buy United States Treasuries because the US's shrinking current-account gap is reducing supply of dollars overseas, a Chinese central bank official said yesterday.

The comments by Zhu Min, deputy governor of the People's Bank of China, referred to the overall situation globally, not specifically to China, the biggest foreign holder of US government bonds.

Chinese officials generally are very careful about commenting on the dollar and Treasuries, given that so much of its US$2.3 trillion reserves are tied to their value, and markets always watch any such comments closely for signs of any shift in how it manages its assets.

China's State Administration of Foreign Exchange reaffirmed this month that the dollar stands secure as the anchor of the currency reserves it manages, even as the country seeks to diversify its investments.

In a discussion on the global role of the dollar, Zhu told an academic audience that it was inevitable that the dollar would continue to fall in value because Washington continued to issue more Treasuries to finance its deficit spending.

He then addressed where demand for that debt would come from.

"The United States cannot force foreign governments to increase their holdings of Treasuries," Zhu said, according to an audio recording of his remarks. "Double the holdings? It is definitely impossible."

"The US current account deficit is falling as residents' savings increase, so its trade turnover is falling, which means the US is supplying fewer dollars to the rest of the world," he added. "The world does not have so much money to buy more US Treasuries."

China continues to see its foreign exchange reserves grow, albeit at a slower pace than in past years, due to a large trade surplus and inflows of foreign investment. They stood at US$2.3 trillion at the end of September.


Where Did Social Security Go So Wrong?
Social Security in the United States currently refers to the Federal Old-Age, Survivors, and Disability Insurance (OASDI) program. It commenced only as an old age ("survivors:") retirement insurance program as a forced way of saving for retirement by paying worker premiums matched by employer contributions into the SS Trust Fund. Premiums were relatively low due heavily to the proviso that the SS Trust Fund got to keep all the premiums paid for each worker and spouse that did not reach retirement age (generally viewed as 65).  Details are provided at
http://en.wikipedia.org/wiki/Social_Security_(United_States)#Creation:_The_Social_Security_Act

If Congress had not tapped the SS Trust Fund for other (generally unfunded social programs of various types), the SS Trust Fund would not be in any trouble at all if it were managed like a diversified investment fund. But it became too tempting for Congress to tap the SS Trust Fund for a variety of other social programs, the costliest of which was to make monthly living allowance payments to each person of any age who is declared "disabled." In many cases a disabled person collects decades of benefits after having paid less than a single penny into the SS Trust Fund. It's well and good for our great land to provide living allowances to disabled citizens, but without funding from other sources such as a separate Disability Trust Fund fed with some type of other taxes, the disability payments mostly drained the SS Trust Fund to where it is in dire trouble today.


Blessed are the young, for they shall inherit the national debt.
Herbert Hoover --- http://www.brainyquote.com/quotes/quotes/h/herberthoo110353.html

Hoover Daily Report (Economics, History, Political Science, Social Science) --- http://www.hoover.org/news/daily-report 


The obligation to pay pensioners as well as disabled persons was passed on to current and future generations to a point where the Social Security and Disability Program is no longer self-sustaining with little hope for meeting entitlement obligations from worker premiums and employer matching funds. The SS Trust Fund will have deficits beginning in 2010 that are expected to explode as baby boomers collect benefits for the first time.

 

Where Did Medicare Go So Wrong?
Medicare is a much larger and much more complicated entitlement burden relative to Social Security by a ratio of about six to one or even more. The Medicare Medical Insurance Fund was established under President Johnson in 1965.

Note that Medicare, like Social Security in general, was intended to be insurance funded by workers over their careers. If premiums paid by workers and employers was properly invested and then paid out after workers reached retirement age most of the trillions of unfunded debt would not be precariously threatening the future of the United States. The funds greatly benefit when workers die before retirement because all that was paid in by these workers and their employers are added to the fund benefits paid out to living retirees.

The first huge threat to sustainability arose beginning in 1968 when medical coverage payments payments to surge way above the Medicare premiums collected from workers and employers. Costs of medical care exploded relative to most other living expenses. Worker and employer premiums were not sufficiently increased for rapid growth in health care costs as hospital stays surged from less than $100 per day to over $1,000 per day.

A second threat to the sustainability comes from families no longer concerned about paying up to $25,000 per day to keep dying loved ones hopelessly alive in intensive care units (ICUs) when it is 100% certain that they will not leave those ICUs alive. Families do not make economic choices in such hopeless cases where the government is footing the bill. In other nations these families are not given such choices to hopelessly prolong life at such high costs. I had a close friend in Maine who became a quadriplegic in a high school football game. Four decades later Medicare paid millions of dollars to keep him alive in an ICU unit when there was zero chance he would ever leave that ICU alive.

On November 22, 2009 CBS Sixty Minutes aired a video featuring experts (including physicians) explaining how the single largest drain on the Medicare insurance fund is keeping dying people hopelessly alive who could otherwise be allowed to die quicker and painlessly without artificially prolonging life on ICU machines.
"The Cost of Dying," CBS Sixty Minutes Video, November 22, 2009 ---
http://www.cbsnews.com/video/watch/?id=5737138n&tag=contentMain;cbsCarousel

What is really sad is the way Republicans are standing in the way of making rational cost-benefit decisions about dying by exploiting the "Kill Granny" political strategy aimed at killing a government option in health care reform.
See the "Kill Granny" strategy at --- www.defendyourhealthcare.us

The third huge threat to the economy commenced in when disabled persons (including newborns) tapped into the Social Security and Medicare insurance funds. Disabled persons should receive monthly benefits and medical coverage in this great land. But Congress should've found a better way to fund disabled persons with something other than the Social Security and Medicare insurance funds. But politics being what it is, Congress slipped this gigantic entitlement through without having to debate and legislate separate funding for disabled persons. And hence we are now at a crossroads where the Social Security and Medicare Insurance Funds are virtually broke for all practical persons.

Most of the problem lies is Congressional failure to sufficiently increase Social Security deductions (for the big hit in monthly payments to disabled persons of all ages) and the accompanying Medicare coverage (to disabled people of all ages). The disability coverage also suffers from widespread fraud.

Other program costs were also added to the Social Security and Medicare insurance funds such as the education costs of children of veterans who are killed in wartime. Once again this is a worthy cause that should be funded. But it should've been separately funded rather than simply added into the Social Security and Medicare insurance funds that had not factored such added costs into premiums collected from workers and employers.

The fourth huge problem is that most military retirees are afforded full lifetime medical coverage for themselves and their spouses. Although they can use Veterans Administration doctors and hospitals, most of these retirees opted for the unfunded  TRICARE plan the pushed most of the hospital and physician costs onto the Medicare Fund. Unlike where other workers had Medicare deductions taken from their paychecks with employer matchinf funds over the years, TRICARE coverage was dumped on Medicare without prior funding. This became a huge drain on the Medicare fund.

The fifth threat to sustainability came when actuaries failed to factor in the impact of advances in medicine for extending lives. This coupled with the what became the biggest cost of Medicare, the cost of dying, clobbered the insurance funds. Surpluses in premiums paid by workers and employers disappeared much quicker than expected.

A sixth threat to Medicare especially has been widespread and usually undetected fraud such as providing equipment like motorized wheel chairs to people who really don't need them or charging Medicare for equipment not even delivered. There are also widespread charges for unneeded medical tests or for tests that were never really administered. Medicare became a cash cow for crooks. Many doctors and hospitals overbill Medicare and only a small proportion of the theft is detected and punished.

The seventh threat to sustainability commenced in 2007 when the costly Medicare drug benefit entitlement entitlement was added by President George W. Bush. This was a costly addition, because it added enormous drains on the fund by retired people like me and my wife who did not have the cost of the drug benefits factored into our payments into the Medicare Fund while we were still working. It thus became and unfunded benefit that we're now collecting big time.

In any case we are at a crossroads in the history of funding medical care in the United States that now pays a lot more than any other nation per capita and is getting less per dollar spent than many nations with nationalized health care plans. I'm really not against Obamacare legislation. I'm only against the lies and deceits being thrown about by both sides in the abomination of the current proposed legislation.

Democrats are missing the boat here when they truly have the power, for now at least, in the House and Senate to pass a relatively efficient nationalized health plan. But instead they're giving birth to entitlements legislation that threatens the sustainability of the United States as a nation.

In any case, The New York Times presents a nice history of other events that I left out above ---
http://www.nytimes.com/interactive/2009/07/19/us/politics/20090717_HEALTH_TIMELINE.html

"THE HEALTH CARE DEBATE: What Went Wrong? How the Health Care Campaign Collapsed --
A special report.; For Health Care, Times Was A Killer," by Adam Clymer, Robert Pear and Robin Toner, The New York Times, August 29, 1994 --- Click Here
http://www.nytimes.com/1994/08/29/us/health-care-debate-what-went-wrong-health-care-campaign-collapsed-special-report.html

November 22, 2009 reply from Richard.Sansing [Richard.C.Sansing@TUCK.DARTMOUTH.EDU]

The electorate's inability to debate trade-offs in a sensible manner is the biggest problem, in my view. See

http://www.washingtonpost.com/wp-dyn/content/article/2009/11/19/AR2009111904053.html?referrer=emailarticle 

Richard Sansing


The New York Times
Timeline History of Health Care Reform in the United States
---
http://www.nytimes.com/interactive/2009/07/19/us/politics/20090717_HEALTH_TIMELINE.html
Click the arrow button on the right side of the page. The biggest problem with "reform" is that it added entitlements benefits without current funding such that with each reform piece of legislation the burdens upon future generations has hit a point of probably not being sustainable.

Call it the fatal arithmetic of imperial decline. Without radical fiscal reform, it could apply to America next.
Niall Ferguson, "An Empire at Risk:  How Great Powers Fail," Newsweek Magazine Cover Story, November 26, 2009 --- http://www.newsweek.com/id/224694/page/1

. . .

In other words, there is no end in sight to the borrowing binge. Unless entitlements are cut or taxes are raised, there will never be another balanced budget. Let's assume I live another 30 years and follow my grandfathers to the grave at about 75. By 2039, when I shuffle off this mortal coil, the federal debt held by the public will have reached 91 percent of GDP, according to the CBO's extended baseline projections. Nothing to worry about, retort -deficit-loving economists like Paul Krugman.

. . .

Another way of doing this kind of exercise is to calculate the net present value of the unfunded liabilities of the Social Security and Medicare systems. One recent estimate puts them at about $104 trillion, 10 times the stated federal debt.

Continued in article

 

This is now President Obama's problem with or without new Obamacare entitlements that are a mere drop in the bucket compared to the entitlement obligations that President Obama inherited from every President of the United States since FDR in the 1930s. The problem has been compounded under both Democrat and Republican regimes, both of which have burdened future generations with entitlements not originally of their doing.

Professor Niall Ferguson and David Walker are now warning us that by year 2050 the American Dream will become an American Nightmare in which Americans seek every which way to leave this fallen nation for a BRIC nation offering some hope of a job, health care, education, and the BRIC Dream.

 

Bob Jensen's threads on health care ---
http://www.trinity.edu/rjensen/Health.htm

 

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 

Ten Trillion and Counting (a full-length PBS Frontline video) --- http://www.pbs.org/wgbh/pages/frontline/tentrillion/view/
All of the federal government's efforts to stem the tide of the financial meltdown have added hundreds of billions of dollars to an already staggering national debt, a sum that is expected to double over the next 10 years to more than $23 trillion. In Ten Trillion and Counting, FRONTLINE traces the politics behind this mounting debt and investigates what some say is a looming crisis that makes the current financial situation pale in comparison.


No sugar coating from this Wharton professor
"National Retirement Expert: 75 needs to be the new 62," by Carla Fried, CBS Moneywatch, June 2010 ---
http://moneywatch.bnet.com/retirement-planning/blog/retirement-beat/national-retirement-expert-75-needs-to-be-the-new-62/644/

Olivia Mitchell is one of the nation’s foremost retirement experts, having spent an impressive career studying the evolving nature of retirement planning issues for individuals, corporations and government. The short version of Mitchell’s resume is that she is a professor at the Wharton School at the University of Pennsylvania and executive director of the Pension Research Council. I’ll let you peruse Mitchell’s full 23-page CV at your own leisure.

So I was interested to read a recent PRC paper Mitchell penned that digs into some of the most pressing retirement security issues in the wake of the financial crisis.

Sugarcoating is not her way.

My message is straightforward and, I fear, not particularly upbeat: current and future generations of managers and employees will not be able to use the ‘old fashioned’ model of provisioning for retirement. Instead, the 21st century economy will require an entirely new perspective on retirement risk management.

From there Mitchell ticks off the big risks weighing on the current model: We’re not saving enough, we don’t have a clue how to deal with longevity risk — in fact, we don’t have a clue about basic financial concepts — traditional pensions are in major trouble, the PBGC is not exactly rock solid, and then there’s the little issue of Social Security, a topic near and dear to her heart, having served on the 2001 bipartisan presidential Commission to Strengthen Social Security

The Retirement Fix

Mitchell concludes the report with a perfectly serviceable call to action:

Part of the task is to enhance financial literacy and political responsibility.  We will also need to save more, invest smarter, and insure better against longevity. Another task will be to develop new products which can be used to hedge longevity and better protect against very long term risks including inflation.

What struck me in her report was this final thought:

But when all is said and done, most of us will simply have to work longer to preserve some flexibility against shocks in the long run.

And there it is: one of the nation’s foremost retirement thinkers concludes that at the end of the day, it’s working longer that is going to be our ticket out of any shortfalls and “shocks.”

Retire Early….at 75

Mitchell points out that working two to four more years can go a long way to closing a retirement funding gap. But that’s directed at Baby Boomers. Given ever-expanding longevity forecasts for younger generations she has this bit of advice for Gen X and Gen Y:

For the younger generation, age 75 might be a good target for early retirement, and later if possible!

Confirmation, from one of the country’s leading retirement thinkers, that 75 may indeed be the new 55.

Jensen Comment
At the moment we're between a rock and a hard place apart from each person's private problem concerning retirement. The global problem is that extending retirement age to 75 contributes significantly to decline of employment opportunities for younger people versus the need to extend retirement age to 75 to save the U.S. Social Security and Medicare entitlement programs.

Video on IOUSA Bipartisan Solutions to Saving the USA

If you missed Sunday afternoon CNN’s two-hour IOUSA Solutions broadcast, you can watch a 30-minute version at
http://www.pgpf.org/newsroom/press/IOUSA-Solutions-Premiers-on-CNN/   (Scroll Down a bit)
Note that great efforts were made to keep this a bipartisan panel along with the occasional video clips of President Obama discussing the debt crisis. The problem is a build up over spending for most of our nation’s history, It landed at the feet of President Obama, but he’s certainly not the cause nor is his the recent expansion of health care coverage the real cause.

One take home from the CNN show was that over 60% of the booked National Debt increases are funded off shore (largely in Asia and the Middle East).
This going to greatly constrain the global influence and economic choices of the United States.

By 2016 the interest payments on the National Debt will be the biggest single item in the Federal Budget, more than national defense or social security. And an enormous portion of this interest cash flow will be flowing to foreign nations that may begin to put all sorts of strings on their decisions  to roll over funding our National Debt.

The unbooked entitlement obligations that are not part of the National Debt are over $60 trillion and exploding exponentially. The Medicare D entitlements to retirees like me added over $8 trillion of entitlements under the Bush Presidency.

Most of the problems are solvable except for the Number 1 entitlements problem --- Medicare.
Drastic measures must be taken to keep Medicare sustainable.

 

I thought the show was pretty balanced from a bipartisan standpoint and from the standpoint of possible solutions.

Many of the possible “solutions” are really too small to really make a dent in the problem. For example, medical costs can be reduced by one of my favorite solutions of limiting (like they do in Texas) punitive damage recoveries in malpractice lawsuits. However, the cost savings are a mere drop in the bucket. Another drop in the bucket will be the achievable increased savings from decreasing medical and disability-claim frauds. These are important solutions, but they are not solutions that will save the USA.

The big possible solutions to save the USA are as follows (you and I won’t particularly like these solutions):

 

 

Watch for the other possible solutions in the 30-minute summary video ---
http://www.pgpf.org/newsroom/press/IOUSA-Solutions-Premiers-on-CNN/
(Scroll Down a bit)

 


Spending Deficits and Unfunded Entitlements
There are two economic disasters facing the United States. One is the problem of annual spending deficits now approaching trillions of dollars. The far worse problem, however, is unfunded entitlements now approaching $100 trillion. David Walker's mission in life is to warn us about both time bombs.

David Walker, former head of the Government Accountability Office, appeared on the program of the 2009 American Accounting Association Annual Meetings in New York City. He as also appeared previously in those annual meetings.

"Warning: The Deficits Are Coming! The former head of the Government Accountability Office is on a crusade to alert taxpayers to their true obligations," by John Fund, The Wall Street Journal, September 4, 2009 ---
http://online.wsj.com/article/SB10001424052970203585004574392620693542630.html?mod=djemEditorialPage

David Walker sounds like a modern-day Paul Revere as he warns about the country's perilous future. "We suffer from a fiscal cancer," he tells a meeting of the National Taxpayers Union, the nation's oldest anti-tax lobby. "Our off balance sheet obligations associated with Social Security and Medicare put us in a $56 trillion financial hole—and that's before the recession was officially declared last year. America now owes more than Americans are worth—and the gap is growing!"

His audience sits in rapt attention. A few years ago these antitax activists would have been polite but a tad restless listening to the former head of the Government Accountability Office, the nation's auditor-in-chief. Higher taxes is what hikes their blood pressure the most, but the profligate spending of the Bush and Obama administrations has put them in a mood to listen to this green-eyeshade Cassandra. "He's so unlike most politicians," says Sharron Angle, a former state legislator from Nevada, "his message is clear, detailed and with no varnish."

Mr. Walker, a 57-year-old accountant, didn't set out to be a fiscal truth-teller. He rose to be a partner and global managing director of Arthur Anderson, before being named assistant secretary of labor for pensions and benefits during the Reagan administration. Under the first President Bush, he served as a trustee for Social Security and Medicare, an experience that convinced him both programs are looming train wrecks that could bankrupt the country. In 1998 he was appointed by President Bill Clinton to head the GAO, where he spent the next decade issuing reports trying to stem waste, fraud and abuse in government.

Despite many successes, he was able to make only limited progress in reforming Washington's tangled bookkeeping. When he arrived he was told the Pentagon was nearly a decade away from having a clean audit, or clear evidence that its financial statements were accurate. When he left in 2008, he was told the Pentagon was still a decade away from that goal. "If the federal government was a private corporation, its stock would plummet and shareholders would bring in new management and directors," he said as he retired from the GAO.

Although he found the work fulfilling, Mr. Walker said he decided to leave last year with a third of his 15-year term left because "there are practical limits on what one can—and cannot—do in that job." He became president and CEO of the Peter G. Peterson Foundation, a group seeking to educate the public and policy makers on the need for fiscal prudence. Although it accepts private donations, its own future is secure given that Mr. Peterson, a former head of the Blackstone private equity firm and secretary of commerce under Richard Nixon, has endowed it with a $1 billion gift.

We met to hash over current events in his tastefully appointed office just off of New York's Fifth Avenue. Mr. Walker, a lean man with an unflappable demeanor, welcomed me with the observation that he's never been in more demand as a speaker "but it's only because everyone is so worried for our future."

His group calls itself strictly nonpartisan and nonideological, and that seems to limit how tough and specific it can be. Last year, it released a documentary "I.O.U.S.A.," that followed Mr. Walker as he toured the country on his fiscal "wake up" tour. The solutions the film proposes for the debt crisis are either glib or gray: The country should save more, reduce oil consumption, hold politicians accountable and get more value from health-care spending.

But in its diagnosis of the problem the film scores a bull's-eye. Among the fiscal hawks featured in the film is Rep. Ron Paul, who memorably tells Alan Greenspan that if doctors had the same success rate in meeting his goals as the Fed has had, patients would be dead all over America.

Mr. Walker's own speeches are vivid and clear. "We have four deficits: a budget deficit, a savings deficit, a value-of-the-dollar deficit and a leadership deficit," he tells one group. "We are treating the symptoms of those deficits, but not the disease."

Mr. Walker identifies the disease as having a basic cause: "Washington is totally out of touch and out of control," he sighs. "There is political courage there, but there is far more political careerism and people dodging real solutions." He identifies entrenched incumbency as a real obstacle to change. "Members of Congress ensure they have gerrymandered seats where they pick the voters rather than the voters picking them and then they pass out money to special interests who then make sure they have so much money that no one can easily challenge them," he laments. He believes gerrymandering should be curbed and term limits imposed if for no other reason than to inject some new blood into the system. On campaign finance, he supports a narrow constitutional amendment that would bar congressional candidates from accepting contributions from people who can't vote for them: "If people can't vote in a district not their own, should we allow them to spend unlimited money on behalf of someone across the country?"

Recognizing those reforms aren't "imminent," Mr. Walker wants Congress to create a "fiscal future commission" that would hold hearings all over America to move towards a consensus on reform. It would then present Congress with a "grand bargain" on entitlement and budget-control reforms. Its recommendations would be guaranteed a vote in Congress and be subject to only limited amendments. I note that critics have called such a commission an end-run around the normal legislative process. He demurred, saying that Congress would still have to approve any recommendations in an up-or-down vote—much like the successful base-closing commission created by GOP Rep. Dick Armey in the 1980s.

What kind of reforms would Mr. Walker hope the commission would endorse? He suggests giving presidents the power to make line-item cuts in budgets that would then require a majority vote in Congress to override. He would also want private-sector accounting standards extended to pensions, health programs and environmental costs. "Social Security reform is a layup, much easier than Medicare," he told me. He believes gradual increases in the retirement age, a modest change in cost-of-living payments and raising the cap on income subject to payroll taxes would solve its long-term problems.

Medicare is a much bigger challenge, exacerbated by the addition of a drug entitlement component in 2003, pushed through a Republican Congress by the Bush administration. "The true costs of that were hidden from both Congress and the people," Mr. Walker says sternly. "The real liability is some $8 trillion."

That brings us to the issue of taxes. Wouldn't any "grand bargain" involve significant tax increases that would only hurt the ability of the economy to grow? "Taxes are going up, for reasons of math, demographics and the fact that elements of the population that want more government are more politically active," he insists. "The key will be to have tax reform that simplifies the system and keeps marginal rates as low as possible. The longer people resist addressing both sides of the fiscal equation the deeper the hole will get."

I steer towards the fiscal direction of the Obama administration. He says his stimulus bill was sold as something it wasn't: "A number of people had agendas other than stimulus, and they shaped the package."

As for health care, Mr. Walker says he had hopes for comprehensive health-care reform earlier this year and met with most of the major players to fashion a compromise. "President Obama got the sequence wrong by advocating expanding coverage before we've proven our ability to control costs," he says. "If we don't get our fiscal house in order, but create new obligations we'll have a Thelma and Louise moment where we go over the cliff." Mr. Walker's preferred solution is a plan that combines universal coverage for all Americans with an overall limit on the federal government's annual health expenditures. His description reminds me of the unicorn—a marvelous creature we all wish existed but is not likely to ever be seen on this earth.

As I prepare to go, Mr. Walker returns to the theme of economic education. Poor schools often produce young people with few tools to help them realize the extent of the fiscal trap their generation is going to fall into.

One way the Peterson Foundation wants to change that is to bring big numbers down to earth so people can comprehend them. "Our $56 trillion in unfunded obligations amount to $483,000 per household. That's 10 times the median household income—so it's as if everyone had a second or third mortgage on a house equal to 10 times their income but no house they can lay claim to." As for this year's likely deficit of $1.8 trillion, Mr. Walker suggests its size be conveyed thusly: "A deficit that large is $3.4 million a minute, $200 million an hour, $5 billion a day," he says. That does indeed put things into perspective.

Despite an occasional detour into support for government intervention, Mr. Walker remains the Jeffersonian he grew up as in his native Virginia. "I view the Constitution with deep respect," he told me. "My ancestors and those of my wife fought and died in the Revolution, and I care a lot about returning us to the principles of the Founding Fathers."

He notes that today the role of the federal government has grown such that last year less than 40% of it related to the key roles the Founders envisioned for it: defense, foreign policy, the courts and other basic functions. "What happened to the Founders' intent that all roles not expressly reserved to the federal government belong to the states, and ultimately the people?" he asks. "I'm pleased the recent town halls show people are waking up and realizing it's time to pay attention to first principles."

With that we parted, as he had to get back to work. Today's Paul Revere is hard at work on a book due out in January from Random House that will be called, "Come Back America."

