Tidbits Quotations on October 05, 2010
To Accompany the October 5, 2010 edition of Tidbits
Bob Jensen at Trinity University


This is not a forwarded politically-biased message since David Walker is leading a very bipartisan effort to save the United States from economic disaster. Former Andersen Partner David Walker was appointed U.S. Comptroller General by President Bill Clinton and retained in the same position under President Bush ---

In his government position David Walker became staggered by the pending economic doom of the United States.

At the American Accounting Association 2010 annual meetings in San Francisco in August, David Walker will be the only person inducted this year into the Accounting Hall of Fame. Since leaving government service, David became the CEO of the Peterson Foundation that is trying to aid our government in saving the United States from entitlements bankruptcy. (By the way, as I read it, the Peterson Foundation supported the latest health care legislation that, in theory, will reduce deficit spending, although I personally think it should’ve been a full-fledged national health plan).

President Obama has appointed a joint task force to find ways of preventing total economic disaster of the United States that exists not so much because of current trillion dollar deficits as the threat of unfunded future entitlements obligations, with Medicare being the biggest unfunded entitlement as baby boomers retire.

Before viewing the Town Hall video, you might want to view the following earlier video:

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

One take home from the CNN show was that over 60% of the booked National Debt increases are funded off shore (largely in Asia and the Middle East).  

 This going to greatly constrain the global influence and economic choices of the United States.

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

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

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



Watch National Town Meetings


Video on IOUSA Bipartisan Solutions to Saving the USA

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

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

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

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

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


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

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

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


 Peter G. Peterson Website on Deficit/Debt Solutions ---

Watch for the other possible solutions in the 30-minute summary video ---
(Scroll Down a bit)


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

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

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

Featured Panelists Include:

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

Watch for the other possible solutions in the 30-minute summary video ---
(Scroll Down a bit)


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

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

"The Looming Entitlement Fiscal Burden," by Gary Becker, The Becker-Posner Blog, April 11, 2010 ---

"The Entitlement Quandary," by Richard Posner, The Becker-Posner Blog, April 11, 2010 ---

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

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

Harvard Profession Video:   Niall Ferguson: Empires on the Edge of Chaos ---

Call it the fatal arithmetic of imperial decline. Without radical fiscal reform, it could apply to America next.
Niall Ferguson, "An Empire at Risk:  How Great Powers Fail," Newsweek Magazine Cover Story, November 26, 2009 --- http://www.newsweek.com/id/224694/page/1
Please note that this is NBC’s liberal Newsweek Magazine and not Fox News or The Wall Street Journal.

. . .

In other words, there is no end in sight to the borrowing binge. Unless entitlements are cut or taxes are raised, there will never be another balanced budget. Let's assume I live another 30 years and follow my grandfathers to the grave at about 75. By 2039, when I shuffle off this mortal coil, the federal debt held by the public will have reached 91 percent of GDP, according to the CBO's extended baseline projections. Nothing to worry about, retort -deficit-loving economists like Paul Krugman.

. . .

Another way of doing this kind of exercise is to calculate the net present value of the unfunded liabilities of the Social Security and Medicare systems. One recent estimate puts them at about $104 trillion, 10 times the stated federal debt.

Continued in article --- http://www.newsweek.com/id/224694/page/1


Niall Ferguson is the Laurence A. Tisch professor of history at Harvard University and the author of The Ascent of Money. In late 2009 he puts forth an unbooked discounted present value liability of $104 trillion for Social Security plus Medicare. In late 2008, the former Chief Accountant of the United States Government, placed this estimate at$43 trillion. We can hardly attribute the $104-$43=$61 trillion difference to President Obama's first year in office. We must accordingly attribute the $61 trillion to margin of error and most economists would probably put a present value of unbooked (off-balance-sheet) present value of Social Security and Medicare debt to be somewhere between $43 trillion and $107 trillion To this we must add other unbooked present value of entitlement debt estimates which range from $13 trillion to $40 trillion. If Obamacare passes it will add untold trillions to trillions more because our legislators are not looking at entitlements beyond 2019.


The Meaning of "Unbooked" versus "Booked" National Debt
By "unbooked" we mean that the debt is not included in the current "booked" National Debt of $12 trillion. The booked debt is debt of the United States for which interest is now being paid daily at slightly under a million dollars a minute. Cash must be raised daily for interest payments. Cash is raised from taxes, borrowing, and/or (shudder) the current Fed approach to simply printing money. Interest is not yet being paid on the unbooked debt for which retirement and medical bills have not yet arrived in Washington DC for payment. The unbooked debt is by far the most frightening because our leaders keep adding to this debt without realizing how it may bring down the entire American Dream to say nothing of reducing the U.S. Military to almost nothing.

