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

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.
Cicero - 55 B.C.

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

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."

IOUSA (the most frightening movie in American history) --- (see a 30-minute version of the documentary at www.iousathemovie.com ).

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.

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

 

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://en.wikipedia.org/wiki/Government_debt
The National Debt recently spiked about 10% to over $11 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/

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

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.

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.

"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.  

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Redistribution is necessary in any type of humane society.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Bob Jensen

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

So maybe a solution is at hand.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

. . .

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

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

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

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

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

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

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

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

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

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

Continued in article

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Question
What is the FASAB?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Continued in article

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Continued in article

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

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

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

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

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

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

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

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

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

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

• The largest skilled workforce, of 472 million, most of them literate and English-speaking.
• The second-largest pool of scientists.
• A hi-tech medical sector, already attracting more than 100,000 foreign patients a year — Arabs avoiding America, and Europeans avoiding long waiting lists at home.
• A solid manufacturing base, turning out, among other things, the world's largest output of motorbikes and three-wheelers.
• The largest railway network, including a just-opened, indigenous $2 billion subway in New Delhi, the capital.
• An information technology sector, which has grown 40 times in a dozen years to $20 billion a year and is poised to cut into the coming boom in software services, from the $650 billion worldwide today to $3 trillion in five years.

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/