From Bob Jensen's threads on entitlements --- http://www.trinity.edu/rjensen/Entitlements.htm

The US government is on a “burning platform” of unsustainable policies and practices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon.
David M. Walker, Former Chief Accountant of the United States --- http://www.financialsense.com/editorials/quinn/2009/0218.html
Also see his dire warnings on CBS Sixty Minutes on the unbooked national debt for entitlements (See below)

IOUSA (the most frightening movie in American history) --- (see a 30-minute version of the documentary at www.iousathemovie.com ).
A Must Read for All Americans

The most important article for the world to read now is the following interview with a former Andersen Partner and former Chief Accountant of the United States:
"Debt Crusader David Walker sounds the alarm for America's financial future," Journal of Accountancy, March 2009 --- http://www.journalofaccountancy.com/Issues/2009/Mar/DebtCrusader.htm 

David Walker is a man on a mission. As U.S. comptroller general, he used the bully pulpit to fuel a campaign of town hall meetings highlighting the country’s ballooning federal deficit. The Fiscal Wake-Up Tour and the publicity it generated begat the documentary I.O.U.S.A. Walker hopes the film will do for fiscal irresponsibility what Al Gore’s An Inconvenient Truth did for global warming—mobilize new citizen activists and pressure politicians to act.

A year ago, Walker stepped away from the five-plus remaining years on his term as comptroller general and head of the Government Accountability Office. He had been recruited by billionaire Pete Peterson, a co-founder of the private- equity fund The Blackstone Group, to become president and CEO of Peterson’s foundation. The Peter G. Peterson Foundation, a nonprofit to which Peterson has pledged $1 billion, focuses on issues such as the deficit, savings levels, entitlement benefits, health care costs, and the nation’s tax system.

Walker talked with the JofA recently about the deficit and the financial crisis. What follow are excerpts from that conversation.

JofA: What did you hope to accomplish when you set out on your speaking tour and got involved with the documentary I.O.U.S.A., and what progress has been made on those goals?

Walker: I have been to over 42 states, giving speeches, participating in town hall meetings, meeting with business community leaders, local television and radio stations, and editorial boards with the objective of trying to state the facts and speak the truth about the deteriorating financial condition of the United States government and the need for us to start making some tough choices on budget controls, tax policy, entitlement reform and spending constraints. And the good news is that people get it. The American people are a lot smarter than many people give them credit for—especially elected officials

Well, a lot has happened since we started the Fiscal Wake-Up Tour. Two significant events would be the 60 Minutes piece, which ran twice in 2007, and that led to the commercial documentary I.O.U.S.A. (see a 30-minute version of the documentary at www.iousathemovie.com ). So there’s a lot more visibility on our issue, and I think that’s encouraging. The other thing that has happened is the recent market meltdown and bailouts of some very venerable institutions in the financial services industry have served to bring things home to America. The concept of “too big to fail” is just not reality anymore, and when you take on too much debt and you don’t have adequate cash flow, some very bad things can happen.

Here’s the key. The factors that led to the mortgage-based subprime crisis exist for the federal government’s finances. Therefore, we must take steps to avoid a super subprime crisis, which frankly would have much more disastrous effects not only domestically but around the world.

JofA:
How does the economic crisis affect your message and the outlook for the kind of wide-scale changes you think need to be made?

Walker:
What’s critical is that we take advantage of the teachable moment associated with the market meltdown and the failure of some of the most prominent financial institutions in the country to help the American people know that nobody can live beyond his means forever. And that goes for government, too.

We have a new president, and therefore we have an opportunity to press the reset button, and I hope President Obama will do two things: That he will assure Americans that he will do what it takes to turn the economy around. I think it is critically important that he also focus on the future and be able to put a mechanism in place like a fiscal future commission so that once we turn the corner on the economy, we have a set of recommendations Congress and the president would be able to consider about budget controls, tax reform, entitlement reform—things that are clear and compelling that we need to act on.

Individuals need to understand that the government has overpromised and under-delivered for far too long. It is going to have to engage in some dramatic and fundamental reform of existing entitlement programs, spending policies and tax policies. The government will be there to provide a safety net through Social Security, a foundation of retirement security, and it will be there to help those that are in need. In general, most individuals are going to have to assume more responsibility for their own financial future, and the earlier they understand that the better off they are going to be. They need to have a financial plan, a budget, make prudent use of debt, save, invest their savings for specified purposes and, very importantly, preserve their savings for the intended purpose, including retirement income.

I believe the government policies are going to have to encourage people to work longer by increasing the eligibility ages for many government programs. So if people want to retire at an earlier age, they are going to have to plan, save, invest and preserve those savings for retirement purposes.

JofA:
You’ve called the current U.S. health care system unsustainable. How can the system be fixed without negatively affecting the care Americans need?

Walker:
Our current health care system is not really a system. It’s an amalgamation of a bunch of different things that have occurred over the years, and it’s unacceptable and unsustainable. We spend twice per capita what any other country on the Earth does. We have the highest uninsured population of any industrialized nation. We have below average health care outcomes. So the value of the equation just does not compute.

We are going to need to do two things on health care. We are going to need to take some steps quickly to reduce the rate of increase in health care cost. We are also going to have to better target taxpayer subsidies and tax preferences for health care.

We are also going to end up needing to move toward trying to achieve comprehensive health care reform that accomplishes four key goals. First: achieve universal coverage for basic and essential health care—based on broad-based societal needs, not unlimited individual wants—that’s affordable and sustainable over time and that avoids taxpayer-funded heroic measures. Secondly, the federal government has to have a budget for health care. We are the only nation on Earth dumb enough to write a blank check for health care. It could bankrupt the country. We have to have constraints. Thirdly, we need national evidence-based practice standards for the practice of medicine and for the issuance of prescription drugs to improve consistency, enhance quality, reduce costs and dramatically reduce litigation risks. And last, but certainly not least, we have to require personal responsibility and accountability for our own health and wellness in a whole range of areas including obesity.

JofA:
What drives you?

Walker: My family has been in this country since the 1680s, and I have ancestors who fought and died in the American Revolution. So I care very deeply about this country, and I am a big history buff. I believe you need to study history in order to learn from it in order not to make some of the same mistakes that others have made in the past.

Secondly, I am only the second person in my direct Walker line to graduate from college. My dad was the first. Therefore, I am somewhat of an example of what someone can accomplish in this great country if you get an education, if you have a positive attitude, if you work hard, if you have good morals and ethical values.

My personal mission in life is to be able to make a difference, to try and make a difference in the lives of others, to try and help make sure our country stays strong, that the American dream stays alive, and that the future will be better for my children and my grandchildren.

Links to David Walkers videos, including his famous CBS Sixty Minutes bell ringer that is far more frightening and sobering than anything Rush Limbaugh is screaming about. You never, ever hear Keith Olbermann, Barack Obama, Nancy Pelosi, or Harry Reid so much as whisper the name of David Walker (See below).

 

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 $100 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

 


"The U.S. Isn't as Free as It Used to Be:  Canada now boasts North America's freest economy," by Terry Miller, The Wall Street Journal, January 19, 2010 ---
http://online.wsj.com/article/SB10001424052748704541004575011684172064228.html#mod=djemEditorialPage

The United States is losing ground to its major competitors in the global marketplace, according to the 2010 Index of Economic Freedom released today by the Heritage Foundation and The Wall Street Journal. This year, of the world's 20 largest economies, the U.S. suffered the largest drop in overall economic freedom. Its score declined to 78 from 80.7 on the 0 to 100 Index scale.

The U.S. lost ground on many fronts. Scores declined in seven of the 10 categories of economic freedom. Losses were particularly significant in the areas of financial and monetary freedom and property rights. Driving it all were the federal government's interventionist responses to the financial and economic crises of the last two years, which have included politically influenced regulatory changes, protectionist trade restrictions, massive stimulus spending and bailouts of financial and automotive firms deemed "too big to fail." These policies have resulted in job losses, discouraged entrepreneurship, and saddled America with unprecedented government deficits.

In the world-wide rankings of economic freedom, the U.S. fell to eighth from sixth place. Canada now ranks higher and boasts North America's freest economy. More worrisome, for the first time in the Index's 16-year history, the U.S. has fallen out of the elite group of countries identified as "economically free" by the objective measures of the Index. Four Asia-Pacific economies now sit atop the global rankings. Hong Kong stands in first place for the 16th consecutive year, followed by Singapore, Australia and New Zealand. Every region of the world maintains at least one country among those deemed "free" or "mostly free" by the Index.

Some countries, notably Britain and China, have followed America's poor example and curtailed economic freedom. But many others—such as Poland, South Korea, Mexico, Japan, Germany and even France—have maintained or expanded economic freedom despite the global crisis. Ignoring the pressures of recession, these enlightened nations have continued to liberalize their economies, granting their entrepreneurs and consumers greater freedom. As a result, the average Index score dropped only 0.1 point in 2010. Eighty-one countries out of the 179 ranked recorded higher scores than in 2009.

These trends are important because study after study shows a strong correlation between economic freedom and prosperity. Citizens of economically freer countries enjoy much higher per-capita incomes on average than those who live in less free economies. Economic freedom also has positive impacts on overall quality of life, political and social conditions, and even on protection of the environment. Perhaps of most significance in these hard times, Index data indicate that freer economies do a much better job of reducing poverty than more highly

The public sector can't match the vitality of the private sector in promoting growth. Governments, even those that promise change, are primarily agents of the status quo. They tend to reflect the views and needs of those already holding political or economic power. Even democratic nations have their vested interests. Real change, however, can happen when those outside the mainstream have the freedom to try new things: new production processes, new technologies and new methods of organizing workers and capital.

It is common these days to dismiss as simpletons or ideologues those who speak in favor of the free market or capitalism. An honest assessment shows otherwise. Economic freedom, as represented in the Index of Economic Freedom, is a philosophy that rejects economic dogma, championing instead the diversity that follows when entrepreneurs are free to choose their own paths to prosperity.

The abiding lesson of the last few years is that the battle for liberty requires perpetual vigilance. President Obama professes desire to foster prosperity, environmental protection, poverty reduction and better health care. How ironic, then, that his economic proposals so consistently ignore or even undermine the one system—free enterprise capitalism—that has proven best able to achieve those goals.

Now America's once high-flying economy is barely crawling forward. Americans deserve better, and they can do better—as soon as they reverse course and start regaining the economic freedom that made America the most prosperous country in the world.

Mr. Miller is director of the Center for International Trade and Economics at the Heritage Foundation. He is co-editor, with Kim R. Holmes, of the "2010 Index of Economic Freedom" (471 pages, $24.95), available at heritage.org/index.

 



"Entitlement Rip Off," by John Stossel, Townhall, March 14, 2010 ---
http://townhall.com/columnists/JohnStossel/2010/03/24/entitlement_rip-off

Bernie Madoff took money from people who thought he'd invested it, gave some to others who thought it was a partial return on their earlier investments and kept much for himself. That's called a Ponzi scheme, and his $50 billion fraud was called the biggest ever. But it wasn't the biggest. Social Security and Medicare are much bigger ones.

These are trillion-dollar scams. Medicare has a $36 trillion unfunded liability. Social Security's is $8 trillion. There's no money to keep those promises.

But Congress isn't investigating this scam. Congress runs it. That FICA money you thought government had saved for your retirement is gone. There's nothing left but IOUs backed by nothing. Your money was spent not only on current retirees but on wars, welfare, corporate bailouts, earmarks and all the other stuff Congress wants. For years, this was possible because the FICA tax brought in surpluses that allowed government to pay retirees more than they contributed and still help buy those other things.

Those days are gone. The huge group of baby boomers has started to retire, and that means trouble. In 2008, for the first time, Medicare paid out more than it took in.

So instead of filling the government's coffers and hiding the real size of the budget deficit, the entitlement programs have now begun to drain the treasury. Part of the "problem" is that we live longer. When Social Security started, most people didn't live to 65. Now we average 78.

This means that baby boomers like me who expect to collect Social Security and Medicare are basically stealing from children.

Think of the burden: When I was a kid, there were five workers for every retired person. Now, there are only three. And soon there will only be two young workers to fund each baby boomer's Social Security and Medicare checks.

When I explore this alarming matter on my Fox Business New show tomorrow night, Veronique de Rugy, an economist at the Mercatus Center, will point out that Social and Medicare right now consume almost half the federal budget. In coming years, if nothing changes, they will swallow nearly the whole thing. But since Congress will want to spend money on all the other things it now buys -- not to mention a new medical entitlement -- the government will either have to raise taxes to stratospheric heights, borrow like crazy or inflate the dollar. Whichever it chooses, we'll have serious problems.

Higher taxes are not a good solution because taxation suppresses economic activity by transferring capital to politicians. Yet our only hope is a sustained economic boom.

As Rep. Paul Ryan, R-Wis., points out: "You literally cannot tax your way out of this problem. It's not mathematically possible. ... You wipe out the middle class."

Well, how about borrowing? That might mean raising interest rates, which, again, would depress economic activity. Even then, lenders such as China may soon be too nervous to lend Uncle Sam more money. Moody's recently announced it might downgrade America's credit rating.

The most likely outcome is that the Fed will print more money, inflating the currency, so that the creditors are paid with less-valuable dollars. Our purchasing power will disappear.

The architects of the welfare state sure have left us a big mess. Yet hardly anyone talks about entitlements, except to add new ones.

De Rugy asks: Why can't people take care of their own retirement by investing the money government now takes? Had we done this all along, the looming problem would have been averted. Instead, "We're about to witness the biggest, most massive transfer of wealth from the relatively young and poor people of society to the relatively old and wealthy people in society."

Our forefathers would be appalled. After the American Revolution, when the new government was debating how to pay its bills, George Washington said this about a national debt: "We should avoid ungenerously throwing upon posterity ... the burden we ourselves ought to bear." Well, we sure are dumping my generation's debt onto posterity. I wish we had more politicians like George Washington.

 


"The Real Pending Crisis: Public Pensions," by Bruce Bialosky, Townhall, November 2, 2009 ---
http://townhall.com/columnists/BruceBialosky/2009/11/02/the_real_pending_crisis_public_pensions 

President Obama often states that the federal budget cannot be balanced without health insurance reform. Even if that were true, the real crisis that exists already and will only worsen over time comes from the horrendous obligations taken on by state and local governments for public employee pension plans.

Keith Richman caught on to this problem while a California Assemblyman. He has formed the non-profit California Foundation for Fiscal Responsibility to educate elected officials and the public on the looming budget disaster. Fortunately, he is not the only one touting this pending mess. Ron Seeling, the Chief Actuary for CalPERS (the California public employees’ retirement program), has stated the plan is unsustainable. CalPERS represents state employees and 1,500 local governmental entities.

Some would say the pension problem starts with the unionization of public employees. In California, the major catalyst was SB400, signed by Gray Davis in his first year in office, 1999. The bill lowered retirement age for public safety employees to 50 years old and to non-public safety employees to 55 years old. We are in an era when people are living on average until around 80 years old.

The law gives the employee pension benefits of 3.0% of their final income for each year of service. It also made the 3.0% amount retroactive to the beginning of their employment period. That means if you work 20 years you receive a pension benefit equal to 60% of your final income. The problem was compounded by how they calculated the income on which to base the pension.

Everything including the kitchen sink adds to the final income level. Things such as auto allowance and bonuses boost the final number. If the employee did not use vacation pay or holiday pay for the prior 10 years that adds to the base salary to determine the income. Understanding that in most private sector jobs when you do not use your vacation, you lose your vacation, the ability to accumulate vacation time opens up the system for vast manipulation. Peter Nowicki, the Moraga Orinda fire chief, retired at age 50. His final salary was a whopping $185,000, but small compared to his annual pension benefit of $241,000. Making that matter worse, Nowicki was hired as a consultant to the fire department for an additional $176,000 per year -- on top of his retirement benefit.

This is not an isolated case. In Los Angeles County there are over 3,000 people receiving greater than $100,000 per year in pension benefits. In San Francisco, it was found that 25% of employees’ income spiked up over 10% in the final year of their work. The San Francisco grand jury found that amount cost the city $132 million.

Some would argue why not game the system? Let’s say you start working for the government when you are 30 years old and work for 25 years. Your final income with all the fancy calculations ends up at $120,000. That means you would receive $90,000 plus full health care benefits. You can either live on that very nice retirement or you are free to get another position. After all, being 55 years old, you are still in your prime earnings years. Where in the private sector are there comparative opportunities?

These kinds of retirement ages and benefits are why the estimated unfunded liability is soaring. California has estimated unfunded pension and health care liabilities ranging from $100 to $300 billion. The school systems operate under their separate pension program – CalSTRS. The Los Angeles Unified School System estimate for unfunded retiree benefits comes in at about $10 billion. That is one school system, be it the largest, in one state. Estimates show that the LAUSD will soon carve out 30% of its budget for combined retiree health and pension benefits.

California may be the worst example, but not the only example of deplorable financial planning by governmental entities. The original justification for rich benefits for public employees centered on lower salaries, but that no longer rings true. A recent analysis by the U.S. Bureau of Economics shows that federal employees receive compensation that is double the average of the private sector. Other studies have shown state and government employees to be receiving like levels of compensation.

The genesis of this pending disaster comes from the right of public employees to unionize. This was not always so. The first opportunity occurred in 1958 in New York City under Mayor Robert Wagner. President Kennedy instituted the right for federal employees to unionize in 1962. Since then the right for public employees to unionize has spread, but is not universal. States that have more restrictive laws have blocked public employee unions and thus have not suffered the consequences.

In states like California, the public employee unions fund huge political campaigns. To most observers, the unions have a stranglehold on the state legislature, Los Angeles and San Francisco city governments, and most if not all of the school districts in the state. When the employees control the employers, the results are uncontrollable obligations.

A recent report stated that children born today will live an average life span of 100 years. With public employees retiring at 50 or 55 years of age, it doesn’t take a deep thinker to extrapolate that these retirement benefit programs are unsustainable.

Private sector employees now receive less annual income than their public counterparts. Private sector employees will have to work well into their seventies to pay for these public sector employees’ retirement benefits which far exceed what the private sector offers. The public will, little by little, become aware of this upside-down arrangement. Heroes like Keith Richman are sacrificing to make the public aware of this coming debacle. Our elected officials need to heed his warnings.

"The Bankrupting of America:  We have a ruinous collaboration of elected officials and unionized public workers," by Mortimer Zuckerman, The Wall Street Journal, May 21, 2010 ---
http://online.wsj.com/article/SB10001424052748703315404575250610059801620.html?mod=djemEditorialPage_t

The American public feels it is drowning in red ink. It is dismayed and even outraged at the burgeoning national deficits, unbalanced state and local budgets, and accounting that often masks the extent of indebtedness. There is a mounting sense that taxpayers are being taken for an expensive ride by public-sector unions. The extraordinary benefits the unions have secured for their members are going to be harder and harder to pay.

The political backlash has energized the tea party activists, put incumbents at risk in both parties, and already elected fiscal conservatives such as Republican Gov. Chris Christie of New Jersey. Over the next fiscal year, the states are looking at deficits approaching hundreds of billions of dollars. The Center on Budget and Policy Priorities, a liberal think tank, estimates that this coming year alone states will face an aggregate shortfall of $180 billion. In some states the budget gap is more than 30%.

How did we get into such a mess? States have always had to cope with volatility in the size and composition of their populations. Now we have shrinking tax bases caused by recession and extra costs imposed on states to pay for Medicaid in the federal health-care program. The straw (well, more like an iron beam) that breaks the camel's back is the unfunded portions of state pension plans, health care and other retirement benefits promised to public-sector employees. And federal government assistance to states is falling—down by roughly half in the next fiscal year beginning Oct. 1.

It is galling for private-sector workers to see so many public-sector workers thriving because of the power their unions exercise. Take California. Investigative journalist Steve Malanga points out in the City Journal that California's schoolteachers are the nation's highest paid; its prison guards can make six-figure salaries; many state workers retire at 55 with pensions that are higher than the base pay they got most of their working lives.

All this when California endures an unemployment rate steeper than the nation's. It will get worse. There's an exodus of firms that want to escape California's high taxes, stifling regulations, and recurring budget crises. When Cisco CEO John Chambers says he will not build any more facilities in California you know the state is in trouble.

The business community and a growing portion of the public now understand the dynamics that discriminate against the private sector. Public unions organize voting campaigns for politicians who, on election, repay their benefactors by approving salaries and benefits for the public sector, irrespective of whether they are sustainable. And what is happening in California is happening in slower motion in the rest of the country. It's no doubt one of the reasons the Pew Research Center this year reported that support for labor unions generally has plummeted "amid growing public skepticism about unions' power and purpose."

In New York, public-service employees have received gold-plated perks for much of the 20th century, especially generous health-insurance benefits. Indeed, where once salaries were lower in the public sector, the salary gaps in the public and private sectors have disappeared or even reversed.

A Citizens Budget Commission report in 2005 showed that for most job categories in the greater New York City region, public-sector workers received higher hourly wages than private-sector workers. And according to a 2009 survey by the same group, this doesn't even count the money that New York City pays in full premiums for comprehensive health-insurance policies for workers and their families. Only 8% of workers in private firms enjoy that subsidy. In virtually all cases, the city also pays the full health-care premium costs for retirees and their spouses. And city pensions are "defined benefit" plans, which are more expensive since they guarantee specific benefits on retirement.

By contrast, private-sector workers in the survey were mostly in "defined contribution" plans, which means that, unlike their cushioned brethren in the public sector, they do not have a predetermined benefit at retirement. If New York City were to require its current workers to pay contributions toward health insurance equal to the amounts paid by the employees of local private-sector firms, the taxpayer savings would be $628 million a year. In New Jersey, Gov. Christie says government employee health benefits are 41% more expensive than those of the average Fortune 500 company.

What we suffer is a ruinously expensive collaboration between elected officials and unionized state and local workers, purchased with taxpayer money. "Scratch my back and I'll scratch yours."

No wonder the Service Employees International Union has become the nation's fastest-growing union: It represents government and health-care workers. Half of its 700,000 California members are government employees. More and more, it wins not on the picket line but at the negotiating table, where it backs up traditional strong-arming with political power. It spends vast amounts of money on initiatives that keep the government growing and the gravy flowing.

The state's teachers unions operate in a similar fashion—with the result that California's various municipalities, especially Los Angeles, face budget shortfalls in the hundreds of millions of dollars. California can no longer rely on a strong economy to support this munificence. Its unemployment rate of 12.5% runs several points higher than the national rate and its high-tech companies are choosing to expand elsewhere. Why stay in a state with such higher taxes and a cumbersome regulatory environment?

California is a horrible warning of how dreams can turn to dust. In most states, politicians face a contracting local economy and shortfalls in tax receipts. Naturally, they look to cut expenses but run into obstruction from politically powerful unions that represent state and local government employees, teachers and health-care workers who have themselves caused pension and health-care insurance costs to soar. It is not an accident that in framing the national stimulus program in 2009 Congress directed a stunning $275 billion of the $787 billion as grants to the states to support public-service employees in health care, education, etc.

The lopsided subsidies for pension and health costs are a large part of the fiscal crises at the state and local levels. The subsequent squeeze on education and infrastructure investment is undermining the very programs that have made it possible for our economy to grow.

Between New York and California, the projected deficits run about $40 billion—and that doesn't account for projected billions of dollars in the operating deficits in the states' mass transit systems or the multibillion-dollar unfunded liability in many of the state pension plans. New York would be badly hit because it is on the verge of being deprived of tax revenues by Washington's increased regulations on the financial industry, especially the hugely profitable, multitrillion-dollar market in derivatives—an industry that is critical to the economy of New York state and the country.

City government was developed to serve its citizens. Today the citizenry is working in large part to serve the government. It is always hard to shrink government spending. It is particularly difficult when public-sector unions have such a unique lever of pressure.

We have to escape this cycle or it will crush us. One way is to take labor negotiations out of the hands of vulnerable legislators and assign them to independent commissions. They would have a better shot at achieving a fair balance between appropriate salary increases and the revenues and services of local municipalities. The electorate won't swallow any more red ink.

Mr. Zuckerman is chairman and editor in chief of U.S. News & World Report.

 

Bob Jensen's threads on health care are at
http://www.trinity.edu/rjensen/Health.htm

 


"The Worst Bill Ever:   Epic new spending and taxes, pricier insurance, rationed care, dishonest accounting: The Pelosi health bill has it all," The Wall Street Journal, November 1, 2009 ---
http://online.wsj.com/article/SB10001424052748703399204574505423751140690.html?mod=djemEditorialPage

Speaker Nancy Pelosi has reportedly told fellow Democrats that she's prepared to lose seats in 2010 if that's what it takes to pass ObamaCare, and little wonder. The health bill she unwrapped last Thursday, which President Obama hailed as a "critical milestone," may well be the worst piece of post-New Deal legislation ever introduced.

In a rational political world, this 1,990-page runaway train would have been derailed months ago. With spending and debt already at record peacetime levels, the bill creates a new and probably unrepealable middle-class entitlement that is designed to expand over time. Taxes will need to rise precipitously, even as ObamaCare so dramatically expands government control of health care that eventually all medicine will be rationed via politics.

Yet at this point, Democrats have dumped any pretense of genuine bipartisan "reform" and moved into the realm of pure power politics as they race against the unpopularity of their own agenda. The goal is to ram through whatever income-redistribution scheme they can claim to be "universal coverage." The result will be destructive on every level—for the health-care system, for the country's fiscal condition, and ultimately for American freedom and prosperity.

•The spending surge. The Congressional Budget Office figures the House program will cost $1.055 trillion over a decade, which while far above the $829 billion net cost that Mrs. Pelosi fed to credulous reporters is still a low-ball estimate. Most of the money goes into government-run "exchanges" where people earning between 150% and 400% of the poverty level—that is, up to about $96,000 for a family of four in 2016—could buy coverage at heavily subsidized rates, tied to income. The government would pay for 93% of insurance costs for a family making $42,000, 72% for another making $78,000, and so forth.