Niall Ferguson,
"An Empire at Risk:  How Great Powers Fail," Newsweek Magazine Cover Story, November 26, 2009 --- http://www.newsweek.com/id/224694/page/1

This matters more for a superpower than for a small Atlantic island for one very simple reason. As interest payments eat into the budget, something has to give—and that something is nearly always defense expenditure. According to the CBO, a significant decline in the relative share of national security in the federal budget is already baked into the cake. On the Pentagon's present plan, defense spending is set to fall from above 4 percent now to 3.2 percent of GDP in 2015 and to 2.6 percent of GDP by 2028.

Over the longer run, to my own estimated departure date of 2039, spending on health care rises from 16 percent to 33 percent of GDP (some of the money presumably is going to keep me from expiring even sooner). But spending on everything other than health, Social Security, and interest payments drops from 12 percent to 8.4 percent.

This is how empires decline. It begins with a debt explosion. It ends with an inexorable reduction in the resources available for the Army, Navy, and Air Force. Which is why voters are right to worry about America's debt crisis. According to a recent Rasmussen report, 42 percent of Americans now say that cutting the deficit in half by the end of the president's first term should be the administration's most important task—significantly more than the 24 percent who see health-care reform as the No. 1 priority. But cutting the deficit in half is simply not enough. If the United States doesn't come up soon with a credible plan to restore the federal budget to balance over the next five to 10 years, the danger is very real that a debt crisis could lead to a major weakening of American power.


Blessed are the young, for they shall inherit the national debt.
Herbert Hoover --- http://www.brainyquote.com/quotes/quotes/h/herberthoo110353.html

The Government' Recipe for Off-Budget Debt
"US Government 'hiding true amount of debt'," by Gregory Bresiger, news,com ---

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

But these numbers are incomplete.

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

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

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

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

Bob Jensen's threads on the sad state of government accounting and accountability ---

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

Wave Goodbye to this nation's top economic advisor
"Lawrence Summers Will Leave White House Post and Return to Harvard," Chronicle of Higher Education, September 21, 2010 ---

"Profit Versus Nonprofit," by Walter E. Williams, Townhall, September 22, 2010 ---

"Philadelphia Scandal Underscores Pitiful State of Public Housing Oversight," read Jonathan Berr's Aug. 28 report in the Daily Finance. It was a story about Carl Greene, the embattled director of the Philadelphia Housing Authority (PHA). He was put on paid leave while the board investigates charges that he settled four sexual harassment claims against him without notifying the PHA, doled out work to politically connected law firms and pressured employees to donate to his favorite nonprofit. Greene is also being investigated by the U.S. Attorney General Office for the Eastern District of Pennsylvania and HUD's Office of Inspector General. They have yet to bring criminal charges against him.

People always act surprised by revelations of political corruption but the Philadelphia Housing Authority corruption is highly probably in nonprofit entities such as government. Because of ignorance and demagoguery, being profit-motivated has become suspicious and possibly a dirty word. Nonprofit is seen as more righteous. Very often, people pompously stand before us and declare, "We're a nonprofit organization." They expect for us to believe that since they're not in it for money, they are somehow above self-interest and have the public interest as their motivation. There's little much further from the truth.

People are always self-interested. It's just when they manage a nonprofit organization such as the Philadelphia Housing Authority, government entities in general, universities and charitable organizations, they face a different set of constraints on their behavior. The fundamental difference between nonprofit organizations and their profit-making counterparts is that nonprofits tend to take a greater portion of their compensation from easier working conditions, more time off, favors and under-the-table payments. Profit-making organizations take a greater portion of their compensation in cash, except those that are highly regulated.

In the profit-making world, there is much greater monitoring of the behavior of people who act for the organization. Profit-making organizations have a financial bottom line they must meet, or sooner or later, heads will roll. Not so with nonprofits, who have no bottom line to meet. On top of that, incompetence for nonprofits means bigger budgets, higher pay and less oversight. That description aptly fits one the nation's largest nonprofit organizations -- the public education establishment.

Profit is vital to human well-being. Profit is the payment to entrepreneurs just as wages are payments to labor, interest to capital and rent to land. In order to earn profits in free markets, entrepreneurs must identify and satisfy human wants and do so in a way that economizes on society's scarce resources.

Continued in article

"What Ahmadinejad Knows:  Iran's president appeals to 9/11 Truthers," The Wall Street Journal, September 28, 2010 ---

Let's put a few facts on the table.

• The recent floods in Pakistan are acts neither of God nor of nature. Rather, they are the result of a secret U.S. military project called HAARP, based out of Fairbanks, Alaska, which controls the weather by sending electromagnetic waves into the upper atmosphere. HAARP may also be responsible for the recent spate of tsunamis and earthquakes.

• Not only did the U.S. invade Iraq for its oil, but also to harvest the organs of dead Iraqis, in which it does a thriving trade.

• Faisal Shahzad was not the perpetrator of the May 1 Times Square bombing, notwithstanding his own guilty plea. Rather, the bombing was orchestrated by an American think tank, though its exact identity has yet to be established.

• Oh, and 9/11 was an inside job. Just ask Mahmoud Ahmadinejad.