At least at first, these benefits would be offered only to those whose employers don't provide insurance or work for small businesses with 100 or fewer workers. The taxpayer costs would be far higher if not for this "firewall"—which is sure to cave in when people see the deal their neighbors are getting on "free" health care. Mrs. Pelosi knows this, like everyone else in Washington.

Even so, the House disguises hundreds of billions of dollars in additional costs with budget gimmicks. It "pays for" about six years of program with a decade of revenue, with the heaviest costs concentrated in the second five years. The House also pretends Medicare payments to doctors will be cut by 21.5% next year and deeper after that, "saving" about $250 billion. ObamaCare will be lucky to cost under $2 trillion over 10 years; it will grow more after that.

• Expanding Medicaid, gutting private Medicare. All this is particularly reckless given the unfunded liabilities of Medicare—now north of $37 trillion over 75 years. Mrs. Pelosi wants to steal $426 billion from future Medicare spending to "pay for" universal coverage. While Medicare's price controls on doctors and hospitals are certain to be tightened, the only cut that is a sure thing in practice is gutting Medicare Advantage to the tune of $170 billion. Democrats loathe this program because it gives one of out five seniors private insurance options.

As for Medicaid, the House will expand eligibility to everyone below 150% of the poverty level, meaning that some 15 million new people will be added to the rolls as private insurance gets crowded out at a cost of $425 billion. A decade from now more than a quarter of the population will be on a program originally intended for poor women, children and the disabled.

Even though the House will assume 91% of the "matching rate" for this joint state-federal program—up from today's 57%—governors would still be forced to take on $34 billion in new burdens when budgets from Albany to Sacramento are in fiscal collapse. Washington's budget will collapse too, if anything like the House bill passes.

• European levels of taxation. All told, the House favors $572 billion in new taxes, mostly by imposing a 5.4-percentage-point "surcharge" on joint filers earning over $1 million, $500,000 for singles. This tax will raise the top marginal rate to 45% in 2011 from 39.6% when the Bush tax cuts expire—not counting state income taxes and the phase-out of certain deductions and exemptions. The burden will mostly fall on the small businesses that have organized as Subchapter S or limited liability corporations, since the truly wealthy won't have any difficulty sheltering their incomes.

This surtax could hit ever more earners because, like the alternative minimum tax, it isn't indexed for inflation. Yet it still won't be nearly enough. Even if Congress had confiscated 100% of the taxable income of people earning over $500,000 in the boom year of 2006, it would have only raised $1.3 trillion. When Democrats end up soaking the middle class, perhaps via the European-style value-added tax that Mrs. Pelosi has endorsed, they'll claim the deficits that they created made them do it.

Under another new tax, businesses would have to surrender 8% of their payroll to government if they don't offer insurance or pay at least 72.5% of their workers' premiums, which eat into wages. Such "play or pay" taxes always become "pay or pay" and will rise over time, with severe consequences for hiring, job creation and ultimately growth. While the U.S. already has one of the highest corporate income tax rates in the world, Democrats are on the way to creating a high structural unemployment rate, much as Europe has done by expanding its welfare states.

Meanwhile, a tax equal to 2.5% of adjusted gross income will also be imposed on some 18 million people who CBO expects still won't buy insurance in 2019. Democrats could make this penalty even higher, but that is politically unacceptable, or they could make the subsidies even higher, but that would expose the (already ludicrous) illusion that ObamaCare will reduce the deficit.

• The insurance takeover. A new "health choices commissioner" will decide what counts as "essential benefits," which all insurers will have to offer as first-dollar coverage. Private insurers will also be told how much they are allowed to charge even as they will have to offer coverage at virtually the same price to anyone who applies, regardless of health status or medical history.

The cost of insurance, naturally, will skyrocket. The insurer WellPoint estimates based on its own market data that some premiums in the individual market will triple under these new burdens. The same is likely to prove true for the employer-sponsored plans that provide private coverage to about 177 million people today. Over time, the new mandates will apply to all contracts, including for the large businesses currently given a safe harbor from bureaucratic tampering under a 1974 law called Erisa.

The political incentive will always be for government to expand benefits and reduce cost-sharing, trampling any chance of giving individuals financial incentives to economize on care. Essentially, all insurers will become government contractors, in the business of fulfilling political demands: There will be no such thing as "private" health insurance.

*** All of this is intentional, even if it isn't explicitly acknowledged. The overriding liberal ambition is to finish the work began decades ago as the Great Society of converting health care into a government responsibility. Mr. Obama's own Medicare actuaries estimate that the federal share of U.S. health dollars will quickly climb beyond 60% from 46% today. One reason Mrs. Pelosi has fought so ferociously against her own Blue Dog colleagues to include at least a scaled-back "public option" entitlement program is so that the architecture is in place for future Congresses to expand this share even further.

As Congress's balance sheet drowns in trillions of dollars in new obligations, the political system will have no choice but to start making cost-minded decisions about which treatments patients are allowed to receive. Democrats can't regulate their way out of the reality that we live in a world of finite resources and infinite wants. Once health care is nationalized, or mostly nationalized, medical rationing is inevitable—especially for the innovative high-cost technologies and drugs that are the future of medicine.

Mr. Obama rode into office on a wave of "change," but we doubt most voters realized that the change Democrats had in mind was making health care even more expensive and rigid than the status quo. Critics will say we are exaggerating, but we believe it is no stretch to say that Mrs. Pelosi's handiwork ranks with the Smoot-Hawley tariff and FDR's National Industrial Recovery Act as among the worst bills Congress has ever seriously contemplated.


EGADs! Pending Collapse of the Overspending U.S. Economy to Be Financed With Hot Air
President Barack Obama on Tuesday proposed budget rules that would allow Congress to borrow tens of billions of dollars and put the nation deeper in debt to jump-start the administration's emerging health care overhaul. The "pay-as-you-go" budget formula plan is significantly weaker than a proposal Obama issued with little fanfare last month. It would carve out about $2.5 trillion worth of exemptions for Obama's priorities over the next decade. His health care reform plan also would get a green light to run big deficits in its early years. But over a decade, Congress would have to come up with money to cover those early year deficits. Obama's latest proposal for addressing deficits urges Congress to pass a law requiring lawmakers to pay for new spending programs and tax cuts without further adding to exploding deficits projected to total about $10 trillion over the next decade.
Andrew Taylor, "Obama: It's OK to borrow to pay for health care:  Obama-proposed budget rules allow deficits to swell to pay for health care plan," Yahoo News, June 8, 2009 ---
http://finance.yahoo.com/news/Obama-Its-OK-to-borrow-to-pay-apf-15483626.html?.v=13
Jensen Comment
The frightening part of this is that the added $10 trillion does not include the entitlements obligations of Obama's Universal Health Plan. That will add up to another $100 trillion to the current $100 trillion in entitlements obligations.

President Obama's deficit spending playbook is straight out of Alice in Wonderland. The King says"
"Begin at the beginning and go on till you come to the end: then stop."

America, what is happening to you?
“One thing seems probable to me,” said Peer Steinbrück, the German finance minister, in September 2008....“the United States will lose its status as the superpower of the global financial system.” You don’t have to strain too hard to see the financial crisis as the death knell for a debt-ridden, overconsuming, and underproducing American empire . . .
Richard Florida, "How the Crash Will Reshape America," The Atlantic, March 2009 --- http://www.theatlantic.com/doc/200903/meltdown-geography

If the economy improves and unemployment drops, Obama can take credit. If it fails to improve and unemployment rises, though, he can say he averted an even worse showing. Republicans will take the opposite tack—attributing any improvement to the natural resilience of the economy and blaming the administration if things get worse. And neither side will really know who's right. I have long been a believer in the value of economics in understanding the world. But the chief effect of the current crisis is to raise the possibility that economists—at least those macroeconomists, who study the broad economy—don't have a blessed clue.
"Baffled by the Economy:  Why being a macroeconomist means never having to say you're sorry," by Steve Chapman, Reason Magazine, June 11, 2009 --- http://www.reason.com/news/show/134059.html

U.S. Debt/Deficit Clock --- http://www.usdebtclock.org/


"Will the Democrats' Massive Borrowing and Spending Binge Kill the U.S. Economy?" by Gerard Jackson, Seeking Alpha, July 13, 2009 --- Click Here

Any reasonably intelligent person understands that if the demand for a product increases then (all things being equal, as the economist would say) its price will rise. The same holds in the case of borrowing, except for congressional Democrats. These people seem to think that economics laws are a vicious Republican plot.

Poll figures are now showing that the American public is growing alarmed by the Democrats' utterly reckless fiscal policy. Unfortunately, few people understand just how grave the danger really is. In less than five months Obama increased the national debt by more than $800 million and lumbered the economy with a $1.8 trillion deficit that looks like growing even bigger. (I still get silly emails from Obama cultists who were evidently screaming into their computer monitors: "Bush did!" Pathetic doesn't begin to describe these people). In 2003 Thomas Laubach, the US Federal Reserve’s senior economist, produced New Evidence on the Interest Rate Effects of Budget Deficits and Debt, a paper containing calculations for long-term interest rates based on historical evidence. He concluded that

a percentage point increase in the projected deficit-to-GDP ratio raises the 10-year bond rate expected to prevail five years into the future by 20 to 40 basis points, a typical estimate is about 25 basis points.

As the US deficit has rocketed from 3 percent to 13.5 percent one should therefore expect long-term rates to rise by at least 2.5 percentage points. In addition, he believes that a 1 percent rise in the ratio of debt to GDP will raise future rates by 4 to 5 basis points. It appears that recent movements in long-term rates support Mr Laubach's thesis. The 20-year treasury bill stood at 3.22 percent on 2 February: by the 8 July it had risen to 4.13 percent. It was the same story 10-year treasuries which rose from 2.46 percent on 2 January to 3.33 percent on 8 July while the 30-year mortgage rate had risen to 5.32 percent by 2 July as against 4.78 percent for 2 April. The government's insatiable demand for funds looks very much like it is driving up long-term rates very quickly.

Obama supporters with their fetish for big government can always claim that economic conditions in Japan refute Laubach. Japan has increased its national debt by a colossal amount and yet interest rates remain ridiculously low. These critics overlooked the economist's caveat: All things being equal. Just as the price of the a monetary unit (its purchasing power) is determined by the supply and demand for it, the same holds for all other economic goods. For example, though US car production has dropped car prices have not jumped. Why? Because demand fell.

The same holds for Japanese interest rates. They have not been driven up government borrowing because the private demand for loans has virtually collapsed. A similar situation prevailed during the Great Depression. Despite Roosevelt's spending and borrowing interest rates remained low — but so did business borrowing with the result that there was a great deal of capital consumption.

Professor Higgs calculated that from 1930 to 1940 net private investment was minus $3.1 billion. (Robert Higgs, Depression, War, and Cold War, The Independent Institute, 2006, p. 7). Arthur Lewis calculated that from 1929 to 1938 net capital formation plunged by minus 15.2 percent (W. Arthur Lewis, Economic Survey 1919-1939, Unwin University Books, 1970, p. 205). Benjamin M. Anderson estimated that in 1939 there was more than 50 percent slack in the economy. (Benjamin M. Anderson, Economics and the Public Welfare: A Financial and Economic History of the United States 1914-1946, LibertyPress, 1979, pp. 479-48). It ought to be obvious that where a process of capital consumption is underway — as it was in the 1930s — one should expect to see a rise in the average age of plant and equipment. This is precisely what happened as shown by the table below.

So where we have a situation in which extremely low interest rates reign while government borrowing has massively expanded we should expect to find — as in Japan — that the personal demand for loans. particularly by business, has plunged. In other words, critics have been looking at only part of the equation. It just so happens that most critics of Obama's spending mania have also overlooked a vital point — the crucial role that interest rates play in raising or lowering the standard of living.

If the government's fiscal policy imposes high long-term rates on the economy then prospective highly time-consuming projects, the ones that do so much to raise real wage rates, would have to be abandoned. Moreover, existing projects of the same nature would be eventually phased out. This is called capital consumption. What this means is that the quantity of savings necessary to prevent the capital structure from contracting are no longer available. As Hayek observed:

[I]t is quite possible that, after a period of great accumulation of capital and a high rate of saving, he rate of profit and the rate of interest may be higher than they were before — if the rate of saving is insufficient compared with the amount of capital which entrepreneurs have attempted tp form, or if the demand for consumers' goods is too high compared with the supply. And for the same reason the rate of interest and profit may be higher in a rich community with much capital and a high rate of saving than in an otherwise similar community with little capital and a low rate of saving. (Friedrich von Hayek, The Pure Theory of Capital, The University of Chicago Press, 1975, p. 396).

Added to this is Obama's misguided energy policy that amounts to a massive tax on production. Once that is also taken into account one is left looking at economic carnage.

America, what is happening to you?
“One thing seems probable to me,” said Peer Steinbrück, the German finance minister, in September 2008....“the United States will lose its status as the superpower of the global financial system.” You don’t have to strain too hard to see the financial crisis as the death knell for a debt-ridden, overconsuming, and underproducing American empire.
Richard Florida, "How the Crash Will Reshape America," The Atlantic, March 2009 ---
http://www.theatlantic.com/doc/200903/meltdown-geography


Accounting in the U.S. Government is all done with smoke and mirrors
The worst stuff is all off balance sheet

Question
What accounts for the difference between the booked $3.3 trillion in U.S. "National Debt" owed to foreign investors reported by Newsweek, June 8, 2009 on Page 57 compared to the booked $13.7 trillion in U.S. debt owed to foreign investors as reported in the CIA's World Fact Book?

Answer
The $13.7 trillion includes a massive amount of state and local public debt held by nonresidents as well as corporate bonds that are issued by business firms rather than government jurisdictions. Some of this non-Federal debt is becoming especially worrisome such as bond obligations of California that may have to be bailed out by the Federal Government. The massive indebtedness of California is especially worrisome since California bond defaults could rile foreign investors that we also depend upon to fund our Federal deficit --- which in 2009 will be nearly $2 trillion that must be funded in new debt. Hence we have Hillary Clinton, Nancy Pelosi, and Timothy Geithner recently carrying tin cups around China.

See the definition of "Debt - External" at
https://www.cia.gov/library/publications/the-world-factbook/docs/notesanddefs.html#2079

Nations are ranked by "external debt" owed to investors outside their borders ---
http://en.wikipedia.org/wiki/List_of_countries_by_external_debt
Data source:  CIA's World Fact Book ---
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2079rank.html

U.S. National Debt ---  http://www.usdebtclock.org/
The National Debt recently spiked about 10% to over $12 trillion.

U.S. Debt/Deficit Clock --- http://www.usdebtclock.org/

But as bad as the fiscal picture is, panic-driven monetary policies portend to have even more dire consequences. We can expect rapidly rising prices and much, much higher interest rates over the next four or five years, and a concomitant deleterious impact on output and employment not unlike the late 1970s. About eight months ago, starting in early September 2008, the Bernanke Fed did an abrupt about-face and radically increased the monetary base -- which is comprised of currency in circulation, member bank reserves held at the Fed, and vault cash -- by a little less than $1 trillion. The Fed controls the monetary base 100% and does so by purchasing and selling assets in the open market. By such a radical move, the Fed signaled a 180-degree shift in its focus from an anti-inflation position to an anti-deflation position.
Arthur B. Laffer, "Get Ready for Inflation and Higher Interest Rates," The Wall Street Journal, June 10, 2009 --- http://online.wsj.com/article/SB124458888993599879.html

The Jim Rogers video that everyone seems to be talking about concerns the US Dollar and potential inflation ---
http://financeprofessorblog.blogspot.com/2009/06/jim-rogers-video-that-everyone-seems-to.html
And that is before the pending Universal Health Plan is set in motion!

President Obama's deficit spending playbook is straight out of Alice in Wonderland. The King says"
"Begin at the beginning and go on till you come to the end: then stop."

The projected U.S. budget annual budget spending deficits are now standing in the way of economic recovery. Deficits are also restraining our national sovereignty and public policy as we now have to beg on our hands and knees for foreign investors in Asia and the Middle East to invest trillions more in in our Treasury bonds. For example, efforts to tax or otherwise restrain imports from Asia (think automobiles) and the Middle East (think oil) could spell disaster since we must beg most to those parts of the world to invest in government debt to fund our Federal trillion-dollar deficits. This, in turn, greatly increases our own troubling foreign trade deficits.

Worse yet, we worry about foreign investors not rolling over what they've already invest in our public and private "external debt." That could lead to having to monetize our National Debt (read than print money) that almost immediately translates to Zimbabwe-like disastrous price inflation and destruction of the U.S. currency in foreign exchange markets.

Although the media tends to avoid serious discussion of deficit reduction, some big spenders in government are at last owning up to the pending time bomb of trillion-dollar deficit spending.

 

"Bernanke Urges Deficit Reduction," by Brian Blackstone, The Wall Street Journal, June 3, 2009 --- http://online.wsj.com/article/SB124403584900281215.html

U.S. Federal Reserve Chairman Ben Bernanke on Wednesday urged lawmakers to commit to reducing the nearly $2 trillion budget deficit, warning that the government can't borrow "indefinitely" to meet the growing demand on its resources.

Mr. Bernanke also reiterated that the pace of economic contraction appears to be slowing, setting the stage for a return to growth later this year.

"Unless we demonstrate a strong commitment to fiscal sustainability in the longer run, we will have neither financial stability nor healthy economic growth," Mr. Bernanke said in prepared testimony to the House Budget Committee. (Read the full remarks.)

The White House estimates that the budget deficit will reach around $1.8 trillion this year and fall to about $900 billion by 2011. That, Mr. Bernanke said, will push the debt-to-GDP ratio from 40% before the financial crisis began to 70% by 2011, which would be the highest since after World War II.

"Certainly, our economy and financial markets face extraordinary near-term challenges, and strong and timely actions to respond to those challenges are necessary and appropriate," Mr. Bernanke told the House panel.

However, the retirement of the Baby Boom generation will place even more of a burden on entitlement programs like Social Security and Medicare, and "we will not be able to continue borrowing indefinitely to meet those demands," he said.

Mr. Bernanke suggested that fiscal concerns may already be having an effect in the markets. Yields on longer-term Treasury securities and fixed-rate mortgages have risen, he noted.

"These increases appear to reflect concerns about large federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight-to-quality flows, and technical factors related to the hedging of mortgage holdings," he said.

Mr. Bernanke adhered closely to the Fed's cautiously upbeat outlook for the economy. Consumer spending, he said, has been flat since the start of the year and sentiment has improved. Housing, he said, "has also shown some signs of bottoming" and lean inventories should eventually spur production.

Still, he cautioned that even when an upturn begins, growth will remain below its long-run potential "for a while."

"Sizable" job losses, he said, should continue for "the next few months," pushing the unemployment rate higher. The government releases May payroll figures Friday. Economists expect another payroll decline of over 500,000, raising the jobless rate past 9%.

Against that backdrop of widening economic slack, inflation should fall over the next year compared to 2008, Mr. Bernanke said, though an improving economy and stable inflation expectations "should limit further declines in inflation."

Meanwhile, Mr. Bernanke said the ability of banks to raise new capital "suggests that investors are gaining greater confidence in the banking system."

But while financial conditions have improved since the start of the year, they remain under stress and continue to act as a brake on the economy, he said.

 

Question
Would much smaller budget deficits forestall economic disaster in the United States?

Answer
The benefit of deficit reduction is contingent upon many factors. The immediate benefit is linked to Gross Domestic Product such that the ideal situation would be a combination of a surge in GDP coupled with significant deficit spending reductions such as when the surge in GDP greatly increases tax revenues. A plunge in GDP caused, in part, by dysfunctional taxation and deficit reduction would be very worrisome.

However, all that is written about the booked National Debt, booked External Debt, and annual deficit spending pales relative to the time bomb (usually not mentioned in the media now pushing for added social programs) of unbooked off-balance sheet entitlements obligations that are contracted or otherwise promised but are not yet due such as baby boomer Social Security benefits, Medicare obligations (including drug benefits), Medicaid obligations, military pensions, veterans medical benefits, welfare programs, etc. Milton Freedman was a wise man 40 years ago when he said that unfunded entitlement obligations should be avoided as long as we were "free to choose." The idea behind Social Security was that it should be funded by the Social Security Trust Fund which did indeed build up over the years.

The problem with the Social Security Trust Fund is that Congress unwisely commenced to massively "borrow" from it to fund other programs with no intention of taxing to replace the borrowings. Social Security benefits were initially envisioned as being like pension funds where money was taken from both a worker and an employer during all his/her working years to fund eventual small retirement benefits to be collected by that worker.

Congress, however, added unfunded hemorrhages to the Social Security Trust Fund such as the funding of monthly benefits to millions of disabled citizens, including people disabled at birth or at very young ages who never contributed a dime to the Social Security Trust Fund. Other unfunded entitlements were added decades ago such as the funding of education for dependents of soldiers who died while in military service. The point is that unfunded entitlements have been steeped upon what commenced as a funded Social Security "Retirement" Program. The unfunded drains were for worthy causes such as disability benefits that should've been part of the General Fund legislation rather than the Social Security Trust Fund that was not intended for anything other than Social Security retirement benefits.

Accounting in the U.S. Government is all done with smoke and mirrors
Congress like funding disability benefits from the Social Security Trust Fund because that kept the billions spent each year out of the calculation of the budget deficits. The estimated $1.8 trillion projected budget deficit would soar if we added all the payments to millions of disabled citizens that slip out the back door from the Social Security Trust Fund. Accounting in the U.S. Government is all done with smoke and mirrors.

Another huge problem is that added payroll tax funds collected for Medicare hospital, physician, and rehab benefits plus Medicare Drug benefits were collected over the years from workers and employers with vastly under-computed estimates of the soaring inflation in the medical sector of the economy. As a result there's a huge mismatch between what was collected in Medicare taxes versus what is now being paid out to our aging workers and retirees like me and my wife.

Whereas the U.S. National Debt is booked at $11 trillion dollars, the unbooked entitlements debt was estimated in 2007 by the former Chief Accountant of the United States, David Walker, to be in excess of $55 trillion  (now in excess of $100 trillion) for entitlements already in place. Pending entitlements such as universal health and drug coverage will make this unfunded and unbooked obligation soar.

Bob Jensen's threads on the pending economic disaster in the United States --- http://www.trinity.edu/rjensen/2008Bailout.htm#NationalDebt


A New Definition of Life on the Edge

Loss of dollar purchasing power since 1775 --- http://manualofideas.com/blog/2009/03/declining_value_of_us_dollar_s.html

U.S. Debt/Deficit Clock --- http://www.usdebtclock.org/

 

Projected Population Growth (it's out of control) --- http://en.wikipedia.org/wiki/Overpopulation

Reinventing the American Dream ---
http://www.trinity.edu/rjensen/2008Bailout.htm#AmericanDream

The National Debt has continued to increase an average of $3.93 billion per day since September 28, 2007!
The National Debt Amount This Instant (Refresh your browser for updates by the second) --- http://www.brillig.com/debt_clock/
History of the National Debt --- http://en.wikipedia.org/wiki/National_Debt 
The crisis --- http://www.trinity.edu/rjensen/2008Bailout.htm#NationalDebt


National Debt

 

Once the spigot is turned on it's almost never turned off:  That's how special appropriations become entitlements
Several university presidents and higher-education officials went to Capitol Hill on Tuesday to thank lawmakers for committing more
($21.5 billion) funds for scientific research, but they worried about what might happen to their budgets if that commitment didn't continue.
Paul Baskey, "Universities Are Wary of Drawbacks to a Huge Boost in Federal Spending," Chronicle of Higher Education, March 25, 2009 --- http://chronicle.com/daily/2009/03/14470n.htm?utm_source=at&utm_medium=en
Jensen Comment
This is the same argument that will be raised by virtually all recipients of the 2009 massive Stimulus (Recovery) Act handouts to states, education/research institutions, welfare programs, public works projects, etc. Once the spigot is turned on such handouts are hard to stop in future budget years. They become entitlements that will make President Obama's promise to reduce the Year 2012 budget deficit a complete and utter failure. Both logic and sob stories make it virtually impossible to turn the spigots off once they've been turned on. This is one of the common problems of budgeting in general except for Zero-Based Budgeting that almost never takes place in industry and probably has never taken place in state and federal governments.
Bob Jensen's threads on the entitlements disaster are at http://www.trinity.edu/rjensen/Entitlements.htm

Why Obama's Big Spending, Big Taxing Regime Will Cripple the U.S. Economy
Before any article on savings and investment can really make sense, it must first define what savings and investment really mean. Saving is the process of transforming present goods into future goods. Present goods are consumption goods and future goods are capital goods. When we save, we transfer purchasing power from consumption to the production of capital goods, many of which will then be used to produce more capital goods. (This is why growth is sometimes called forgone consumption.) Investment in more capital (the material means of production) makes for increased future consumption, i.e., higher living standards. It needs little imagination to realise that taxing savings amounts to taxing future living standards. What needs to be remembered is that when defined in real terms, investment and savings are (a) always equal and (b) saving is clearly the only means by which resources can be directed from consumption to investment. To put it another way: The function of savings is to redirect resources from the production of consumption goods to the production of capital goods.
"Why Obama's Big Spending, Big Taxing Regime Will Cripple the U.S. Economy," Seeking Alpha, March 23, 2009 ---
http://seekingalpha.com/article/127312-why-obama-s-big-spending-big-taxing-regime-will-cripple-the-u-s-economy

Tim Geithner Draws a Big Laugh and Lots of Sighs In China
U.S. Treasury Secretary Timothy Geithner on Monday reassured the Chinese government that its huge holdings of dollar assets are safe and reaffirmed his faith in a strong U.S. currency. A major goal of Geithner's maiden visit to China as Treasury chief is to allay concerns that Washington's bulging budget deficit and ultra-loose monetary policy will fan inflation, undermining both the dollar and U.S. bonds. China is the biggest foreign owner of U.S. Treasury bonds. U.S. data shows that it held $768 billion in Treasuries as of March, but some analysts believe China's total U.S. dollar-denominated investments could be twice as high. "Chinese assets are very safe," Geithner said in response to a question after a speech at Peking University, where he studied Chinese as a student in the 1980s. His answer drew loud laughter from his student audience, reflecting skepticism in China about the wisdom of a developing country accumulating a vast stockpile of foreign reserves instead of spending the money to raise living standards at home.
Glenn Somerville, Reuters, June 1, 2009 --- Click Here

A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury, with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship.
Alexander Tyler. 1787 - Tyler was a Scottish history professor that had this to say about 2000 years after "The Fall of the Athenian Republic" and about the time our original 13 states adopted their new constitution.
As quoted at http://www.babylontoday.com/national_debt_clock.htm (where the debt clock in real time is a few months behind)
The National Debt Amount This Instant (Refresh your browser for updates by the second) --- http://www.brillig.com/debt_clock/

Forget the glitzy restaurants of New York and London: only in Zimbabwe would a hamburger actually cost millions of dollars. The central bank of the southern African country has a issued a 10million Zimbabwe dollar note. The move increases the denomination of the nation's highest bank note more than tenfold. Even so, a hamburger in an ordinary cafe in Zimbabwe costs 15 million Zimbabwe dollars.
"Zimbabwe bank issues $10million bill - but it won't even buy you a hamburger in Harare," London Daily Mail, January 19, 2008 --- http://www.dailymail.co.uk/pages/live/articles/news/worldnews.html?in_article_id=508840
Jensen Comment
You chuckle but the day is coming when the U.S. will print a $10 million U.S. dollar bill that won't buy a hamburger, because U.S. politicians from both parties no longer can say no to doomsday entitlements.

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."   

With their record over the past few years, the Big Government Republicans in Washington do not merit the support of conservatives. They have busted the federal budget for generations to come with the prescription-drug benefit and the creation and expansion of other programs. They have brought forth a limitless flow of pork for the sole, immoral purpose of holding onto office. They have expanded government regulation into every aspect of our lives and refused to deal seriously with mounting domestic problems such as illegal immigration. They have spent more time seeking the favors of K Street lobbyists than listening to the conservatives who brought them to power. And they have sunk us into the very sort of nation-building war that candidate George W. Bush promised to avoid, while ignoring rising threats such as communist China and the oil-rich “new Castro,” Hugo Chavez.
Richard A. Viguerie, "The show must not go on," The Washington Monthly, October 2006 --- http://www.washingtonmonthly.com/features/2006/0610.viguerie.html
Jensen Comment
China now holds over one trillion U.S. dollars in foreign exchange. The U.S. economy could be thrown into chaos if China converted those dollars into other currencies. This is not likely to happen in the near future because China depends increasingly on exports to the U.S. However, it does illustrate the power China already holds over the U.S. economy.

US Treasury Secretary Henry Paulson said Tuesday that America's Social Security program for the retired is "financially unsustainable" and needs an urgent overhaul . . . Paulson said the Social Security program's cash flows are projected to turn negative in under 10 years and that a Social Security trust fund would likely be exhausted in 2041 without urgent reform. Social Security's unfunded obligation, the difference between the present values of Social Security inflows and outflows less the existing trust funds, equals 4.3 trillion dollars over the next 75 years and 13.6 trillion on a permanent basis, according to the Treasury.
PhysOrg, March 25, 2008 --- http://physorg.com/news125677122.html

 

Say What?
Editorial in the ... no ... can't be ... well maybe ... yes ... YES!
... The New York Times, September 8, 2008 ---
http://www.nytimes.com/2008/09/09/opinion/09tue1.html?_r=1&oref=slogin

The Bailout’s Big Lessons

As an act of crisis management, the government takeover of Fannie Mae and Freddie Mac, the mortgage-finance giants, was a reasonable and reassuring move. It ensures the flow of mortgage credit and is likely to reduce mortgage rates, which are important steps toward the eventual recovery of the ailing United States housing market.

And it does so while putting taxpayers first for future dividends or money that may be earned when the firms are reprivatized, holding out hope that the bailout costs may someday be recouped. Beyond the immediate crisis, however, the takeover raises disturbing issues that may get lost in the tumult of the moment.

¶ The need for an explicit bailout underlines the economic vulnerabilities of the United States. In July, Congress gave Treasury Secretary Henry Paulson unlimited authority to pay the debts of Fannie and Freddie and to shore up their capital, if need be. Yet investors the world over continued to doubt the companies’ viability, shunning their securities or demanding unusually high interest rates on loans. In effect, investors deemed the government’s commitment to Fannie and Freddie as either insufficient or not credible — an extraordinary vote of no confidence that, in the end, led to the bailout.

¶ There is no single reason for the lack of confidence. But investors have good cause to be concerned about the deep indebtedness of the United States, about the nation’s apparent political unwillingness to restore its fiscal health and about the ability of the government to responsibly make good on its commitments. A pledge of the full faith and credit of the United States still means something. That’s why the markets responded favorably to the takeover. But investors’ refusal to accept a promise to act is another sign of the need to reverse the fiscal mismanagement of the Bush years.

¶ The United States must acknowledge that its deep indebtedness is especially dangerous in times of economic crisis. The level and stability of American interest rates and of the dollar are now dependent on the willingness of foreign central banks and other overseas investors to continue lending to the United States. The bailout became inevitable when central banks in Asia and Russia began to curtail their purchases of the companies’ debt, pushing up mortgage rates and deepening the economic downturn.

¶ The bailout is new evidence of the need for better regulation of the American financial system. As the housing bubble inflated, the Bush administration often claimed that America’s unfettered markets were the envy of the world. But, in fact, they have sowed mistrust.

¶ The cost of the bailout needs to be carefully monitored. Fannie and Freddie own or back nearly $800 billion of generally junky mortgages, and some of those will inevitably go bad. So it is reasonable to assume that the cost could easily near $100 billion. There may be ways to make back some of that money later, but for a long time, the bailout will divert resources from other needs.

Senators John McCain and Barack Obama have both voiced support for the bailout, which shows good judgment. But what the next president will need to worry about, and both candidates need to talk about, is the depth of the country’s economic problems. It will take discipline and sacrifice to address them.

Jensen Comment
The national debt is the reason for a weakening dollar, higher oil prices, inflation, and our diminishing stature in the world. George Bush was a spendthrift who plunged us deeper into debt by failing to veto spending bills of a run-away Congress. Barack Obama's unfundable populist programs will only bury us deeper in debt. John McCain is probably maverick enough to veto some spending cuts. Our real economic hope may lie in the ultimate veto pen of . . . gasp . . . Sarah Palin.

For once (actually the second time in 2008) The New York Times had an editorial that makes economic sense:

Longer term, the challenge is perhaps even more daunting. Saving more is ultimately the only way to dig out of the budget hole that the nation is in. That will be painful, because higher government savings, done properly, means higher taxes and restrained spending. Candidates for president do not like to be pessimistic, or even candid, really, about the economy. But a leader who wants to steer the nation through tough times should not spend the campaign telling Americans they can have it all.
"There He Goes Again," The New York Times, July 12, 2008 ---
http://www.nytimes.com/2008/07/12/opinion/12sat1.html?_r=1&oref=slogin
Jensen Comment
But true to form, the NYT only criticizes John McCain's balanced budget goals in this context. No mention is made of the NYT's favorite candidate who certainly, albeit truthfully, is not promising anything within light years of a balanced budget. The question is which candidate, if elected, will heavily veto the outrageous spending bills that most certainly emerge from Congress over the next four or eight years. Sadly, George Bush, unlike Reagan, rarely inked a spending veto in his eight years. This country does not know what a life-threatening debt crisis is and will have a rude awakening after November when the U.S. dollar skids to all time lows never imagined. The real problem is that Congress is leaning to more of entitlement time bombs.

This won't sit well with the pacifists in the far left side of the world
Maybe Michael Moore will do a documentary entitled "Sticko"
This is intolerable, especially when the Pentagon’s budget, including spending on the two wars, reached $685 billion in 2008. That is an increase of 85 percent in real dollars since 2000 and nearly equal to all of the rest of the world’s defense budgets combined. It is also the highest level in real dollars since World War II. To protect the nation, the Obama administration will have to rebuild and significantly reshape the military. We do not minimize the difficulty of this task. Even if money were limitless, planning is extraordinarily difficult in a world with no single enemy and many dangers.
Editorial, The New York Times, November 15, 2008 --- http://www.nytimes.com/2008/11/16/opinion/16Sun1.html
Jensen Comment
What's worse is that expenses of past wars aren't even fully in the budget. Thinks like military pensions, soaring estimates of veteran's future medical costs, and education promises to veterans that are off-balance sheet and buried in the massive entitlements that will drag down future generations of taxpayers already burdened with baby boomer Social Security, Medicare, and Medicaid.

The United States will "look like a banana republic" unless it gains control over its budget deficit and federal debt, economist Allen Sinai warned Congress on Thursday. "The deficit and debt prospects under almost any scenario are daunting," Mr. Sinai, chief global economist for Decision Economics Inc., told the Senate Budget Committee. "This territory is uncharted, with no real historical analogue to this kind of financial situation for a major global economic power." Asked by committee Chairman Kent Conrad, North Dakota Democrat, whether the U.S. government's creditworthiness is at risk, Mr. Sinai replied, "Unequivocally yes." Richard Berner, chief U.S. economist at Morgan Stanley, told the committee one measure of America's creditworthiness -- credit default swap spreads -- already shows some deterioration. The worse a nation's credit rating becomes, the more its CDS spread rises. U.S. sovereign CDS spreads have widened to about 0.6 percent from 0.1 percent last summer, Mr. Berner noted. "So the message is that you ignore global investors at your peril," he told the committee.
David M. Dixon
, "Congress warned about debt U.S. advised to gain control," The Washington Times, January 16, 2009 --- http://washingtontimes.com/news/2009/jan/16/policies-on-debt-a-risk-to-economy/

It's very clear now the Democrats controlling Washington are living in a parallel universe – one where up is down, left is right, dark is light, fairness is unfairness and responsibility is irresponsibility. But is it really necessary for Obama to insult our intelligence (claiming fiscal responsibility for the sake of our grandchildren while doubling unfunded social entitlements trillions upon trillions of dollars) like this? His supporters have already demonstrated a complete, abject inability to comprehend the simplest economic principle. He doesn't need to fool them. They fool themselves.
Joseph Farah, "'Living within our means'," WorldNetDaily, February 28, 2009 ---
http://www.worldnetdaily.com/index.php?fa=PAGE.view&pageId=90236 '

"We Can't Tax Our Way Out of the Entitlement Crisis," by R. Glenn Hubbard, The Wall Street Journal, August 21, 2008; Page A13 --- http://online.wsj.com/article/SB121927694295558513.html 

We can also secure a firm financial footing for Social Security (and Medicare) without choking off economic growth or curtailing our flexibility to pursue other spending priorities. Three actions are essential: (1) reduce entitlement spending growth through some form of means testing; (2) eliminate all nonessential spending in the rest of the budget; and (3) adopt policies that promote economic growth. This 180-degree difference from Mr. Obama's fiscal plan forms the basis of Sen. McCain's priorities for spending, taxes and health care.

The problem with Mr. Obama's fiscal plans is not that that they lack vision. On the contrary, the vision is plain enough: a larger welfare state paid for by higher taxes. The problem is not even that they imply change. The problem is that his plans are statist.

While the candidate is sending a fiscal "Ich bin ein Berliner" message to Americans, European critics of his call for greater spending on defense are the canary in the coal mine for what lies ahead with his vision for the United States.

Professor R. Glenn Hubbard is Dean of the College of Business at Columbia University and a member of the President's Council of Economic Advisors.

Bob Jensen's threads on the "Entitlement Crisis" are at http://www.trinity.edu/rjensen/entitlements.htm

 

The Global Poverty Act (S.2433) is expected to come up for a vote in the US Senate any time before the November presidential elections, according to conservatives who fear it is a giant step towards handing over US sovereignty to the United Nations and foreign governments. This is the newest liberal-inspired plan to allow a United Nations style tax on American citizens, according to officials at the American Conservative Union. ACU officials say that this "sickening bill could potentially force the United States to spend as much as $845,000,000,000.00 on welfare to third-world countries." The American people will be watching and will not tolerate massive United Nations-style giveaways that are passed in the dark of night -- or in broad daylight for that matter. (Obama's) 2433 is a stealth bill and a dagger aimed at the heart of America's sovereignty.
Jim Couri, "OBAMA'S UNITED NATIONS SANCTIONED GLOBAL TAX PLAN,"  NWV News, April 1, 2008 ---
http://www.newswithviews.com/NWV-News/news40.htm
Jensen Comment
This bill gets even worse. It's an annual $800,000,000,000 entitlement to help fight poverty around the world. This money will not go to directly to those who need it, but rather to the UN for distribution. It's a big plum and cherry ripe for fraud just like the U.N.'s disastrous Oil for Food fiasco that diverted the funds to Saddam.


Quantitative Easing (QE) --- http://en.wikipedia.org/wiki/Quantitative_Easing

Quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate the national economy when standard monetary policy has become ineffective. A central bank implements quantitative easing by buying financial assets from commercial banks and other private institutions, thus increasing the monetary base.[3] This is distinguished from the more usual policy of buying or selling government bonds in order to keep market interest rates at a specified target value.[4][5][6][7]

Expansionary monetary policy typically involves the central bank buying short-term government bonds in order to lower short-term market interest rates. However, when short-term interest rates are either at, or close to, zero, normal monetary policy can no longer lower interest rates. Quantitative easing may then be used by the monetary authorities to further stimulate the economy by purchasing assets of longer maturity than only short-term government bonds, and thereby lowering longer-term interest rates further out on the yield curve. Quantitative easing raises the prices of the financial assets bought, which lowers their yield.[

Quantitative easing can be used to help ensure that inflation does not fall below target.Risks include the policy being more effective than intended in acting against deflation – leading to higher inflation, or of not being effective enough if banks do not lend out the additional reserves. According to the IMF and various other economists, quantitative easing undertaken since the global financial crisis has mitigated some of the adverse effects of the crisis.

 

"Quantitative Easing Is Not 'Printing Money'," by Martin Feldstein, Business Insider, June 27, 2013 ---
http://www.businessinsider.com/feldstein-why-inflation-is-low-2013-6 

Jensen Comment
There's a bit of slight of hand in the above article. There's a difference when the U.S. sells a treasury bond to China relative to selling a treasury bond to itself (errrr read that the Fed). The main difference is that the USA has to pay off the debt to China when it comes due. If QE comes to an end Uncle Sam has to either raise the payoff from taxpayers or borrow from somewhere (e.g., Saudi Arabia) to pay off what it owes to China. 

Uncle Sam does not have to borrow from Saudi Arabia (at possibly higher treasury rates) or raise taxes to pay off the bonds that it sold to itself. Instead this debt is paid off with inflation which is (gasp) tantamount to printing green backs. The QE works as long as circumstances are holding down inflation, especially circumstances where the other national economies on earth are in such worse shape.

If QE was the answer to deficit spending economies like Switzerland and Sweden would see the light and use QE to fund massive deficits like the USA funds massive deficits. But they know better!

Thus Feldstein's article is a smoke and mirrors piece that is technically correct but couched in wording that disguises the fact that QE is really a form of printing money.

The biggest drawback of QE in the USA political attitude that deficits don't matter as long as you're borrowing from yourself. Economists are not so easily misled, but the big spenders in Washington who want more of both guns and butter will keep borrowing from themselves if for no other reason than to keep getting re-elected year after year after year ad infinitum until they're finally pushing up daisies.

Someday the USA will pay the piper who is not invited to make music in Switzerland and Sweden. Quantitative Easing is not free money when you tear down the smoke and mirrors justification. Shame on you Martin Feldstein!

The Economist Dean of the Columbia University Business School  is Not a Fan of Ben Bernanke or Paul Krugman

"Glenn Hubbard Explains The Doomsday Scenario That America Will See In 20 Years If There's No Change In Spending," by Joe Weisenthal, Business Insider, June 24, 2013 ---
http://www.businessinsider.com/glenn-hubbards-doomsday-scenario-2013-6

We recently had Glenn Hubbard, dean of the Columbia Graduate School of Business, into discuss his book Balance: The Economics of Great Powers from Ancient Rome to Modern America.

Hubbard's main argument is that the US must reduce its long-term deficit, and that if it's not addressed, then within 20 years the US will see a "doomsday scenario" of virtually no social spending and monstrous taxes.

Watch the video


"Harvard’s Rogoff Sees Sovereign Defaults, ‘Painful’ Austerity," by Aki Ito and Jason Clenfield, Bloomberg, February 24, 2010 ---
http://mobile.bloomberg.com/apps/news?pid=2065100&sid=aaeViPPUVSw4
Thank you for the heads up Jim Mahar.

Ballooning debt is likely to force several countries to default and the U.S. to cut spending, according to Harvard University Professor Kenneth Rogoff , who in 2008 predicted the failure of big American banks.

Following banking crises, “we usually see a bunch of sovereign defaults, say in a few years,” Rogoff, a former chief economist at the International Monetary Fund, said at a forum in Tokyo yesterday. “I predict we will again.”

The U.S. is likely to tighten monetary policy before cutting government spending, sending “shockwaves” through financial markets, Rogoff said in an interview after the speech. Fiscal policy won’t be curbed until soaring bond yields trigger “very painful” tax increases and spending cuts, he said.

Global scrutiny of sovereign debt has risen after budget shortfalls of countries including Greece swelled in the wake of the worst global financial meltdown since the 1930s. The U.S. is facing an unprecedented $1.6 trillion budget deficit in the year ending Sept. 30, the government has forecast.

“Most countries have reached a point where it would be much wiser to phase out fiscal stimulus,” said Rogoff, who co- wrote a history of financial crises published in 2009. It would be better “to keep monetary policy soft and start gradually tightening fiscal policy even if it meant some inflation.”

Failed Marriage

Rogoff, 56, said he expects Greece will eventually be bailed out by the IMF rather than the European Union. Greece will probably announce an austerity program “in a few weeks” that will prompt the EU to provide a bridge loan which won’t be enough to save the country in the long run, he said.

“It’s like two people getting married and saying therefore they’re living happily ever after,” said Rogoff. “I don’t think Europe’s going to succeed.”

Investors will eventually demand higher interest rates to lend to countries around the world that have accumulated debt, including the U.S., he said. The IMF forecast in November that gross U.S. borrowings will amount to the equivalent of 99.5 percent of annual economic output in 2011. The U.K.’s will reach 94.1 percent and Japan’s will spiral to 204.3 percent.

“In rich countries -- Germany, the United States and maybe Japan -- we are going to see slow growth. They will tighten their belts when the problem hits with interest rates,” Rogoff said at the forum, which was hosted by CLSA Asia-Pacific Markets, a unit of Credit Agricole SA, France’s largest retail bank. Japanese fiscal policy is “out of control,” he said.

Euro Concerns

So far concerns about the euro zone’s ability to withstand the deteriorating finances of its member nations have outweighed the U.S.’s deficit woes, propping up the dollar.

“The more they suck in Greece, the lower the euro goes, because it’s not a viable plan,” Rogoff said. “Clearly the dollar is going to go down against the emerging markets -- there’s going to be concern about inflation and the debt.”

The dollar has surged more than 9 percent against the euro in the past three months. Ten-year Treasuries yielded 3.72 percent as of 10:16 a.m. in New York.

The U.S. government will delay any efforts to contain the deficit until Treasury yields reach around 6 percent to 7 percent, Rogoff said.

“The U.S. is in a state of paralysis in its fiscal policy,” he said. “Monetary policy will tighten first, and I don’t think it’s the right mix.”

Fed Exit

The Federal Reserve last week raised the discount rate charged to banks for direct loans, and plans to end its $1.25 trillion purchases of mortgage-backed securities in March. President Barack Obama ’s administration is proposing a $3.8 trillion budget for fiscal 2011 to spur the recovery.

“When they start tightening monetary policy even a little bit, it’s going to send shockwaves through the system,” Rogoff said.

In an interview a month before Lehman Brothers Holdings Inc. went bankrupt in 2008, Rogoff said “the worst is yet to come in the U.S.” and predicted the collapse of “major” investment banks. His 2009 book “This Time Is Different,” co- written with Carmen M. Reinhart , charts the history of financial crises in 66 countries.

“We almost always have sovereign risk crises in the wake of an international banking crisis, usually in a few years, and that’s happening,” he said. “Greece is just the beginning.”

Greece’s debt totaled 298.5 billion euros ($405 billion) at the end of 2009, according to the Finance Ministry. That’s more than five times more than Russia owed when it defaulted in 1998 and Argentina when it missed payments in 2001.

The cost of protecting Greek bonds from default surged in January, then declined this month as concern eased over the country’s creditworthiness. Credit-default swaps on Greek sovereign debt have fallen to 356 basis points from 428 last month, according to CMA DataVision. That’s up from 171 at the start of December.

“Greece just highlights that one of those risks is sovereign default,” said Naomi Fink , a strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. Still, “it doesn’t justify the situation where we’re all in a panic and are going back to cash in the post-Lehman shock.”

U.S. Debt/Deficit Clock --- http://www.usdebtclock.org/

Bob Jensen's threads on looming entitlements disasters ---
http://www.trinity.edu/rjensen/entitlements.htm

David Walker --- http://en.wikipedia.org/wiki/David_M._Walker_(U.S._Comptroller_General)

Niall Ferguson --- http://en.wikipedia.org/wiki/Niall_Ferguson
Niall Ferguson,
"An Empire at Risk:  How Great Powers Fail," Newsweek Magazine Cover Story, November 26, 2009 --- http://www.newsweek.com/id/224694/page/1
Please note that this is NBC’s liberal Newsweek Magazine and not Fox News or The Wall Street Journal.


Stop Imitating Hyper-inflated Zimbabe:  The U.S. Treasury Should Cease Monetizing the Debt
The U.S. should borrow or tax to pay its debts, but stop printing money to pay deficit-driven debt

"Don't Monetize the Debt: The president of the Dallas Fed on inflation risk and central bank independence," by Mary Anastasia O'Grady, The Wall Street Journal, May 23, 2009 ---
http://online.wsj.com/article/SB124303024230548323.html

From his perch high atop the palatial Dallas Federal Reserve Bank, overlooking what he calls "the most modern, efficient city in America," Richard Fisher says he is always on the lookout for rising prices. But that's not what's worrying the bank's president right now.

His bigger concern these days would seem to be what he calls "the perception of risk" that has been created by the Fed's purchases of Treasury bonds, mortgage-backed securities and Fannie Mae paper.

Mr. Fisher acknowledges that events in the financial markets last year required some unusual Fed action in the commercial lending market. But he says the longer-term debt, particularly the Treasurys, is making investors nervous. The looming challenge, he says, is to reassure markets that the Fed is not going to be "the handmaiden" to fiscal profligacy. "I think the trick here is to assist the functioning of the private markets without signaling in any way, shape or form that the Federal Reserve will be party to monetizing fiscal largess, deficits or the stimulus program."

The very fact that a Fed regional bank president has to raise this issue is not very comforting. It conjures up images of Argentina. And as Mr. Fisher explains, he's not the only one worrying about it. He has just returned from a trip to China, where "senior officials of the Chinese government grill[ed] me about whether or not we are going to monetize the actions of our legislature." He adds, "I must have been asked about that a hundred times in China."

A native of Los Angeles who grew up in Mexico, Mr. Fisher was educated at Harvard, Oxford and Stanford. He spent his earliest days in government at Jimmy Carter's Treasury. He says that taught him a life-long lesson about inflation. It was "inflation that destroyed that presidency," he says. He adds that he learned a lot from then Fed Chairman Paul Volcker, who had to "break [inflation's] back."

Mr. Fisher has led the Dallas Fed since 2005 and has developed a reputation as the Federal Open Market Committee's (FOMC) lead inflation worrywart. In September he told a New York audience that "rates held too low, for too long during the previous Fed regime were an accomplice to [the] reckless behavior" that brought about the economic troubles we are now living through. He also warned that the Treasury's $700 billion plan to buy toxic assets from financial institutions would be "one more straw on the back of the frightfully encumbered camel that is the federal government ledger."

In a speech at the Kennedy School of Government in February, he wrung his hands about "the very deep hole [our political leaders] have dug in incurring unfunded liabilities of retirement and health-care obligations" that "we at the Dallas Fed believe total over $99 trillion." In March, he is believed to have vociferously objected in closed-door FOMC meetings to the proposal to buy U.S. Treasury bonds. So with long-term Treasury yields moving up sharply despite Fed intentions to bring down mortgage rates, I've flown to Dallas to see what he's thinking now.

Regarding what caused the credit bubble, he repeats his assertion about the Fed's role: "It is human instinct when rates are low and the yield curve is flat to reach for greater risk and enhanced yield and returns." (Later, he adds that this is not to cast aspersions on former Fed Chairman Alan Greenspan and reminds me that these decisions are made by the FOMC.)

"The second thing is that the regulators didn't do their job, including the Federal Reserve." To this he adds what he calls unusual circumstances, including "the fruits and tailwinds of globalization, billions of people added to the labor supply, new factories and productivity coming from places it had never come from before." And finally, he says, there was the 'mathematization' of risk." Institutions were "building risk models" and relying heavily on "quant jocks" when "in the end there can be no substitute for good judgment."

What about another group of alleged culprits: the government-anointed rating agencies? Mr. Fisher doesn't mince words. "I served on corporate boards. The way rating agencies worked is that they were paid by the people they rated. I saw that from the inside." He says he also saw this "inherent conflict of interest" as a fund manager. "I never paid attention to the rating agencies. If you relied on them you got . . . you know," he says, sparing me the gory details. "You did your own analysis. What is clear is that rating agencies always change something after it is obvious to everyone else. That's why we never relied on them." That's a bit disconcerting since the Fed still uses these same agencies in managing its own portfolio.

I wonder whether the same bubble-producing Fed errors aren't being repeated now as Washington scrambles to avoid a sustained economic downturn.

He surprises me by siding with the deflation hawks. "I don't think that's the risk right now." Why? One factor influencing his view is the Dallas Fed's "trim mean calculation," which looks at price changes of more than 180 items and excludes the extremes. Dallas researchers have found that "the price increases are less and less. Ex-energy, ex-food, ex-tobacco you've got some mild deflation here and no inflation in the [broader] headline index."

Mr. Fisher says he also has a group of about 50 CEOs around the U.S. and the world that he calls on, all off the record, before almost every FOMC meeting. "I don't impart any information, I just listen carefully to what they are seeing through their own eyes. And that gives me a sense of what's happening on the ground, you might say on Main Street as opposed to Wall Street."

It's good to know that a guy so obsessed with price stability doesn't see inflation on the horizon. But inflation and bubble trouble almost always get going before they are recognized. Moreover, the Fed has to pay attention to the 1978 Full Employment and Balanced Growth Act -- a.k.a. Humphrey-Hawkins -- and employment is a lagging indicator of economic activity. This could create a Fed bias in favor of inflating. So I push him again.

"I want to make sure that your readers understand that I don't know a single person on the FOMC who is rooting for inflation or who is tolerant of inflation." The committee knows very well, he assures me, that "you cannot have sustainable employment growth without price stability. And by price stability I mean that we cannot tolerate deflation or the ravages of inflation."

Mr. Fisher defends the Fed's actions that were designed to "stabilize the financial system as it literally fell apart and prevent the economy from imploding." Yet he admits that there is unfinished work. Policy makers have to be "always mindful that whatever you put in, you are going to have to take out at some point. And also be mindful that there are these perceptions [about the possibility of monetizing the debt], which is why I have been sensitive about the issue of purchasing Treasurys."

He returns to events on his recent trip to Asia, which besides China included stops in Japan, Hong Kong, Singapore and Korea. "I wasn't asked once about mortgage-backed securities. But I was asked at every single meeting about our purchase of Treasurys. That seemed to be the principal preoccupation of those that were invested with their surpluses mostly in the United States. That seems to be the issue people are most worried about."

As I listen I am reminded that it's not just the Asians who have expressed concern. In his Kennedy School speech, Mr. Fisher himself fretted about the U.S. fiscal picture. He acknowledges that he has raised the issue "ad nauseam" and doesn't apologize. "Throughout history," he says, "what the political class has done is they have turned to the central bank to print their way out of an unfunded liability. We can't let that happen. That's when you open the floodgates. So I hope and I pray that our political leaders will just have to take this bull by the horns at some point. You can't run away from it."

Voices like Mr. Fisher's can be a problem for the politicians, which may be why recently there have been rumblings in Washington about revoking the automatic FOMC membership that comes with being a regional bank president. Does Mr. Fisher have any thoughts about that?

This is nothing new, he points out, briefly reviewing the history of the political struggle over monetary policy in the U.S. "The reason why the banks were put in the mix by [President Woodrow] Wilson in 1913, the reason it was structured the way it was structured, was so that you could offset the political power of Washington and the money center in New York with the regional banks. They represented Main Street.

"Now we have this great populist fervor and the banks are arguing for Main Street, largely. I have heard these arguments before and studied the history. I am not losing a lot of sleep over it," he says with a defiant Texas twang that I had not previously detected. "I don't think that it'd be the best signal to send to the market right now that you want to totally politicize the process."

Speaking of which, Texas bankers don't have much good to say about the Troubled Asset Relief Program (TARP), according to Mr. Fisher. "Its been complicated by the politics because you have a special investigator, special prosecutor, and all I can tell you is that in my district here most of the people who wanted in on the TARP no longer want in on the TARP."

At heart, Mr. Fisher says he is an advocate for letting markets clear on their own. "You know that I am a big believer in Schumpeter's creative destruction," he says referring to the term coined by the late Austrian economist. "The destructive part is always painful, politically messy, it hurts like hell but you hopefully will allow the adjustments to be made so that the creative part can take place." Texas went through that process in the 1980s, he says, and came back stronger.

This is doubtless why, with Washington taking on a larger role in the American economy every day, the worries linger. On the wall behind his desk is a 1907 gouache painting by Antonio De Simone of the American steam sailing vessel Varuna plowing through stormy seas. Just like most everything else on the walls, bookshelves and table tops around his office -- and even the dollar-sign cuff links he wears to work -- it represents something.

He says that he has had this painting behind his desk for the past 30 years as a reminder of the importance of purpose and duty in rough seas. "The ship," he explains, "has to maintain its integrity." What is more, "no mathematical model can steer you through the kind of seas in that picture there. In the end someone has the wheel." He adds: "On monetary policy it's the Federal Reserve."

Bob Jensen's threads on the National Debt Crisis are at
http://www.trinity.edu/rjensen/2008Bailout.htm#NationalDebt


"Mr. Wen's Debt Bomb," The Wall Street Journal, March 18, 2009 --- http://online.wsj.com/article/SB123734170930865121.html 

President Obama's stimulus plan and new budget will require an additional $3 trillion to $4 trillion in new borrowing over the next two or three years, and that's if the economy recovers smartly. Adding it all up, Federal Reserve Chairman Ben Bernanke last week estimated that U.S. public debt-to-GDP would reach 60% over the next few years, up from 40% before the financial panic hit -- and the highest level since the aftermath of World War II. He must be an optimist. As the nearby chart shows, Mr. Obama's budget anticipates a decade of outlays far above postwar spending and revenue averages. And even that assumes, implausibly, that most "stimulus" spending will be temporary.

That's a lot of T-bills to flog, and the world is taking note. Our colleagues at MarketWatch reported last week that the cost to buy insurance against U.S. sovereign debt default has surged in the past year. The spreads on credit default swaps for U.S. government debt hit 97 basis points last week -- or $97,000 to buy insurance on $10 million in debt -- nearly seven times higher than a year ago and 60% higher than the end of 2008.

Mr. Wen called on the U.S. to "maintain its credibility, honor its commitments and guarantee the safety of Chinese assets." Little wonder: China, like other trading nations, has a big stake in this fiscal free-for-all. Although it doesn't release detailed data, roughly two-thirds of Beijing's $1.9 trillion foreign-exchange reserves are likely parked in U.S. Treasury debt.

The Obama Administration revealed its sensitivity on the issue by responding quickly, with Presidential spokesman Robert Gibbs saying Friday "there's no safer investment in the world than in the United States." Mr. Obama added Saturday that "not just the Chinese government, but every investor can have absolute confidence in the soundness of investments in the United States."

The White House is almost certainly right that the U.S. won't default; the consequences would be too dire. But there are risks well short of formal debt repudiation. As the supply of U.S. debt increases, investors may demand a higher yield and interest rates would rise, reducing the tradable value of current Treasury bonds. The other temptation will be to inflate away the debt, which would also devalue dollar-denominated assets.

What Mr. Wen is really saying is that even the U.S. national balance sheet has limits. The dollar is the world's reserve currency, so the U.S. has the rare privilege among nations of being able to borrow (and then repay its debts) in its own currency. America also remains the world's main safe haven in a crisis, as the flight to the dollar and T-bills in recent months underscores.

But reserve currency status isn't a birthright and it can vanish when nations are irresponsible. Deficits are sometimes necessary to finance tax cuts and investments that promote economic growth. The tragedy of Mr. Obama's $787 billion stimulus and $410 billion 2009 budget is that they spend principally on transfer payments that have little growth payback. The U.S. received another foreign rebuke on this score this weekend, when German Chancellor Angela Merkel and other Europeans rejected Mr. Obama's calls for a comparable spending binge on the Continent.

Mr. Wen may have been trying to placate his domestic Chinese audience, which is suffering through its own economic slowdown. Or perhaps he was trying to repay Treasury Secretary Timothy Geithner for his nomination-hearing comments on Chinese currency "manipulation." Mr. Wen doesn't have much room to lecture the U.S., having done too little in his nearly six years in office to liberalize the Chinese economy.

But the Chinese Premier is right to warn the U.S. political class that the global demand for American debt will continue only if the U.S. runs economic policies that make U.S.-dollar assets worth the risk.


Question
As of December 2008, what do Zimbabwe and the United States have in common?

Answer
Rather than taxing or borrowing to cover deficit spending, both governments are simply printing more money?

What's wrong with that?
First look at what it did to Zimbabwe. Then read about Gresham's Law --- http://en.wikipedia.org/wiki/Gresham%27s_Law
The instant the Federal Reserve announced this new funding policy in December, the U.S. dollar plunged in value relative to foreign currencies. The reason is obvious.

Zimbabwe's central bank will introduce a 100 trillion Zimbabwe dollar banknote, worth about $33 on the black market, to try to ease desperate cash shortages, state-run media said on Friday.
KyivPost, January 16, 2009 --- http://www.kyivpost.com/world/33522
Jensen Comment
This is a direct result of raising money by simply printing it, and the U.S. should take note since this is how our Federal government has decided to pay for anticipated trillion-dollar budget deficits --- http://www.trinity.edu/rjensen/2008Bailout.htm#NationalDebt

The United States will "look like a banana republic" unless it gains control over its budget deficit and federal debt, economist Allen Sinai warned Congress on Thursday. "The deficit and debt prospects under almost any scenario are daunting," Mr. Sinai, chief global economist for Decision Economics Inc., told the Senate Budget Committee. "This territory is uncharted, with no real historical analogue to this kind of financial situation for a major global economic power." Asked by committee Chairman Kent Conrad, North Dakota Democrat, whether the U.S. government's creditworthiness is at risk, Mr. Sinai replied, "Unequivocally yes." Richard Berner, chief U.S. economist at Morgan Stanley, told the committee one measure of America's creditworthiness -- credit default swap spreads -- already shows some deterioration. The worse a nation's credit rating becomes, the more its CDS spread rises. U.S. sovereign CDS spreads have widened to about 0.6 percent from 0.1 percent last summer, Mr. Berner noted. "So the message is that you ignore global investors at your peril," he told the committee.
David M. Dixon
, "Congress warned about debt U.S. advised to gain control," The Washington Times, January 16, 2009 --- http://washingtontimes.com/news/2009/jan/16/policies-on-debt-a-risk-to-economy/

The US government is on a “burning platform” of unsustainable policies and practices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon.
David M. Walker, Former Chief Accountant of the United States --- http://www.financialsense.com/editorials/quinn/2009/0218.html
Also see his dire warnings on CBS Sixty Minutes on the unbooked national debt for entitlements (See below)

Question
What caused the credit crisis and why can't credit be unlocked after throwing over $1 trillion at the big banks?

Great answers on Video --- this is a must-see video for you, your family, and your students who want to understand these banking failures
The Short and Simple Video About What Caused the Credit Crisis --- http://vimeo.com/3261363
Also at http://www.youtube.com/watch?v=Q0zEXdDO5JU
Ed Scribner forwarded the above links

Question
Who more than anybody else is at fault for wiping out shareholders in AIG, Bear Stearns, Merrill Lynch, CitiBank, Bank of America, Washington Mutual, Fannie Mae, Freddie Mack, etc.

Answers
I primarily blame the CPA auditors, internal auditors, and credit rating agencies that failed to disclose the off-balance-sheet risks that fee-loving bankers had created. The auditors and credit rating agencies have a fiduciary and professional responsibility to disclose to investors the extent of looming uncollectable investments. For many years auditors have been knowingly understating banks' bad debt risks and failing to warn investors about such banking risks. I also think auditors, along with credit rating agencies, knew full well about the financial risks of their huge clients but were afraid to jeopardize their fees by blowing whistles.

Question
What more than anything else saved United Airlines and who is primarily at fault for wiping out the shareholders of United Airlines in 2002?

Answer
In December 2002 United Airlines filed Chapter 11 Bankruptcy. In order to get United's airplanes back in the air, the single most important saving device was to have Uncle Sam's taxpayers take over the lifetime retirement obligations to be paid to United's retired pilots, flight attendants, mechanics, passenger agents, and ground crews. This saved United Airlines with the help of some major wage concessions of existing employees who decided that keeping their jobs was the most important thing to them.

Once again the auditors are primarily at fault for not warning investors soon enough that United Airlines was not a viable going concern and would not be able to meet its unbooked liabilities called Off-Balance-Sheet-Financing (OBSF) by accountants. If investors had been warned years earlier, the stock market would've forced United Airlines to become more serious about pricing and funding of retirement obligations. But since investors were not forewarned by the auditors and credit rating agencies, the equity holders (many of them United Airlines employees) got wiped out by the 2002 declaration of bankruptcy.

Question
What more than anything else will save General Motors in 2009 and who is primarily at fault for wiping out the shareholders of General Motors?
GM is now losing $85 million per day on average.

In 2009 or 2010 filed General Motors will most likely declare Chapter 11 Bankruptcy. It will be Deja Vu United Airlines. In order to get GM's vehicles back on the road, the single most important saving device was to have Uncle Sam's taxpayers take over the retirement obligations (pensions and health care obligations) to be paid to GM's retired management and factory workers and GMAC retired employees as well. This will save GM with the help of some major wage concessions of existing GM employees who eventually decide that keeping their jobs was the most important thing to them.

Once again the auditors are primarily at fault for not warning investors soon enough that General Motors was not a viable going concern and would not be able to meet its unbooked liabilities called Off-Balance-Sheet-Financing (OBSF). If investors had been warned years earlier, the stock market would've forced General Motors to become more serious about pricing and funding of retirement obligations. But since investors were not forewarned by the auditors and credit rating agencies, the equity holders (many of them being huge investment funds) got wiped out by the forthcoming 2009 declaration of bankruptcy.

In fairness, the accountants did give more warning about OBSF unfunded retirement obligations in GM's case relative the United Airlines. Accountants did disclose some years ago that about $1,500 of each new vehicle sold went toward current funding of for retirement and health care of GM's retired workers. It's been widely known for some time that GM's retirement obligations were badly underfunded. What made it especially difficult for GM is that it's major foreign competitors were making longer-lasting vehicles that beat GM prices. The reason Toyota, Subaru, Nissan, etc. could undercut GM prices is that these foreign automakers did not have the serious unbooked OBSF obligations that GM carried on its back.

Question
What are the two secret numbers that you will never hear mentioned by Uncle Sam's current leaders like President Obama, House Speaker Pelosi, and Senate Leader Reid?

Answer
They will never mention the extent of Uncle Sam's unbooked OBSF liabilities. Accountants have no accurate estimates of these liabilities, but the former Chief Accountant of the United States, David Walker, estimates that these are about $60 trillion at the moment. They may well be $100 trillion in four years if Congress is successful in legislating tens of trillions of dollars in new entitlements for education, energy, welfare, and health care.

Uncle Sam's leaders are now focusing our attention on problems with the annual spending deficit (which may well approach $ trillion at the end of 2009) and the booked National Debt (which may well approach $12 trillion by the end of 2009). But these booked items will not break the back of Uncle Sam. What will break the back of Uncle Sam is what broke the back of United Airlines and General Motors. It's the unbooked OBSF debt which the companies, auditors, and credit rating agencies tried to keep secret.

Uncle Sam saved United Airlines by taking over United's OBSF retirement debt. Uncle Sam will probably do the same for GM, Ford, and Chrysler unfunded OBSF debt. But who will save Uncle Sam from its $60-$100 trillion of unfunded and unbooked OBSF debt?
Answer
Only the Abraham Lincoln School of Finance (see Lincoln’s quote below) will save Uncle Sam from its unsustainable OBSF

You, your family, and your students may learn a great deal from the links to David Walker's warning videos and the most worrisome CBS Sixty Minutes module ever produced --- http://www.trinity.edu/rjensen/entitlements.htm

The US government is on a “burning platform” of unsustainable policies and practices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon.
David M. Walker, Former Chief Accountant of the United States --- http://www.financialsense.com/editorials/quinn/2009/0218.html
Also see his dire warnings on CBS Sixty Minutes on the unbooked national debt for entitlements (See below)

A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury, with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship.
Alexander Tyler. 1787 - Tyler was a Scottish history professor that had this to say about 2000 years after "The Fall of the Athenian Republic" and about the time our original 13 states adopted their new constitution.
As quoted at http://www.babylontoday.com/national_debt_clock.htm (where the debt clock in real time is a few months behind)
The National Debt Amount This Instant (Refresh your browser for updates by the second) --- http://www.brillig.com/debt_clock/

 

The Perfect (Stimulus) Storm for a Universal Healthcare Entitlement in the United States
The more we dig into the pile of spending and tax favors known as the "stimulus bill," the more amazing discoveries we make. Namely, Democrats have apparently decided that the way to gun the economy is to spend even more on health care. This is notable because if there has been one truly bipartisan idea in Washington, it's that the U.S. as a whole spends too much on health care. President Obama has been talking up entitlement reform as a way to free up the money for his other social priorities. But it turns out that Congress is using the stimulus as cover for a massive expansion of federal entitlements.
"The Entitlement Stimulus:  More giant steps toward government," The Wall Street Journal, January 29, 2009 --- http://online.wsj.com/article/SB123318915075926757.html?mod=djemEditorialPage
Jensen Comment
On January 28, ABC News reported how the Canadian Universal Health Care Plan was so much more efficient in terms of accounting efficiency, largely because third party billing in the U.S. has become a quagmire. However, what ABC failed to mention, probably deliberately, is that over half of the average Canadian's salary is taxed mostly for health care. Much has been made about the months or years Canadians wait for non-emergency medical treatments. But seldom does the liberal U.S. press mention the enormous tax bill that goes with the Canadian Universal Health Care Plan. Taxpayers need not worry in the United States however. The new entitlement payment plan in the U.S. simply entails printing money rather than taxing or borrowing --- http://www.trinity.edu/rjensen/Entitlements.htm

"Fed Cuts Key Rate to a Record Low," by Edmund L. Andrews and Jackie Calmes, The New York Times, December 16, 2008 ---
http://www.nytimes.com/2008/12/17/business/economy/17fed.html?_r=1&scp=1&sq=printing money&st=cse

In effect, the Fed is stepping in as a substitute for banks and other lenders and acting more like a bank itself.
“The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth,” it said. Those tools include buying “large quantities” of mortgage-related bonds, longer-term Treasury bonds, corporate debt and even consumer loans.

The move came as President-elect Barack Obama summoned his economic team to a four-hour meeting in Chicago to map out plans for an enormous economic stimulus measure that could cost anywhere from $600 billion to $1 trillion over the next two years.

The two huge economic stimulus programs, one from the Fed and one from the White House and Congress, set the stage for a powerful but potentially risky partnership between Mr. Obama and the Fed’s Republican chairman, Ben S. Bernanke.

“We are running out of the traditional ammunition that’s used in a recession, which is to lower interest rates,” Mr. Obama said at a news conference Tuesday. “It is critical that the other branches of government step up, and that’s why the economic recovery plan is so essential.”

Financial markets were electrified by the Fed action. The Dow Jones industrial average jumped 4.2 percent, or 359.61 points, to close at 8,924.14.

Investors rushed to buy long-term Treasury bonds. Yields on 10-year Treasuries, which have traditionally served as a guide for mortgage rates, plunged immediately after the announcement to 2.26 percent, their lowest level in decades, from 2.51 percent earlier in the day.

Yields on investment-grade corporate bonds edged down to 7.215 percent on Tuesday, from 7.355 on Monday. Yields on riskier high-yielding corporate bonds remained in the stratosphere at 22.493 percent, almost unchanged from 22.732 on Monday.

By contrast, the dollar dropped sharply against the euro and other major currencies for the second consecutive day — a sign that currency markets were nervous about a flood of newly printed dollars.
Some analysts predict that the Treasury will have to sell $2 trillion worth of new securities over the next year to finance its existing budget deficit, a new stimulus program and to refinance about $600 billion worth of maturing government debt.

For the moment, Mr. Obama and Mr. Bernanke appear to be on the same page, though that could abruptly change if the economy starts to revive. Fed officials have already assumed that Congress will pass a major spending program to stimulate the economy, and they are counting on it to contribute to economic growth next year.

In more normal times, the Fed might easily start raising interest rates in reaction to a huge new spending program, out of concern about rising inflation.

But data on Tuesday provided new evidence that the biggest threat to prices right now was not inflation but deflation.

The federal government reported on Tuesday that the Consumer Price Index fell 1.7 percent in November, the steepest monthly drop since the government began tracking prices in 1947. The decline was largely driven by the recent plunge in energy prices, but even the so-called core inflation rate, which excludes the volatile food and energy sectors, was essentially zero.

Mr. Obama’s goal is to have a package ready when the new Congress convenes on Jan. 6. His hope is that the House and Senate, with their bigger Democratic majorities, can agree quickly on a plan for Mr. Obama to sign into law soon after he is sworn into office two weeks later.

The Fed, in a statement accompanying its rate decision, acknowledged that the recession was more severe than officials had thought at their last meeting in October.

“Over all, the outlook for economic activity has weakened further,” the central bank said.

“Labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment and industrial production have declined.”

The central bank added: “The committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.”

With fewer than 10 days until Christmas, retailers from Saks Fifth Avenue to Wal-Mart have been slashing prices to draw in consumers, who have sharply reduced their spending over the last six months. On Tuesday, Banana Republic offered customers $50 off on any purchases that total $125. The clothing retailer DKNY offered customers $50 off any purchase totaling $250.

Ian Shepherdson, an analyst at High Frequency Economics, said falling energy prices were likely to bring the year-over-year rate of inflation to below zero in January.

The Fed has already announced or outlined a range of unorthodox new tools that it can use to keep stimulating the economy once the federal funds rate effectively reaches zero. On Tuesday, Fed officials said they stood ready to expand them or create new ones to relieve bottlenecks in the credit markets.

All of the tools involve borrowing by the Fed, which amounts to printing money in vast new quantities, a process the Fed has already started.
Since September, the Fed’s balance sheet has ballooned from about $900 billion to more than $2 trillion as it has created money and lent it out. As soon as the Fed completes its plans to buy mortgage-backed debt and consumer debt, the balance sheet will be up to about $3 trillion.

“At some point, and without knowing the timing, the Fed is going to have to destroy all that money it is creating,” said Alan Blinder, a professor of economics at Princeton and a former vice chairman of the Federal Reserve.

“Right now, the crisis is created by the huge demand by banks for hoarding cash. The Fed is providing cash, and the banks want to hoard it. When things start returning to normal, the banks will want to start lending it out. If that much money is left in the monetary base, it would be extremely inflationary.”

This is the thing I’ve been afraid of ever since I realized that Japan really was in the dreaded, possibly mythical liquidity trap. You can read my 1998 Brookings Paper on the issue here. Incidentally, there were a bunch of us at Princeton worrying about the Japan problem in the early years of this decade. I was one; Lars Svensson, currently at Sweden’s Riksbank, was another; a third was a guy named Ben Bernanke. I wonder whatever happened to him?
Paul Krugman, "ZIRP," The New York Times, December 16, 2008 ---
http://krugman.blogs.nytimes.com/2008/12/16/zirp/?scp=8&sq=printing money&st=cse


Federal Revenue and Spending Book of Charts (Great Charts on Bad Budgeting) ---
http://www.heritage.org/research/features/BudgetChartBook/index.html


A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury, with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship.
Alexander Tyler. 1787 - Tyler was a Scottish history professor that had this to say about 2000 years after "The Fall of the Athenian Republic" and about the time our original 13 states adopted their new constitution.
As quoted at http://www.babylontoday.com/national_debt_clock.htm (where the debt clock in real time is a few months behind)
The National Debt Amount This Instant (Refresh your browser for updates by the second) --- http://www.brillig.com/debt_clock/

Question
As of December 2008, what do Zimbabwe and the United States have in common.

Answer
Rather than taxing or borrowing to cover deficit spending, both governments are simply printing more money?

What's wrong with that?
First look at what it did to Zimbabwe. Then read about Gresham's Law --- http://en.wikipedia.org/wiki/Gresham%27s_Law
The instant the Federal Reserve announced this new funding policy in December, the U.S. dollar plunged in value relative to foreign currencies. The reason is obvious.

"Fed Cuts Key Rate to a Record Low," by Edmund L. Andrews and Jackie Calmes, The New York Times, December 16, 2008 ---
http://www.nytimes.com/2008/12/17/business/economy/17fed.html?_r=1&scp=1&sq=printing money&st=cse

In effect, the Fed is stepping in as a substitute for banks and other lenders and acting more like a bank itself.
“The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth,” it said. Those tools include buying “large quantities” of mortgage-related bonds, longer-term Treasury bonds, corporate debt and even consumer loans.

The move came as President-elect Barack Obama summoned his economic team to a four-hour meeting in Chicago to map out plans for an enormous economic stimulus measure that could cost anywhere from $600 billion to $1 trillion over the next two years.

The two huge economic stimulus programs, one from the Fed and one from the White House and Congress, set the stage for a powerful but potentially risky partnership between Mr. Obama and the Fed’s Republican chairman, Ben S. Bernanke.

“We are running out of the traditional ammunition that’s used in a recession, which is to lower interest rates,” Mr. Obama said at a news conference Tuesday. “It is critical that the other branches of government step up, and that’s why the economic recovery plan is so essential.”

Financial markets were electrified by the Fed action. The Dow Jones industrial average jumped 4.2 percent, or 359.61 points, to close at 8,924.14.

Investors rushed to buy long-term Treasury bonds. Yields on 10-year Treasuries, which have traditionally served as a guide for mortgage rates, plunged immediately after the announcement to 2.26 percent, their lowest level in decades, from 2.51 percent earlier in the day.

Yields on investment-grade corporate bonds edged down to 7.215 percent on Tuesday, from 7.355 on Monday. Yields on riskier high-yielding corporate bonds remained in the stratosphere at 22.493 percent, almost unchanged from 22.732 on Monday.

By contrast, the dollar dropped sharply against the euro and other major currencies for the second consecutive day — a sign that currency markets were nervous about a flood of newly printed dollars.
Some analysts predict that the Treasury will have to sell $2 trillion worth of new securities over the next year to finance its existing budget deficit, a new stimulus program and to refinance about $600 billion worth of maturing government debt.

For the moment, Mr. Obama and Mr. Bernanke appear to be on the same page, though that could abruptly change if the economy starts to revive. Fed officials have already assumed that Congress will pass a major spending program to stimulate the economy, and they are counting on it to contribute to economic growth next year.

In more normal times, the Fed might easily start raising interest rates in reaction to a huge new spending program, out of concern about rising inflation.

But data on Tuesday provided new evidence that the biggest threat to prices right now was not inflation but deflation.

The federal government reported on Tuesday that the Consumer Price Index fell 1.7 percent in November, the steepest monthly drop since the government began tracking prices in 1947. The decline was largely driven by the recent plunge in energy prices, but even the so-called core inflation rate, which excludes the volatile food and energy sectors, was essentially zero.

Mr. Obama’s goal is to have a package ready when the new Congress convenes on Jan. 6. His hope is that the House and Senate, with their bigger Democratic majorities, can agree quickly on a plan for Mr. Obama to sign into law soon after he is sworn into office two weeks later.

The Fed, in a statement accompanying its rate decision, acknowledged that the recession was more severe than officials had thought at their last meeting in October.

“Over all, the outlook for economic activity has weakened further,” the central bank said.

“Labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment and industrial production have declined.”

The central bank added: “The committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.”

With fewer than 10 days until Christmas, retailers from Saks Fifth Avenue to Wal-Mart have been slashing prices to draw in consumers, who have sharply reduced their spending over the last six months. On Tuesday, Banana Republic offered customers $50 off on any purchases that total $125. The clothing retailer DKNY offered customers $50 off any purchase totaling $250.

Ian Shepherdson, an analyst at High Frequency Economics, said falling energy prices were likely to bring the year-over-year rate of inflation to below zero in January.

The Fed has already announced or outlined a range of unorthodox new tools that it can use to keep stimulating the economy once the federal funds rate effectively reaches zero. On Tuesday, Fed officials said they stood ready to expand them or create new ones to relieve bottlenecks in the credit markets.

All of the tools involve borrowing by the Fed, which amounts to printing money in vast new quantities, a process the Fed has already started.
Since September, the Fed’s balance sheet has ballooned from about $900 billion to more than $2 trillion as it has created money and lent it out. As soon as the Fed completes its plans to buy mortgage-backed debt and consumer debt, the balance sheet will be up to about $3 trillion.

“At some point, and without knowing the timing, the Fed is going to have to destroy all that money it is creating,” said Alan Blinder, a professor of economics at Princeton and a former vice chairman of the Federal Reserve.

“Right now, the crisis is created by the huge demand by banks for hoarding cash. The Fed is providing cash, and the banks want to hoard it. When things start returning to normal, the banks will want to start lending it out. If that much money is left in the monetary base, it would be extremely inflationary.”

This is the thing I’ve been afraid of ever since I realized that Japan really was in the dreaded, possibly mythical liquidity trap. You can read my 1998 Brookings Paper on the issue here. Incidentally, there were a bunch of us at Princeton worrying about the Japan problem in the early years of this decade. I was one; Lars Svensson, currently at Sweden’s Riksbank, was another; a third was a guy named Ben Bernanke. I wonder whatever happened to him?
Paul Krugman, "ZIRP," The New York Times, December 16, 2008 ---
http://krugman.blogs.nytimes.com/2008/12/16/zirp/?scp=8&sq=printing money&st=cse

As it has so often in recent months, the market elation that greeted the Federal Reserve's epic monetary easing earlier this week has turned to worry. Stocks fell off again yesterday, but the big news of the week has been the slide in the dollar. The nearby chart shows the greenback's story since September. From its dangerous summer lows, the buck soared at the height of the credit panic as investors looked for safety in a hurricane. But the dollar has fallen like Newton's apple in December, as Chairman Ben Bernanke and his comrades signaled that they are willing to cut interest rates to near-zero and print as much money as it takes to prevent a deflation.
"A Dollar Referendum Currency markets reflect a lack of faith in Bernanke," The Wall Street Journal, December 19, 2008 ---
http://online.wsj.com/article/SB122965017184420567.html

Am I the only guy in this country who’s fed up with what’s happening? Where the hell is our outrage? We should be screaming bloody murder. We’ve got a gang of clueless bozos steering our ship of state right over a cliff, we’ve got corporate gangsters stealing us blind, and we can’t even clean up after a hurricane much less build a hybrid car. But instead of getting mad, everyone sits around and nods their heads when the politicians say, "Stay the course." . . . Name me a government leader who can articulate a plan for paying down the debt, or solving the energy crisis, or managing the health care problem. The silence is deafening. But these are the crises that are eating away at our country and milking the middle class dry. I have news for the gang in Congress and the Senate. We didn’t elect you to sit on your asses and do nothing and remain silent while our democracy is being hijacked and our greatness is being replaced with mediocrity. What is everybody so afraid of? That some bonehead on Fox News will call them a name? Give me a break. Why don’t you guys show some spine for a change? I honestly don’t think any of you have one! . . . The most famous business leaders are not the innovators but the guys in handcuffs. While we’re fiddling in Iraq , the Middle East is burning and nobody seems to know what to do. And the press is waving ‘pom-poms’ instead of asking hard questions. That’s not the promise of the ‘ America ‘ my parents and yours traveled across the ocean for. I’ve had enough. How about you?
Lee Iococca (the former and successful CEO of Chrysler) as quoted in Jim Sinclair's Mailbox on December 20, 2008 --- http://www.jsmineset.com/


The House made its first down payment on President Obama's health-care plans last week, passing 289-139 a major expansion of the State Children's Health Insurance Program. The Senate is scheduled to take it up soon and pass it easily as well. These days tens of billions in new spending is a mere pittance, but Schip is also the Democratic model for a quantum jump in government health care down the line. The bill became a liberal Pequot after President Bush repeatedly vetoed it in 2007 (while supporting a modest expansion). The GOP has no hope of stopping it now, so Schip will more than double in size with $73.3 billion in new spending over the next decade -- not counting a budget gimmick that hides the true cost. The program is supposed to help children from working-poor families who earn too much to qualify for Medicaid, but since it was created in 1997 Democrats have used it as a ratchet to grow the federal taxpayer share of health-care coverage. With the new bill, Schip will be open to everyone up to 300% of the federal poverty level, or $63,081 for a family of four. In other words, a program supposedly targeted at low-income families has an eligibility ceiling higher than the U.S. median household income, which according to the Census Bureau is $50,233. Even the 300% figure isn't really a ceiling, given that states can get a government waiver to go even higher. Tom Daschle's folks at Health and Human Services will barely read the state paperwork before rubberstamping these expansions.
"The Latest Entitlement:  Federal health care at 300% of poverty," The Wall Street Journal, January 21, 2009 ---
http://online.wsj.com/article/SB123249769747600423.html?mod=djemEditorialPage


Reinventing the American Dream --- http://www.trinity.edu/rjensen/2008Bailout.htm#AmericanDream


"Paul Krugman: The Prophet of Socialism A prophet who has been consistently wrong," by Donald Luskin )Editor’s Note: This article is excerpted from Donald Luskin’s new book, I Am John Galt,, National Review, June 13, 2011 ---
http://www.nationalreview.com/articles/269428/paul-krugman-prophet-socialism-donald-luskin

Christiane Amanpour’s eyes darted back and forth in fear, and her mouth twisted in disgust, because she could see where this was going. A guest on her Sunday-morning political talk show, ABC’s This Week, was getting dangerously overexcited, and something very regrettable was about to happen.

She could see that he was winding himself up as he talked about how a recent deficit-reduction panel hadn’t been “brave enough” — because it failed to endorse the idea of expert panels that would determine what medical services government-funded care wouldn’t pay for. When Obamacare was still being debated in Congress, Sarah Palin had created a media sensation by calling them “death panels,” causing most liberals who supported Obamacare to quickly distance themselves from any idea of rationing care as being tantamount to murder.

The guest said, “Some years down the pike, we’re going to get the real solution, which is going to be a combination of death panels and sales taxes.”

It was all the more horrifying because the guest was not a conservative, not an opponent of Obamacare. This guest was an avid liberal, a partisan Democrat, and an enthusiastic supporter of government-run health care. He was endorsing death panels, not warning about them. He was saying death panels are a good thing. And it was even more horrifying because of who this guest was. This was no fringe lefty wearing a tinfoil hat, churning out underground newspapers in his parents’ basement. This was an economics professor at Princeton, one of the country’s most prestigious universities. This was the winner of the Nobel Prize in economics, the highest honor the profession can bestow. This was a columnist for the New York Times, the most influential newspaper in the world. This was Paul Krugman, live, on national television, endorsing government control over life and death. And while we’re at it, let’s raise taxes on those who are permitted to live.

Who exactly does Paul Krugman think he is? He’d like to think he’s John Maynard Keynes, the venerated British economist who created the intellectual framework for modern government intervention in the economy. Keynes is something of a cult figure for modern liberal economists like Krugman, who read his texts with exegetical fervor. But Krugman will never live up to Keynes. However politicized his economic theories, Keynes’s predictions were so astute that he made himself wealthy as a speculator. Economics is called “the dismal science,” but as we’ll see, Krugman’s predictions are so laughably bad his economics should be called the abysmal pseudo-science.

Most critiques of Krugman as a public intellectual begin with what is apparently an obligatory disclaimer, usually in the very first sentence — something to the effect that Krugman is a very accomplished and well-respected economist. Then comes the “But . . .” and the critique proceeds in earnest, often scathingly.

But why concede this honor to Krugman? So what if he won the Nobel Prize? The real test of Krugman’s mettle as an economist is the accuracy of his economic forecasting. The fact is that, with about three decades of evidence now in, Krugman’s track record, to use a technical term favored by economists, sucks.

He’s not always candid about this. But once, under the pressure of a televised debate with conservative talk-show host Bill O’Reilly, Krugman blurted out an understated if truthful self-evaluation: “Compare me . . . compare me, uh, with anyone else, and I think you’ll see that my forecasting record is not great.”

The most egregious example of “not great” is Krugman’s utterly incorrect 1982 prediction that inflation would soar. He made this prediction from no less lofty a perch than the White House, as staff member of the Council of Economic Advisers in the first Reagan administration. In a memo titled “The Inflation Time Bomb” Krugman wrote with co-author Lawrence Summers, “We believe that it is reasonable to expect a significant reacceleration of inflation . . . at least 5 percentage points to future increases in consumer prices. . . . This estimate is conservative.”

It also turned out to be hilariously, side-splittingly, knee-slappingly, rolling-on-the-floor wrong. Except for a tiny uptick the very next month, inflation didn’t rise; it fell. Four years later, it had fallen to 1.18 percent, a rate so low as to border on deflation.

In late February 2000, two weeks before the peak of the dot-com stock bubble at Nasdaq 5,000, Krugman wrote in his Times column that the Dow Jones Industrial Average was overvalued, saying, “Let the blue chips fall where they may.” As for the Nasdaq — which at that point had almost doubled over the prior year, and more than tripled over the prior three years — Krugman said soothingly, “I’m not sure that the current value of the Nasdaq is justified, but I’m not sure that it isn’t.”

We all know what happened. As of this writing, the Dow is about 20 percent higher than when Krugman wrote those words — and that’s not including a decade of dividends. The Nasdaq is about 42 percent lower. It hit bottom in October 2002, a 75.7 percent loss from where Krugman said not to worry about it. After something of a recovery, stocks fell again. They hit a real bottom — about a week after Krugman wrote a Times column asking the rhetorical question, “Is there any relief in sight?” His wrong answer: “No.”

Perfect bookends: He missed the top, and then three years later, he missed the bottom. But then he outdid himself. In June 2003, with the Nasdaq up 20 percent since Krugman’s “No,” did he recognize his error and reverse course? Again, no. Krugman wrote that “the current surge in stocks looks like another bubble.” From there the Nasdaq was to rally another 75 percent.

At around the same time, afraid of what he called a “fiscal train wreck” that would lead to disastrously high interest rates, he announced in the lead paragraph of a March 2003 Times column: “So last week I switched to a fixed-rate mortgage. It means higher monthly payments, but I’m terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits.” In fact, rates didn’t rise, even when budget deficits skyrocketed beyond anything he could have imagined then, driven by government “stimulus” spending that he himself urged. Nowadays, on his New York Times blog, he regularly chides deficit-wary Republicans by using today’s low interest rates to prove that the U.S. faces no financial difficulties.

In 2003, I set out to expose Krugman’s various distortions, and to force the New York Times to correct them. I started first on my blog, and soon afterward in a series of columns for National Review Online called “The Krugman Truth Squad” (KTS). The inaugural KTS column appeared on March 20, 2003. The series of columns was structured as what is now called “crowdsourcing”: Within several hours of a Krugman column’s appearing on the Times website, I and a network of fellow bloggers would put it under a microscope and discover all the filthy microbes hiding in every crack. We’d fact-check every claim, confirm every quotation, run down every source, and compare every statement for consistency with statements made in the past. The KTS called Krugman “America’s most dangerous liberal pundit,” and our promise to readers was: “We’ll read Paul Krugman so you don’t have to.”

I won’t cite here very many of the dozens upon dozens of prevarications that my Krugman Truth Squad exposed in 94 columns over five years. If you are interested, look up my name in the NRO author archives, where most of the KTS columns can still be seen. Or you can download a PDF file with the entire collection of KTS columns here.

Continued in article

Bob Jensen's threads on entitlements are at
http://www.trinity.edu/rjensen/Entitlements.htm


What is (Obama's) biggest challenge? Not demoralized and reorganizing Republicans on the Hill but his own party, with a hunger for innovation and a head of steam built up and about to burst. And the incredible sense of expectation his supporters hold. When you think someone's Moses, you expect him to part the seas. Americans want change, and they just voted for it, but in times of high-stakes history they appreciate stability. And while we love drama in our movie stars and on our television sets, we don't love unneeded drama in our government and among our govern-ors. This is already a dramatic time—two wars, economic collapse—and people are rattled. "Moderation in all things." It should be noted here that the split in the popular vote was 53% to 46%. That is a solid seven-point win for the new president-elect, but it also means more than 56 million voters went for John McCain in a year when all the stars were aligned against the Republicans. (Though it is also true that many of the indexes for the GOP are dreadful, especially that they lost the vote of two-thirds of those aged 18 to 29. They lost a generation! If that continues in coming years, it will be a rolling wave of doom.)
Peggy Noonan, "The Children Are Watching:  America makes history, but the mandate is for moderation," The Wall Street Journal, November 7, 2008 ---
http://online.wsj.com/article/SB122600597583706149.html?mod=djemEditorialPage

"The country must be governed from the middle," said House Speaker Nancy Pelosi, who has spent much of the last two years working to quell intramural fights between liberals and conservatives on everything from ending the Iraq war to curbing the deficit. "You have to bring people together to reach consensus on solutions that are sustainable and acceptable to the American people." She also acknowledged, however, that Obama faces "more expectations than any president I can ever remember in my life time." So does his party.
"Pelosi: Obama Facing Higher Expectations Than Any Other President," Fox News, November 6, 2008 ---
http://elections.foxnews.com/2008/11/06/pelosi-obama-facing-higher-expectations-president/
Jensen Comment
If Nancy Pelosi keeps saying such things as "curbing the deficit," you can expect a new Speaker of the House soon.

Obama is not making a balanced budget any kind of priority
Asked what Barack Obama was elected to do, and what legislation he's likely to find on his Oval Office desk soonest, Mr. Emanuel (the incoming White House Chief of Staff) didn't hesitate. "Bucket one would have children's health care, Schip," he said. "It has bipartisan agreement in the House and Senate. It's something President-elect Obama expects to see. Second would be [ending current restrictions on federally funded] stem-cell research. And third would be an economic recovery package focused on the two principles of job creation and tax relief for middle-class families."
Jason L. Riley, "Do What You Got Elected to Do," The Wall Street Journal, November 8, 2008 ---
http://online.wsj.com/article/SB122611134918910647.html?mod=djemEditorialPage
Jensen Comment
It's interesting that Buckets 1, 2, and 3 did not mention ending the war in Iraq on the promised timetable. Stem cell research spending seems to have been moved up to the Number 2 bucket. Bucket Number 3 seems to be tax relief for the middle class coupled with the inevitable inflation accompanying increased balanced budgets. As an accountant I will be watching how the government hides the start of the trillion-dollar universal health care plan. Don't watch the media for revelations of slight of hand government accounting.
Welcome to George Orwell's Big Brother!

As for the liberal academy, the majority of professors won't give up bashing a market-based economy until the stock markets are dead and the private banking system is failed entirely.
How long will it be before the government bails out all pension funds, including TIAA/CREF? That's probably the next big bailout.
It's best to study about how to live on a government pension with soaring inflation ---
http://www.trinity.edu/rjensen/entitlements.htm

An academic voice speaks against Big Brother --- how dare he?
A second paper in this series will examine the theoretical justifications for the importance of the stock market as perhaps the central financial institution in the United States.

"Who Needs the Stock Market? Part I: The Empirical Evidence," by Lawrence E. Mitchell George Washington University - Law School, SSRN, October 30, 2008 --- http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1292403

Data on historical and current corporate finance trends drawn from a variety of sources present a paradox. External equity has never played a significant role in financing industrial enterprises in the United States. The only American industry that has relied heavily upon external financing is the finance industry itself. Yet it is commonly accepted among legal scholars and economists that the stock market plays a valuable role in American economic life, and a recent, large body of macroeconomic work on economic development links the growth of financial institutions (including, in the U.S, the stock market) to growth in real economic output. How can this be the case if external equity as represented by the stock market plays an insignificant role in financing productivity? This paradox has been largely ignored in the legal and economic literature.

This paper surveys the history of American corporate finance, presents original and secondary data demonstrating the paradox, and raises questions regarding the structure of American capital markets, the appropriate rights of stockholders, the desirable regulatory structure (whether the stock market should be regulated by the Securities and Exchange Commission or the Commodities Futures Trading Commission, for example), and the overall relationship between finance and growth.

The answers to these questions are particularly pressing in light of a dramatic increase in stock market volatility since the turn of the century creating distorted incentives for long-term corporate management, especially trenchant in light of the recent global financial collapse.

A second paper in this series will examine the theoretical justifications for the importance of the stock market as perhaps the central financial institution in the United States.


Questions
What will happen to all the future capital markets studies and CAPM when the assumed risk-free interest rate is no longer "risk free?"
Is “Risk Free” an oxymoron?

"Uncle Sam's Credit Line Running Out," by Randall Forsyth, Barron's, November 11, 2008 ---
http://online.barrons.com/article/SB122633310980913759.html

Be that as it may, it's all (new National Debt at now $6 billion per day) adding up. If the late Sen. Everett Dirksen were around today, he might comment that a trillion here, a trillion there and pretty soon you're talking about real money.

Trillions are no hyperbole. The Treasury is set to borrow $550 billion in the current quarter alone and $368 billion in the first quarter of 2009. "Near-term pressures on Treasury finances are much more intense than we had thought," Goldman Sachs economists commented when the government announced its borrowing projections last week.

It may finally be catching up with Uncle Sam. That's what the yield curve may be whispering. But some economists are too deaf, or dumb, to get it.

The yield curve simply is the graph of Treasury yields of increasing maturities, starting from one-month bills to 30-year bonds. The slope of the line typically is ascending -- positive in math terms -- because investors would want more to tie up their money for longer periods, all else being equal. Which it never is.

If they expect yields to rise in the future, they'll want a bigger premium to commit to longer maturities. Otherwise, they'd rather stay short and wait for more generous yields later on. Conversely, if they think rates will fall, investors will want to lock in today's yields for a longer period.

The Treasury yield curve -- from two to 10 years, which is how the bond market tracks it -- has rarely been steeper. The spread is up to 250 basis points (2.5 percentage points, a level matched only in the past quarter century in 2002 and 1992, at the trough of economic cycles.

Based on a simplistic reading of that history and the Cliff Notes version of theory, one economist whose main area of expertise is to get quoted by reporters even less knowledgeable than he, asserts such a steep yield curve typically reflects investors' anticipation of economic recovery. Never mind that the yield curve has steepened as the economy has worsened and prospects for recovery have diminished. Like the Bourbons, the French royal family up to the Revolution, he learns nothing and forgets nothing.

As with so much other things, something else is happening this year.

The steepening of the Treasury yield curve has been accompanied by an increase in the cost of insuring against default by the U.S. Treasury. It may come as a shock, but there are credit-default swaps on the U.S. government and they have become more expensive -- in tandem with an increase in the spread between two- and 10-year notes.

This link has been brought to light by Tim Backshall, the chief analyst of Credit Derivatives Research. The attraction of investors to the short end of the Treasury market is "juxtaposed with the massive oversupply and inflationary expectations of the longer end," he writes.

Backshall is not alone in this dire assessment. Scott Minerd, the chief investment officer for fixed income at Guggenheim Partners, a Los Angeles money manager, estimates that total Treasury borrowing for fiscal 2009 will total $1.5 trillion-$2 trillion. That was based on $700 billion for TARP, a $500 billion-$750 billion "cyclical deficit," an additional $500 billion stimulus program and some uncertain amount for the Federal Deposit Insurance Corp.

Minerd doubts that private savings in the U.S. and foreign purchases of Treasury debt will be sufficient to meet those government cash requirements. That leaves the Fed to take up the slack; that is, monetization of the debt.

However it comes about, Backshall's charts of the yield curve and the spread on U.S. Treasury CDS paint a dramatic picture. Both the yield spread and the cost of insuring debt moved up sharply together starting in September.

Let's recall what happened that month: the Fannie Mae-Freddie Mac bailouts, the AIG bailout and the Lehman Brothers failure. The two lines continued their parallel ascent with the announcement and ultimate passage of the TARP last month. And evidence mounted of an accelerating slide in growth.

Cutting through the technical jargon, the yield curve and the credit-default swaps market both indicate the markets are exacting a greater cost to lend to Uncle Sam. And it's not because of anticipated recovery, which would reduce, not increase, the cost of insuring Treasury debt against default.

All of which suggests America's credit line has its limits.

Continued in article

Bob Jensen's threads on the National Debt and off-balance sheet liabilities are at
http://www.trinity.edu/rjensen/2008Bailout.htm#NationalDebt

 


A Sobering Paper from the University of Pennsylvania
"Think the Credit Crisis Is Bad? Coalition Sees Bigger Problems Down the Road
,"  Knowledge@Wharton, October 29, 2008 ---
http://knowledge.wharton.upenn.edu/article.cfm;jsessionid=9a30144044b07a406280?articleid=2077

When most people look at the turmoil in the American economy over the last month -- wild gyrations in the stock market, giants of finance failing or requiring government rescue, rising unemployment, sinking home prices and a wave of mortgage foreclosures -- they see an immediate crisis and a bleak future.

But Alice Rivlin, who was head of the U.S. Office of Management and Budget in the Clinton administration, also sees an opportunity. Rivlin was among a number speakers who came to the University of Pennsylvania recently as part of a "Fiscal Wake-Up Tour" organized by a bipartisan coalition of think tanks and government watch-dog groups trying to focus voters on America's mounting debt. A Wharton department was among the sponsors of the tour's recent visit to the university.

Rivlin said she has long believed that only a short-term crisis atmosphere might spur political leaders in Washington to make some of the difficult long-term choices to head off a rising tide of red ink. "I have said that a mini-crisis would actually be useful, something like a rapid plunge in the dollar," said Rivlin, currently director of economic studies for the liberal-leaning Brookings Institution. Instead, she said, the much larger economic storm now unfolding could convince Washington -- as it is pressed to take bold and sometimes unpopular action related to the credit crisis -- to wrap in some forward-looking solutions to rising costs associated with Medicare, Social Security and Medicaid -- costs that will make the taxpayers' Wall Street rescue effort, which could amount to more than $1 trillion, seem petty by comparison. A General Accounting Office study concluded that in less than 20 years, the cost of Social Security and Medicare will exceed all government revenues.

David M. Walker -- president and CEO of the Peter G. Peterson Foundation, a non-profit that focuses on the national debt and related challenges -- agreed with Rivlin that the current economic crisis could be a teachable moment for the nation's leaders about the risks of fiscal inaction. "They waited for a crisis until they did something about it," said Walker, referring to the credit logjam that has locked up the flow of credit that lubricates the economy. When it comes to government action on tough economic issues, he said, "the system is dysfunctional."

Walker, Rivlin, and their co-panelists -- Robert L. Bixby, executive director of the debt-fighting Concord Coalition, and Stuart M. Butler, vice president for domestic and economic policy studies for the conservative-leaning Heritage Foundation -- are carrying on the Fiscal Wake-Up Tour that was launched back in 2005. Since the beginning, the campaign has been trying to persuade Americans to pay less attention to day-to-day ups and downs of Wall Street and the U.S. economy, and focus more on the bigger picture of projections for the staggering future costs of federal entitlements.

Bringing the Message to Battleground States

The tour's visit to the Penn campus was co-sponsored by Wharton's Business and Public Policy Department as well as the Annenberg School for Communication, the Department of Political Science, the Fels Institute of Government and the Fox Leadership Program. Officials said the selection of Pennsylvania -- a key battleground state in the presidential election less than three weeks away -- is part of the Fiscal Wake-Up Tour's strategy of visiting key states right before major political events such as the New Hampshire primary or Iowa caucuses. Its ultimate goal, organizers said, is a better-informed electorate.

"We're trying to elevate the issue in front of key constituencies in key states," Bixby said. He later noted that many of the group's events have been held on college campuses because the anti-debt coalition believes any solution will ultimately come from greater involvement by the generation now voting for the first time. "If young people get involved, and we can view the situation as a leadership problem, we'll go a long way toward getting it solved."

The broader problem quite simply is this: America is already dangerously deep in debt, and will soon see an explosion in costs to provide Social Security, Medicare and other entitlements it has promised to tens of millions of retiring and soon-to-retire baby boomers. While federal spending is now roughly 20% of the American gross national product, which has been relatively constant in the last half-century, that ratio could rise as high as 42% by 2050 if current federal policies on entitlement spending and taxes remain unchanged, according to Bixby. That would be the same rate as when the U.S. was waging World War II. The impact would fall hardest on today's young people.

Driving this projection are the ticking time bombs of benefit obligations to retirees and impoverished families under Medicare, Medicaid and Social Security. Over the next three decades, the percentage of Americans older than 64 will grow from 13% to 20% even as health care costs continue to increase faster than inflation.

We Suggest... Richard Marston and Jeremy Siegel: Will the Bank Plan Revive Global Markets?

Do the Answers to Our Current Financial Woes Lie in the Past?

The Candidates on Taxes: Finding the Devil in the Details

Obama and McCain: Different -- and Evolving -- Visions for the U.S. Economy

What's Ahead for the Global Economy in 2008? Reports from the Knowledge@Wharton Network Walker, who was formerly the nation's top auditor as its Comptroller General, said unrestrained health care policies are a recipe for fiscal disaster. "We're the only country on the face of the earth that is currently writing a blank check for health care because every other country that has done that has gone bankrupt."

'Arithmetic, Not Ideology'

"It's a matter of arithmetic, not ideology," said Bixby, whose bipartisan Concord Coalition was founded by Warren Rudman, a former Republican senator; the late Paul Tsongas, who served in the Senate as a Democrat; and Pete Peterson, who was Secretary of Commerce in the Nixon administration. Bixby believes part of the problem is that Americans have been too willing to buy into certain myths about our fiscal policies, including the notions that we can close our budget gap simply through growing the economy and increasing revenues, or just by eliminating waste, fraud and abuse in federal spending.

Several speakers emphasized that while their Wake Up Tour can be heavy on charts and graphics outlining the grim mathematics of the problem, the real problem with profligate government spending has a moral component: Is it right for the current generation to take on obligations and hand the bill to the next generation? Walker concluded his presentation with a slide showing his three grandchildren who will inherit the massive debt. "It's really not a fiscal issue," agreed Bixby. "It's a moral issue."

The speakers acknowledged that -- given the wide range of their ideological views -- they do not necessarily agree on all the solutions to the problem, but they want their audience to understand what the choices are -- continued but unsustainable borrowing from overseas sources such as China or the oil-producing nations of OPEC, raising taxes, or making decisions on spending cuts and priorities that so far have proved too difficult for political leaders. In fact, the political hurdles have been so great that some -- including the current co-chairs of the Concord Coalition, Rudman and ex-Democratic senator Bob Kerrey -- have suggested that the only solution would be the creation of a bi-partisan panel to devise a set of solutions that Congress would be required to accept or reject without amendment.

Where to start? Rivlin suggested that longer-term solutions could be wrapped into the current legislative effort to attack the credit crunch and expected recession. For example, she said, "a relatively easy thing to do" would be to gradually raise the retirement age. That would have no impact on current retirees, but would provide significant long-term savings for Social Security.

Butler, of the Heritage Foundation, noted simply raising taxes to cover the deficit is not a likely solution. By 2050, he said, balancing the budget with tax increases but no other policy changes would mean raising marginal income taxes on the wealthiest top bracket to 88%, with a 63% higher levy on the second bracket that comprises much of the middle-class. "If there's a moral problem with passing the debt along to younger people, is raising taxes and taking their money any less immoral?" he asked. He also doubted that Congress would use such additional revenue for debt reduction. If you believe it would, he said, "you're probably one of those people who think professional wrestling is real."

A more likely scenario, as outlined by Butler, would be to look at the most sensible ways to make the benefits that now go to American retirees more affordable, such as reconsidering the current prescription drug benefits for seniors and whether they should be extended to the wealthiest citizens. He noted that billionaire Warren Buffett now receives the same drug benefit as a low-income retiree. The Heritage Foundation expert also said America needs to do a much better job encouraging private citizens to save for the future, citing a recent study that the lowest income households, making less than $13,000 a year, spend an average of 9% of that income on lottery tickets.

Indeed, several of the speakers agreed that the Baby Boom generation now running the country has never been asked to sacrifice and rarely asks such measures of citizens. At the same time, he noted, America's consumer-oriented economy and the rise of relatively cheap credit beginning in the 1980s has resulted in a national personal savings rate of zero. On top of that, Butler political debate has been dragged down in some ways by the rise of the Internet and especially cable television, which "emphasizes conflict while dialogue is eliminated."

In the meantime, the speakers said that ongoing federal deficits -- and a debt service that now costs $238 billion annually and is growing sharply -- are squeezing programs that could make America more competitive in the global economy. These would include a massive program to repair the nation's crumbling infrastructure as well as improving education and health care, especially for children in low-income families. "The large middle class is our backbone, but we can't compete on wages in this country," Walker said, stressing instead the need for a better educated workforce and also for a health care system that delivers better results for the money. "We're mortgaging our future and increasing our obligation on the backs of young people at the same time that we're investing less in them," he warned.

Yet, according to Rivlin, despite all the controversy about the government's current dramatic efforts to deal with the immediate financial crisis, these measures may not contribute much to solving the debt problem. She acknowledged that the Treasury may recover some of the $950 billion it has pledged to unlock credit markets and stabilize key banks, and that a new economic stimulus package under discussion in Congress might stave off a lengthy recession that would also sap tax revenues. "But the danger," she warned, "is that we will lose all discipline, that the recession will be the excuse" to delay difficult choices.

Still, there seemed to be a general consensus among the speakers that the current crisis could raise the public's awareness and interest in a long-term solution to government debt. "There's nobody to bail out America," said Walker, "so the sooner we get started, the better."

Continued in article

Bob Jensen's threads on the end of the American Dream as we know it are at http://www.trinity.edu/rjensen/2008Bailout.htm#AmericanDream

 


Peter, Paul, and Barney: An Essay on 2008 U.S. Government Bailouts of Private Companies ---
http://www.trinity.edu/rjensen/2008Bailout.htm

Personal Note from Bob Jensen on October 17, 2008
Why I'm going to vote a straight Democratic Party ticket in November 2008

Get your facts first, then you can distort them as you please. 
Mark Twain

Economic Recessions Throughout History --- http://blog.eogn.com/eastmans_online_genealogy/2008/10/economic-recess.html
(Actually only the severe recessions)

A media-fueled stock market panic does not equate directly to a severe economic recession.

''I don't think things can get much worse,'' said Brian Bethune, chief financial economist at Global Insight Inc. in Lexington, Massachusetts. ``September was a terrible month in terms of the overall situation, in both sales and production. The fourth quarter is guaranteed to be a terrible quarter.'' --- http://www.bloomberg.com/apps/news?pid=20601087&sid=aZ0o8ZBt6hos&refer=home
Jensen Comment
We may well experience a severe economic recession running into 2009, but things will have to get a “whole lot worse” Brian. But let’s borrow yet another trillion to stimulate the economy out of this downturn no matter how small or how large it is in fact. I’m ready for another $1,200 stimulus gift from Washington DC. Let unborn generations pay back what the Government borrows for my luxuries in retirement.

The current “recession” is a bit odd due to the credit freeze and energy price fears. But recession claims are exaggerated thus far in the media and in academe. Sure retail sales were down 1.2% in September following three months of relatively small declines. But does that equate to a severe recession?

The unemployment rate of 6.1% in September was unchanged from August 2008 and is actually on the decline in terms of seasonal adjustments --- http://www.bls.gov/news.release/pdf/empsit.pdf
Is this a severe-recession unemployment rate?

Much of the recession alarms sounding in the media may be media efforts to impact election outcomes and grasping at straws to explain the stock market crash. Far more important to date has been media sensationalism coupled with efforts of the banks and their Administration and Congressional allies to extort “taxpayers.” But since taxpayers for the next few generations will not have to really pay for this in taxes, most of today’s taxpayers really aren’t footing the bill.

I chuckle to myself when the analysts claim that these bailouts and stimulus payments are being paid for by taxpayers --- http://www.trinity.edu/rjensen/2008Bailout.htm#NationalDebt

Far more devastating is the Government-spending credit bubble built up during eight years of severely unbalanced budgets plus billions (trillions?) being wasted on the present bailout and stimulus spending plans --- http://www.trinity.edu/rjensen/2008Bailout.htm#NationalDebt  

I just want to say thanks to the Government for borrowing the money to pay for prescription drugs that would otherwise cost my wife and me over $5,000 per year on the other side of the donut hole. This new Medicare Drug Plan entitlement is great for us senior citizens as long as we don’t let it bother our conscience how much the Government is borrowing today at millions of dollars a minute --- borrowings that will one day break the backs of the younger generations. As for me, I’m greedy for a succession of $1,200 stimulus checks on top of my drug benefits. Keep them coming! These gifts sure do stimulate me!

For what it’s worth, I’m actually (seriously) going to vote a straight Democratic Party ticket. I anticipate that a Democratic Party monopoly in the executive branch and the legislative branch in Washington DC will be the most “stimulating” to me personally. And billions awaiting to be spent on stem cell research may help me live forever. It’s a win, win situation as far as I’m concerned. I’d probably vote otherwise if any candidate for elective office promised to seek a balanced budget for U.S. spending, but it’s literally impossible to elect any president, senator, or congressional representative who promises to actively seek a balanced budget. As Pogo says:  “The real enemy is us.”

So what the heck? Eat, drink, and be merry for the moment! It’s a good time for me to shop for a big heavy Hummer and a top-deck world cruise. I’m entitled to all this ---
http://www.trinity.edu/rjensen/entitlements.htm

And since my Government benefits are all being paid for on credit, I’m not costing any of you working stiffs a penny. I can’t say the same for your eventual grandchildren, but who cares about them?

I’ve become Father Goose.
Pass Me By (lyrics by Carolyn Leigh) --- http://hk.youtube.com/watch?v=C-F3vSrJIUQ
Peggy Lee's "Pass Me By" --- http://hk.youtube.com/watch?v=GpxKaBLDXDg

 


IOUSA (the most frightening movie in American history) --- (see a 30-minute version of the documentary at www.iousathemovie.com ).
A Must Read for All Americans

The most important article for the world to read now is the following interview with a former Andersen Partner and former Chief Accountant of the United States:
"Debt Crusader David Walker sounds the alarm for America's financial future," Journal of Accountancy, March 2009 --- http://www.journalofaccountancy.com/Issues/2009/Mar/DebtCrusader.htm 

David Walker is a man on a mission. As U.S. comptroller general, he used the bully pulpit to fuel a campaign of town hall meetings highlighting the country’s ballooning federal deficit. The Fiscal Wake-Up Tour and the publicity it generated begat the documentary I.O.U.S.A. Walker hopes the film will do for fiscal irresponsibility what Al Gore’s An Inconvenient Truth did for global warming—mobilize new citizen activists and pressure politicians to act.

A year ago, Walker stepped away from the five-plus remaining years on his term as comptroller general and head of the Government Accountability Office. He had been recruited by billionaire Pete Peterson, a co-founder of the private- equity fund The Blackstone Group, to become president and CEO of Peterson’s foundation. The Peter G. Peterson Foundation, a nonprofit to which Peterson has pledged $1 billion, focuses on issues such as the deficit, savings levels, entitlement benefits, health care costs, and the nation’s tax system.

Walker talked with the JofA recently about the deficit and the financial crisis. What follow are excerpts from that conversation.

JofA: What did you hope to accomplish when you set out on your speaking tour and got involved with the documentary I.O.U.S.A., and what progress has been made on those goals?

Walker: I have been to over 42 states, giving speeches, participating in town hall meetings, meeting with business community leaders, local television and radio stations, and editorial boards with the objective of trying to state the facts and speak the truth about the deteriorating financial condition of the United States government and the need for us to start making some tough choices on budget controls, tax policy, entitlement reform and spending constraints. And the good news is that people get it. The American people are a lot smarter than many people give them credit for—especially elected officials

Well, a lot has happened since we started the Fiscal Wake-Up Tour. Two significant events would be the 60 Minutes piece, which ran twice in 2007, and that led to the commercial documentary I.O.U.S.A. (see a 30-minute version of the documentary at www.iousathemovie.com ). So there’s a lot more visibility on our issue, and I think that’s encouraging. The other thing that has happened is the recent market meltdown and bailouts of some very venerable institutions in the financial services industry have served to bring things home to America. The concept of “too big to fail” is just not reality anymore, and when you take on too much debt and you don’t have adequate cash flow, some very bad things can happen.

Here’s the key. The factors that led to the mortgage-based subprime crisis exist for the federal government’s finances. Therefore, we must take steps to avoid a super subprime crisis, which frankly would have much more disastrous effects not only domestically but around the world.

JofA:
How does the economic crisis affect your message and the outlook for the kind of wide-scale changes you think need to be made?

Walker:
What’s critical is that we take advantage of the teachable moment associated with the market meltdown and the failure of some of the most prominent financial institutions in the country to help the American people know that nobody can live beyond his means forever. And that goes for government, too.

We have a new president, and therefore we have an opportunity to press the reset button, and I hope President Obama will do two things: That he will assure Americans that he will do what it takes to turn the economy around. I think it is critically important that he also focus on the future and be able to put a mechanism in place like a fiscal future commission so that once we turn the corner on the economy, we have a set of recommendations Congress and the president would be able to consider about budget controls, tax reform, entitlement reform—things that are clear and compelling that we need to act on.

Individuals need to understand that the government has overpromised and under-delivered for far too long. It is going to have to engage in some dramatic and fundamental reform of existing entitlement programs, spending policies and tax policies. The government will be there to provide a safety net through Social Security, a foundation of retirement security, and it will be there to help those that are in need. In general, most individuals are going to have to assume more responsibility for their own financial future, and the earlier they understand that the better off they are going to be. They need to have a financial plan, a budget, make prudent use of debt, save, invest their savings for specified purposes and, very importantly, preserve their savings for the intended purpose, including retirement income.

I believe the government policies are going to have to encourage people to work longer by increasing the eligibility ages for many government programs. So if people want to retire at an earlier age, they are going to have to plan, save, invest and preserve those savings for retirement purposes.

JofA:
You’ve called the current U.S. health care system unsustainable. How can the system be fixed without negatively affecting the care Americans need?

Walker:
Our current health care system is not really a system. It’s an amalgamation of a bunch of different things that have occurred over the years, and it’s unacceptable and unsustainable. We spend twice per capita what any other country on the Earth does. We have the highest uninsured population of any industrialized nation. We have below average health care outcomes. So the value of the equation just does not compute.

We are going to need to do two things on health care. We are going to need to take some steps quickly to reduce the rate of increase in health care cost. We are also going to have to better target taxpayer subsidies and tax preferences for health care.

We are also going to end up needing to move toward trying to achieve comprehensive health care reform that accomplishes four key goals. First: achieve universal coverage for basic and essential health care—based on broad-based societal needs, not unlimited individual wants—that’s affordable and sustainable over time and that avoids taxpayer-funded heroic measures. Secondly, the federal government has to have a budget for health care. We are the only nation on Earth dumb enough to write a blank check for health care. It could bankrupt the country. We have to have constraints. Thirdly, we need national evidence-based practice standards for the practice of medicine and for the issuance of prescription drugs to improve consistency, enhance quality, reduce costs and dramatically reduce litigation risks. And last, but certainly not least, we have to require personal responsibility and accountability for our own health and wellness in a whole range of areas including obesity.

JofA:
What drives you?

Walker: My family has been in this country since the 1680s, and I have ancestors who fought and died in the American Revolution. So I care very deeply about this country, and I am a big history buff. I believe you need to study history in order to learn from it in order not to make some of the same mistakes that others have made in the past.

Secondly, I am only the second person in my direct Walker line to graduate from college. My dad was the first. Therefore, I am somewhat of an example of what someone can accomplish in this great country if you get an education, if you have a positive attitude, if you work hard, if you have good morals and ethical values.

My personal mission in life is to be able to make a difference, to try and make a difference in the lives of others, to try and help make sure our country stays strong, that the American dream stays alive, and that the future will be better for my children and my grandchildren.

Links to David Walkers videos, including his famous CBS Sixty Minutes bell ringer that is far more frightening and sobering than anything Rush Limbaugh is screaming about. You never, ever hear Keith Olbermann, Barack Obama, Nancy Pelosi, or Harry Reid so much as whisper the name of David Walker (See below).

 

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 $100 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
"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.

 


 

Their report, "Dreaming with BRICs: The Path to 2050," predicted that within 40 years, the economies of Brazil, Russia, India and China - the BRICs - would be larger than the US, Germany, Japan, Britain, France and Italy combined. China would overtake the US as the world's largest economy and India would be third, outpacing all other industrialised nations. 
"Out of the shadows," Sydney Morning Herald, February 5, 2005 --- http://www.smh.com.au/text/articles/2005/02/04/1107476799248.html 

 


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.


"Budget Insanity We're always one massive spending bill away from having a better economy," by John Stossel, Reason Magazine, July 11, 2012 ---
http://reason.com/archives/2012/07/11/budget-insanity

Video:  The Stossel Solution --- http://townhall.com/columnists/calthomas/2012/07/12/the_stossel_solution/page/full/

 


Of course by 2012 the deficit in approaching $2 trillion at breakneck speed
"U.S. Deficit Would Top $1 Trillion with New Method  (more accurate method of accounting)," AccountingWeb, December 15, 2008 --- http://accounting.smartpros.com/x64135.xml

The federal deficit for 2008 would top $1 trillion if the government had to use the same accounting methods as private companies.

And that doesn't even account for the huge costs of the Wall Street bailout, which didn't really start until the new budget year began on Oct. 1.

The government is promising $49 trillion more than it can deliver on Social Security, Medicare and Medicaid over the next 75 years unless Congress steps in to shore up the system. Some combination of tax increases, benefit cuts or other policy changes is needed to stave off unsustainable deficits.

That was the finding Monday when the administration released a 188-page "Financial Report of the United States Government" for the 2008 budget year that ended on Sept. 30.

The report, released by the Treasury Department and the White House budget office, found that under the accrual method of accounting used by businesses, the deficit for 2008 would have totaled $1 trillion - not the $455 billion reported in October under the cash system of accounting.

Under the accrual method, expenses are recorded when they are incurred rather than when they are paid. That tends to raise costs for liabilities such as pensions and health insurance. The big jump in the 2008 budget year was largely due to changed calculations for the payment of veterans benefits.

Even under regular cash accounting, the deficit is expected to top a staggering $1 trillion for the ongoing 2009 fiscal year, reflecting the costs of the Wall St. bailout, weaker tax revenues from the deepening recession and the costs of President-elect Barack Obama's upcoming economic recovery measure.

What's more: The report doesn't factors in the enormous potential liabilities incurred by the Federal Reserve System over the past few months as it has tried to stabilize the financial system by taking steps like guaranteeing $306 billion worth of Citigroup troubled assets. Fed transactions aren't reported on the government's books.

Despite the turmoil caused by the financial crisis, the longer term liabilities facing the government are even more staggering.

Virtually every budget expert warns that the long-term costs of federal retirement programs like Social Security and Medicare are going to swamp the budget as more and more baby boomers retire. The long-term shortfall for Medicare grew by $3.1 trillion over the past year.

"This report shows we have fiscal cancer and once you have cancer you have to treat it,' said Rep. Jim Cooper, a Tennessee Democrat. "Our problems are metastasizing at the rate of about $3 trillion a year, and that's before the bailout."

"We must not forget the long-term needs that pose a significant threat to our economy's fiscal sustainability," said Treasury Secretary Henry Paulson. "Changes are needed to ensure these programs are fiscally sustainable."

"It is without question that we face extraordinary challenges in our financial markets and the larger economy," said White House budget chief Jim Nussle. "As a result, the bottom-line budget results in the short-term are sobering."

The fiscal results also amplify President George W. Bush's record on the deficit. Virtually every administration promise on the deficit has failed to come to pass.

Bush hands President-elect Barack Obama a government in bad fiscal shape, but Obama's unlikely to tackle the deficit until an economic recovery begins.

Bush inherited a budget seen as producing endless huge surpluses after four straight years in positive territory. That stretch of surpluses represented a period when the country's finances had been bolstered by a 10-year period of uninterrupted economic growth, the longest expansion in U.S. history.

Twelve years ago, Congress ordered the government to start issuing annual reports using the accrual method of accounting in an effort to show the finances in a way that was comparable with the private sector.


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.  

"Promise Them Everything" Politics Feeds Upon Economic Ignorance
Edwards is quick to acknowledge his spending on health care, energy and poverty reduction comes at a cost, with more plans to come. All told, his proposals would equal more than $1 trillion if he could get them enacted into law and operational during two White House terms.
Nedra Pickler, "John Edwards' big ideas costly," Associated Press, May 11, 2007 --- http://news.yahoo.com/s/ap/20070511/ap_on_el_pr/edwards_spending
Jensen Comment
That's not the half of it! Edwards knows that U.S. taxpayers, unlike Canadians, will not tolerate crippling  taxes to pay for socialized medicine. Instead, he proposes that Universal Health Care for all men, women, and children be funded by employers even if it puts nearly all small businesses out of business and creates massive unemployment. His proposed socialized medicine plan is far more deadly to the U.S. economy than the modest state plans that are struggling to get off the ground.  Actually I don't get too fired up about Edward's political agenda since the U.S. is already doomed by entitlements enacted under the eight-year disastrous, free-spending reign of George W. Bush.

Here's the Cost of Universal Health Care Entitlements
The average Canadian family spends more money on taxes than on necessities of life such as food, clothing, and housing, according to a study from The Fraser Institute, an independent research organization with offices across Canada. The Canadian Consumer Tax Index, 2007, shows that even though the income of the average Canadian family has increased significantly since 1961, their total tax bill has increased at a much higher rate.

The Fraser Institute, April 16, 2007 --- http://www.newswire.ca/en/releases/archive/April2007/16/c5234.html

 

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."

Their report, "Dreaming with BRICs: The Path to 2050," predicted that within 40 years, the economies of Brazil, Russia, India and China - the BRICs - would be larger than the US, Germany, Japan, Britain, France and Italy combined. China would overtake the US as the world's largest economy and India would be third, outpacing all other industrialised nations. 
"Out of the shadows," Sydney Morning Herald, February 5, 2005 --- http://www.smh.com.au/text/articles/2005/02/04/1107476799248.html 

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."


Video Lecure by Nobel Laureate Robert Merton
The Future of Finance
MIT World
http://mitworld.mit.edu/video/881

In his keynote address, Robert Merton chooses not to focus on the financial crisis. It is clear to him there were “fools and knaves,” as well as “many structural elements that would have happened even if people were well behaved and well informed” -- risks are simply “embedded in our systems.” Instead, Merton explores how financial engineering is essential in preparing for the inevitable next crisis, and in solving critical challenges. “The world has changed; we can’t go back. Let’s talk about what we should do going forward.”

To illustrate society’s need for financial innovation, Merton uses “a live case study:” the vast problem of retirement funding. In the past decade, stock market declines and falling interest rates have hit mainstream employer pension plans hard. Municipal pension plans may be underfunded to the tune of three trillion dollars. (“It makes the S&L crisis look like nothing.”) But people seek, and are due, “the standard of living during retirement they enjoyed in the latter part of their work life.”

Generally, determining this standard of living means adding up likely medical, housing and general consumption costs, and Merton describes how to target such retirement income. The main ways to achieve the desired goal are by saving more, working longer or taking more risk. Merton would like to design a software-based tool for ordinary people, simple on the user end, complex on the provider end, which would serve as a “next generation pension solution,” offering a way to manipulate the key variables in retirement income and demonstrate potential financial outcomes. This tool would help users continuously optimize risk to help them reach their retirement funding goals.

There are regulatory obstacles now to the implementation of such a method on a widespread basis, and a gap between how managers, advisers and financial institutions think about pension assets, and what Merton has in mind. Nevertheless, he says, “What we need to do for most of the people who don’t have extra money and must do the most with their assets is deliver a simple, easy to use, and if they don’t use it still gets them there, solution.” Merton acknowledges those who think the giant problem of pension funding can be solved by what’s already available -- bond and equity markets, bank loans – and who hanker “to get rid of all the complexity, go back to 1930, ’50 or ’80.” From his perspective, this means “throwing away a lot of what you could do, because the market-proven strategies people have developed and used…can do a much better job for people.”

Jensen Comment
Contributing to the pension crisis has been a willingness of the accounting and auditing profession to allow both the public and private sectors to deceive taxpayers and investors about the extend to which contracted pension obligations are off the balance sheet and not even disclosed properly.

The sad state of governmental accounting ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting

Off Balance Sheet Financing (OBSF) ---
http://www.trinity.edu/rjensen/Theory02.htm#OBSF2


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.


Blessed are the young, for they shall inherit the national debt.
Herbert Hoover --- http://www.brainyquote.com/quotes/quotes/h/herberthoo110353.html

Hoover Daily Report (Economics, History, Political Science, Social Science) --- http://www.hoover.org/news/daily-report 


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:   Washington ignores bigger problem of exploding health care costs," USA Today, March 9, 2005, Page 10A --- http://www.usatoday.com/printedition/news/20050309/edit09.art.htm 


India is freeing itself of government
More than these economic indicators, though, something more profound is underway, five decades after independence.  India was stripped clean under British rule, its vast riches plundered and its manufacturing capacity squashed.  Independent India's economy, therefore, had to be built almost entirely by the state. Socialist the model was, but it did lay down a rudimentary national infrastructure.  What's happening now is that the economy is freeing itself of government.
Haroon Siddiqui, "Surging China, India take aim at our markets, Toronto Star, March 17, 2005 --- http://snipurl.com/starMarch17 

This prompted the head of Intel Corp. to say that the two Asian giants are out to eat America's lunch. He could have added that they may have similar intentions toward Canada, Europe and others.

Craig Barrett, CEO of the world's largest computer chip maker, sees the tectonic economic shifts under way and sighs: "I worry for the U.S. and I worry for my grandchildren."

He is dazzled not only by the energy and enterprise of the Chinese and the Indians but the quality of their work, especially India's software engineers. Which is why India is Intel's third largest operation, after America and Israel.

China is, of course, way ahead in the economic race. But India is brimming with self-confidence on its unique set of assets. Besides democracy, it boasts:


Nations from Europe to Eastern Asia are on a fast track to pass the United States in scientific excellence and technological innovation.
For more than half a century, the United States has led the world in scientific discovery and innovation. It has been a beacon, drawing the best scientists to its educational institutions, industries and laboratories from around the globe. However, in today’s rapidly evolving competitive world, the United States can no longer take its supremacy for granted. Nations from Europe to Eastern Asia are on a fast track to pass the United States in scientific excellence and technological innovation. The Task Force on the Future of American Innovation has developed a set of benchmarks to assess the international standing of the United States in science and technology. These benchmarks in education, the science and engineering (S&E) workforce, scientific knowledge, innovation, investment and high-tech economic output reveal troubling trends across the research and development (R&D) spectrum. The United States still leads the world in research and discovery, but our advantage is rapidly eroding, and our global competitors may soon overtake us.
"THE KNOWLEDGE ECONOMY: IS THE UNITED STATES LOSING ITS COMPETITIVE EDGE?" THE TASK FOR C E ON THE FUTUR E OF AME R I CAN INNOVAT ION, February `6, 2005 --- http://www.futureofinnovation.org/PDF/Benchmarks.pdf 


Japan Is Running Out of Time
Given the daunting fiscal deficit and rapidly ageing society, Japan is running out of time. A truly reformist leader can not just leave decisions to the next generation. Mr. Koizumi and his team are still the best bet to get the job done, but they owe it to the Japanese people to create the foundation for a brighter future.
Jesper Koll, "Japan Is Running Out of Time," The Wall Street Journal, April 26, 2005 --- http://online.wsj.com/article/0,,SB111446439694916359,00.html?mod=opinion&ojcontent=otep


Doomsday precedent:  Give workers retirement plans and then pawn them off for taxpayers (and companies) to pay the pensions.  Passing along these kinds of entitlements to taxpayers is another nail in the coffin of the United States.

"UAL Reaches Pact To Hand Over Pensions to U.S.," by Susan Carey, The Wall Street Journal,  April 25, 2005; Page A2 --- http://online.wsj.com/article/0,,SB111419401664114663,00.html

UAL Corp.'s United Airlines and a federal pension insurer announced a settlement that would allow the airline to hand over its four underfunded pension plans to the government in the largest corporate-pension default in U.S. history.

While the move needs approval by a bankruptcy-court judge and is certain to be contested by some of the airline's unions and retirees, the shedding of $9.8 billion of retirement obligations would represent a huge step in UAL's efforts to lower its costs and attract funding to exit from Chapter 11 this fall. Giving up the plans would save the company $645 million a year for the next five years, it has said.

Erasing that liability could force other unprofitable airlines with heavy pension obligations to seek bankruptcy protection specifically to foist their own underfunded plans onto the government. According to Michael Kushner, an employee-benefits attorney for law firm Coudert Brothers LLP, if UAL succeeds in side-stepping its pension liabilities, that would "substantially worsen the situation for competitors that don't have this relief." He predicted the rest of the big airlines that offer such costly defined-benefit retirement plans "will follow suit. They couldn't possibly survive with these legacy costs intact."

Continued in article

From The Wall Street Journal Weekly Accounting Review on April 29, 2005

TITLE: UAL Reaches Pact to Hand Over Pensions to U.S.
REPORTER: Susan Carey
DATE: Apr 25, 2005
PAGE: A2
LINK: http://online.wsj.com/article/0,,SB111419401664114663,00.html 
TOPICS: Advanced Financial Accounting, Pension Accounting

SUMMARY: "UAL Corp.'s United Airlines and a federal pension insurer announced a settlement that would allow the airline to hand over its four underfunded pension plans to the government in the largest corporate-pension default in U.S. history."

QUESTIONS:
1.) Distinguish between defined benefit pension plans and defined contribution pension plans.

2.) Which type of plan is UAL terminating? What type will replace the terminated plan?

3.) Who will be responsible for the obligations under UAL's pension plans?

4.) Why does the author state that other airlines might be more likely to seek bankruptcy protection if UAL succeeds in winning bankruptcy-court approval to eliminate these pension plans? Comment on the reasons the other airlines might undertake this step both in terms of the financial impact on their current balance sheets and their expected future income statements.

Reviewed By: Judy Beckman, University of Rhode Island

--- RELATED ARTICLES ---
TITLE: UAL May Stop Contributions Into Pension Plans to Save Cash
REPORTER: Susan Carey
PAGE: A2
ISSUE: Jul 26, 2004
LINK: http://online.wsj.com/article/0,,SB109088544353874512,00.html


On the Hopeful Side of Things

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
Adviser, Federal Reserve Bank of Minneapolis

We live in a world of staggering and unprecedented income inequality. Production per person in the wealthiest economy, the United States, is something like 15 times production per person in the poorest economies of Africa and South Asia. Since the end of the European colonial age, in the 1950s and ’60s, the economies of South Korea, Singapore, Taiwan and Hong Kong have been transformed from among the very poorest in the world to middle-income societies with a living standard about one-third of America’s or higher. In other economies, many of them no worse off in 1960 than these East Asian “miracle” economies were, large fractions of the population still live in feudal sectors with incomes only slightly above subsistence levels. How are we to interpret these successes and failures?

Economists, today, are divided on many aspects of this question, but I think that if we look at the right evidence, organized in the right way, we can get very close to a coherent and reliable view of the changes in the wealth of nations that have occurred in the last two centuries and those that are likely to occur in this one. The Asian miracles are only one chapter in the larger story of the world economy since World War II, and that story in turn is only one chapter in the history of the industrial revolution. I will set out what I see as the main facts of the economic history of the recent past, with a minimum of theoretical interpretation, and try to see what they suggest about the future of the world economy. I do not think we can understand the contemporary world without understanding the events that have given rise to it.

I will begin and end with numbers, starting with an attempt to give a quantitative picture of the world economy in the postwar period, of the growth of population and production since 1950. Next, I will turn to the economic history of the world up to about 1750 or 1800, in other words, the economic history known to Adam Smith, David Ricardo and the other thinkers who have helped us form our vision of how the world works. Third, I will sketch what I see as the main features of the initial phase of the industrial revolution, the years from 1800 to the end of the colonial age in 1950. Following these historical reviews, I will outline a theoretical structure roughly consistent with the facts. If I succeed in doing this well, it may be possible to conclude with some useful generalizations and some assessments of the world’s future economic prospects.

Continued


Harvard Center for Population and Development Studies --- http://www.hsph.harvard.edu/hcpds/


Evolution of the Conservative Mind

"The Burke Habit Prudence, skepticism and 'unbought grace'," by Jeffrey Hart, The Wall Street Journal, December 27, 2005 --- http://www.opinionjournal.com/ac/?id=110007730 

Dr. Hart, professor of English emeritus at Dartmouth, is author of "The American Conservative Mind Today" (ISI, 2005). This is the last in an occasional series --- http://www.nationalreview.com/15sept97/hart091597.html
Also see http://www.brothersjudd.com/index.cfm/fuseaction/reviews.detail/book_id/1201/Smiling Thro.htm


Why Republicans Can't Cut Spending
The GOP switch from government-shrinking to machine-building has backfired
 "Why Republicans Can't Cut Spending?" by Jonathan Rouch, Reason Magazine, January 23, 2006 --- http://www.reason.com/rauch/012306.shtml  

And, indeed, this first post-DeLay budget proves DeLay wrong. Spending is not completely uncuttable. It is, rather, 99.5 percent uncuttable.

The Deficit Reduction Act of 2005 is, strictly speaking, a deficit-reduction act only in the Washington sense of the term—meaning, it is part of a plan to increase the deficit. It consists of about $40 billion of reductions in spending on entitlement programs, spread over five years (fiscal 2006 through 2010). Based on Congressional Budget Office forecasts, the Deficit Reduction Act will reduce entitlement outlays by about 0.5 percent over that period and cut cumulated deficits by about 2.5 percent. Wow.

Meanwhile, another budget bill is slated to cut taxes by $70 billion over the same five-year period. The net effect of the two bills (known as reconciliation bills) would be to increase the deficit by $30 billion. "The fact that the overall effect of reconciliation taken together was to enlarge rather than reduce the deficit undermines the credibility of anyone claiming that this was a deficit-reduction package," says Maya MacGuineas, the president of the Committee for a Responsible Federal Budget, a nonpartisan fiscal-watchdog group.

Judged in purely fiscal terms, then, the reconciliation action resembles the old joke about a man who fell out of a plane without a parachute. Fortunately, there was a haystack below him. Unfortunately, there was a pitchfork in the haystack. Fortunately, he missed the pitchfork. Unfortunately, he missed the haystack.

The reconciliation bill focuses on entitlement programs such as Medicare, Medicaid, and student loans. Not to be overlooked are the discretionary accounts. Here, the Republicans' budget is indeed tight.

The White House boasts that, thanks in part to a 1 percent across-the-board reduction, total discretionary spending (that is, defense and homeland security, plus domestic discretionary programs) will grow by only 1.1 percent in fiscal 2006, which is below the likely rate of inflation. G. William Hoagland, the director of budget and appropriations for Senate Majority Leader Bill Frist (R-Tenn.) notes that domestic discretionary spending (which excludes defense and homeland security) is budgeted to decline a little, a feat not seen in Washington for years.

But, again, the Republicans missed the haystack. Domestic discretionary spending accounts for only a sixth of the budget, and the other five-sixths are growing. According to the Committee for a Responsible Federal Budget, Congress reduced nondefense discretionary spending by $106 billion over five years, but it more than offset those cuts with $237 billion in added spending on defense, Iraq, and emergencies like Katrina and bird flu.

All of that is before counting billions more in likely supplemental appropriations, notably for the Iraq war, which is being conducted off the books. "Appropriations represented some success this year, in that the line was held on nondefense discretionary spending," says Brian Riedl, a senior budget analyst at the Heritage Foundation. "At the same time, Congress continues to put $100 billion to $150 billion a year into emergency supplemental bills, and those never get counted in the final number."

If your paramount concern is reducing the federal deficit, then the best that can be said for the 2006 budget is that it may do less fiscal damage than the budgets of 2005, 2004, 2003, 2002, and 2001. But, as has become pretty obvious, deficit reduction is not the paramount concern of today's conservative Republicans. Their concern, rather, is to scrape away at the calcified mass of programs that constitute Big Government. On that measure, how did they do?

Not particularly well. Riedl says, "I didn't find much in the reconciliation bill that will have a substantial impact on the budget or on the programs themselves." Many of the reductions involved fee increases, spectrum-auction proceeds, and other measures short of fundamental programmatic reform.

Continued in article


The "Oops" List (includes photographs of crashed airplanes and other "Oops" happenings --- http://www.micom.net/oops/ Many of the photographs and cartoons on the “Oops” list will be familiar. You may not have seen some of these images, some of which are hilarious.
The "Oops" List  (some links are video links) --- http://www.micom.net/oops/ 

The "Oops" impact of labor unions of California politics:  Some Cities and Counties Will Declare Bankruptcy

"Chickens Roosting:  At Home Legislative slaves of public employee unions," by Ray Haynes, CaliforniaRepublic.org, February 27, 2006 --- http://www.californiarepublic.org/archives/Columns/Haynes/20060227HaynesRoosting.html

From 1999 through 2002, I was the Vice Chair of the Senate Public Employment and Retirement Committee. During that time, a number of bills presented to the committee increased pension and retirement benefits for state and local government employees. Every single one of these bills were passed and signed by Governor Davis.

At the hearing on each of these bills, the lobbyists for the government employee unions showed up and begged the committee members to vote for the bill. In addition, the representative for the California Public Employee Retirement System (CalPERS) told the committee that the retirement system could afford the increases because it had a $60 billion surplus. The surplus was so big that the state did not have to pay any money to the CalPERS fund, and CalPERS told us we would never have to pay into the retirement system ever again, even with the benefit increases. Of course, the government employee unions control the CalPERS board. The state was experiencing record budget surpluses, so everyone thought that the good times would last forever.

I kept trying to explain to my legislative colleagues that we were being foolish. No one can increase benefits without some cost. At some point, I said, these pension chickens were going to come home to roost in our budget. My colleagues called me Chicken Little telling me “the sky is not falling.” They said the pension was sound and the budget could absorb the cost.

Oops.

The chickens have come home to roost. The City of San Diego is going bankrupt from generous pension benefits. Orange County is talking seriously about filing bankruptcy again to get out from underneath their pension requirements. The state’s contribution to CalPERS is estimated to be $3.5 billion this year, and even higher next year. This is from nothing in 1999.

And this week, the Legislative Analyst’s Office released a report that the cost of retiree health benefits will be “in the range of $40 billion to $70 billion, and perhaps more.” The report identifies two reasons for this increased cost; (a) increased health care costs; and (b) legislatively mandated increased health benefits.

Health care costs have increased significantly in the last six years for one reason: legislatively mandated minimum requirements for health care. From 1999 to 2000, the Legislature passed over 30 different mandates on health insurers, and as a result, costs increased over 40%.

Continued in article


The Pending Collapse of the Western Economies

"Seven Pillars of Folly," by Edward Chancellor, The Wall Street Journal, March 8, 2006; Page A20 --- http://online.wsj.com/article/SB114179101554692300.html?mod=opinion&ojcontent=otep

The oil exporters of the Persian Gulf are flush with cash. Some of that money is going towards acquiring P&O, the British shipping concern, thus sparking off the heated controversy over foreign control of U.S. ports. This has led people to worry that Arab petrodollars might be scared away from the U.S. In fact, unlike during the last oil boom of the late 1970s, relatively little of the current Arab oil surplus has been directly invested in U.S. assets or even deposited in the international banking system. This time much of the oil money has remained at home where a classic speculative mania is now being played out.

Lawrence of Arabia took the title of his celebrated book from a passage in the Book of Proverbs: "Wisdom hath builded her house, she hath hewn out her seven pillars." In homage to Lawrence, we identify the seven pillars of folly upon which the Great Arab Boom has been weakly constructed.

• The first pillar is liquidity:
OPEC members have earned around $1.3 trillion in petrodollars since 1998, according to the Bank for International Settlements. The extra liquidity injected into the Gulf economies by the oil price hike since 2002 is estimated at around $300 billion by HSBC. Some of this money has been spent on building up foreign currency reserves and on the acquisition of foreign companies, such as P&O. Arab takeovers of European and U.S. firms totaled $30 billion last year. Some money has even been invested in hedge funds and gold. However, a great deal has stayed in the Gulf region.

This has contributed to an extraordinary explosion of bank credit in Saudi Arabia and its neighbors. Since the member countries of the Gulf Cooperation Council link their currencies to the U.S. dollar, they have also enjoyed the Federal Reserve's easy money policy. The Saudi government has recently repaid around $100 billion of outstanding debt, further contributing to domestic liquidity.

The deposit base of Gulf commercial banks has increased by over 60% since 2000, according to a recent report from Credit Suisse. Bank loans have financed business investment, personal consumption, property development and stock margin loans, thereby boosting both the economy and asset prices.

• The second pillar is the new economy:
The Gulf economies are growing rapidly, along with corporate profits. Returns on equity in the region are approaching 20%, calculates Credit Suisse. Saudi Arabia has recently joined the World Trade Organization. Kuwait is selling off some state-owned businesses. A new era of permanently high oil prices and perpetual prosperity has been hailed.

The Gulf rulers are seeking to reduce their economies' dependence on oil. This is spurring a massive investment boom. Dubai is attempting to transform itself into a leading financial center and tourist resort. Saudi Arabia intends to become a world leader in fertilizer production. A bridge costing $3 billion is proposed to span the Red Sea. A new economy is coming into being. The current oil boom, unlike former ones, won't be followed by a bust, say the believers. This time it's different.

• The third pillar is the stock market:
The recent performance of Arab stock markets makes the Nasdaq of the late 1990s look like a slouch. Since January 2002, the Egyptian, Dubai and Saudi stock markets are up respectively by over 1,100%, 630% and 600%. Only four years ago, Gulf companies were priced at around twice book value. Today they trade on an average of 44 times historic earnings and at over eight times book value. Gulf banks are valued at over nine times book value, according to Credit Suisse.

Sabic, a Saudi conglomerate, is currently ranked among the world's 10 largest companies by market capitalization. The Saudi stock exchange has a market cap of around $750 billion. That's roughly three times the country's GDP. By comparison, the U.S. stock market reached a peak of 183% of GDP in March 2000. In fact, the relative overvaluation of the Saudi stock market is even greater than these figures suggest. Nomura analyst Tarek Fadlallah points out that as the oil industry remains in state hands, a far smaller fraction of Saudi economic activity is captured by the stock market than in the U.S.

• The fourth pillar is an IPO boom:
In the late 1980s, the Japanese authorities kindled a speculative mania by floating telecom giant NTT. In unconscious imitation, the Gulf states have stimulated their mania with privatizations and IPOs at bargain prices. It is not unknown for stocks to climb 500% on the first day's trading. Applications for new issues have been oversubscribed by up to 800 times. One IPO in the United Arab Emirates attracted aggregate subscriptions greater than $100 billion, a larger sum than the UAE's GDP.

• The fifth pillar is a property boom:
Dubai is the fastest-growing city in the world. Hundreds of new buildings are under construction, including what is planned to be the tallest building ever, the Burj Tower. Cynics point out that the capping of the world's highest property, from the Empire State Building to the Petronas Towers in Malaysia, has occasionally in the past coincided with economic crises. Reports suggest that the majority of new Dubai properties are being acquired for speculative purposes, with only small deposits put down. They are being flipped in the contemporary Miami manner.

• The sixth pillar is market inefficiency:
Financial information in the Gulf is totally inadequate. The Saudi megacap conglomerate Sabic attracts no domestic financial analysis, says Nomura's Mr. Fadlallah. Companies report their results in a rudimentary fashion. It is against the law to sell short overpriced stocks in the Saudi market. And foreigners' financial sophistication is absent since only Gulf nationals can purchase Saudi stocks. Instead, speculators operate in an information vacuum in markets reportedly dominated by insider trading and practiced manipulation.

• The seventh pillar is the madness of crowds:
Newspapers gleefully report stories of police called to protect banks from overeager IPO subscribers. A Saudi woman is said to have been divorced by her husband for no reason other than that he'd had lost money in the stock market. Up to two million of the 16 million Saudi population are said to be playing the market. Interest-free loans are commonly available. Saudi bank foyers are lined with LCD screens showing stock movements. A local TV station has started to provide stock market reports. The education minister has warned teachers to stop day-trading at schools. People are quitting their jobs to trade.

This is a familiar tale of folly, similar in certain aspects to the global technology bubble of the late 1990s. And like the tech bubble it is set to burst. The current Gulf prosperity is a mirage created by a haze of liquidity. The Federal Reserve, which inadvertently caused the Arab bubble when it slashed interest rates in 2002, is currently mopping up that liquidity. The Gulf Arabs are likely to be rudely awoken from their speculative dreams. In fact, the Arab markets are beginning to crack: Dubai has fallen 40% from its November peak, and the Saudi market is down by around 12% in the past few days.

There are several implications of the coming Arab crash. Speculative booms lead to capital being misallocated. Many of today's investments in the Gulf region may appear, in retrospect, as extravagant as U.S. fiber-optic expenditures in the late 1990s. As for Dubai's desire to become an international financial center, it is spookily reminiscent of Tokyo's ambition to rival New York and London in the 1980s. Japan's ambition was shattered by the collapse of its bubble economy.

The political consequences could be more serious. Arab rulers have deliberately encouraged the boom in the hope that rising asset prices and a strong economy would distract their youthful populations from religious fundamentalism. This strategy could backfire. History teaches that when speculative bubbles burst and the public loses large sums, there is normally a political backlash. This was true of the U.S. in the 1930s, and to a lesser extent in the early 2000s, and of Japan in the 1990s. It's not hard to imagine Islamists capitalizing on a future bust with denunciations of stock-market gambling. Some of today's young Arab day-traders could well turn into tomorrow's al Qaeda recruits.

Mr. Chancellor is deputy U.S. editor for Breakingviews.com.


 




Projected Population Growth (it's out of control) --- http://geography.about.com/od/obtainpopulationdata/a/worldpopulation.htm
         Also see http://users.rcn.com/jkimball.ma.ultranet/BiologyPages/P/Populations.html

My communications on "Hypocrisy in Academia and the Media" --- http://www.trinity.edu/rjensen/hypocrisy.htm 


My  “Evil Empire” essay is at http://www.trinity.edu/rjensen/hypocrisyEvilEmpire.htm

 

My home page is at http://www.trinity.edu/rjensen/