The U.S. and its European allies were quick to walk out on the Iranian president after he mounted the podium at the U.N. last week to air his three "theories" on the attacks, each a conspiratorial shade of the other. But somebody should give him his due: He is a provocateur with a purpose. Like any expert manipulator, he knew exactly what he was doing when he pushed those most sensitive of buttons.

He knew, for instance, that the Obama administration and its allies are desperate to resume negotiations over Iran's nuclear programs. What better way to set the diplomatic mood than to spit in their eye when, as he sees it, they are already coming to him on bended knee?

He also knew that the more outrageous his remarks, the more grateful the West would be for whatever crumbs of reasonableness Iran might scatter on the table. This is what foreign ministers are for.

Finally, he knew that the Muslim world would be paying attention to his speech. That's a world in which his view of 9/11 isn't on the fringe but in the mainstream. Crackpots the world over—some of whom are reading this column now—want a voice. Ahmadinejad's speech was a bid to become theirs.

This is the ideological component of Ahmadinejad's grand strategy: To overcome the limitations imposed on Iran by its culture, geography, religion and sect, he seeks to become the champion of radical anti-Americans everywhere. That's why so much of his speech last week was devoted to denouncing capitalism, the hardy perennial of the anti-American playbook. But that playbook needs an update, which is where 9/11 "Truth" fits in.

Could it work? Like any politician, Ahmadinejad knows his demographic. The University of Maryland's World Public Opinion surveys have found that just 2% of Pakistanis believe al Qaeda perpetrated the attacks, whereas 27% believe it was the U.S. government. (Most respondents say they don't know.)

Among Egyptians, 43% say Israel is the culprit, while another 12% blame the U.S. Just 16% of Egyptians think al Qaeda did it. In Turkey, opinion is evenly split: 39% blame al Qaeda, another 39% blame the U.S. or Israel. Even in Europe, Ahmadinejad has his corner. Fifteen percent of Italians and 23% of Germans finger the U.S. for the attacks.

Deeper than the polling data are the circumstances from which they arise. There's always the temptation to argue that the problem is lack of education, which on the margins might be true. But the conspiracy theories cited earlier are retailed throughout the Muslim world by its most literate classes, journalists in particular. Irrationalism is not solely, or even mainly, the province of the illiterate.

Nor is it especially persuasive to suggest that the Muslim world needs more abundant proofs of American goodwill: The HAARP fantasy, for example, is being peddled at precisely the moment when Pakistanis are being fed and airlifted to safety by U.S. Marine helicopters operating off the USS Peleliu.

What Ahmadinejad knows is that there will always be a political place for what Michel Foucault called "the sovereign enterprise of Unreason." This is an enterprise whose domain encompasses the politics of identity, of religious zeal, of race or class or national resentment, of victimization, of cheek and self-assertion. It is the politics that uses conspiracy theory not just because it sells, which it surely does, or because it manipulates and controls, which it does also, but because it offends. It is politics as a revolt against empiricism, logic, utility, pragmatism. It is the proverbial rage against the machine.

Chances are you know people to whom this kind of politics appeals in some way, large or small. They are Ahmadinejad's constituency. They may be irrational; he isn't crazy.

"Taxing the Rich The trouble with progressive economics," by John Stossel, Reason Magazine, September 30, 2010 ---

Progressives want to raise taxes on individuals who make more than $200,000 a year because they say it's wrong for the rich to be "given" more money. Sunday's New York Times carries a cartoon showing Uncle Sam handing money to a fat cat. They just don't get it.

As I've said before, a tax cut is not a handout. It simply means government steals less. What progressives want to do is take money from some—by force—and spend it on others. It sounds less noble when plainly stated.

That's the moral side of the matter. There's a practical side, too. Taxes discourage wealth creation. That hurts everyone, the lower end of the income scale most of all. An economy that, through freedom, encourages the production of wealth raises the living standards of lower-income people as well as everyone else.

A free society is not a zero-sum game in which every gain is offset by someone's loss. As long as government keeps its thumb off the scales, the "makers" who get rich do so by making others better off. (When the government allocates capital or creates barriers to competition, all bets are off.)

Of course, this is not the prevailing view among the intelligentsia. Columbia University Professor Marc Lamont Hill tells me, "Those who have more should pay more."

But is there a point where they stop producing wealth or leave altogether?

"The rich have always cried wolf like that," Hill says.

But the wolf is here. Maryland created a special tax on rich people that was supposed to bring in $106 million. Instead, the state lost $257 million.

Former Gov. Robert Ehrlich, who is running again for his old job, says: "It reminds me of Charlie Brown. Charlie Brown was always surprised when Lucy pulled the football away. And they're always surprised in Washington and state capitals when the dollars never come in."

Some of Maryland's rich left the state. "They're out of here. These people aren't stupid," Ehrlich says.

New York billionaire Tom Golisano isn't stupid, either. With $3,000 and one employee, he started a business that processes paychecks for companies. He created 13,000 jobs.

Then New York state hiked the income tax on millionaires.

"It was the straw that broke the camel's back," he says. "Not that I like to throw the number around, but my personal income tax last year would've been $13,800 a day. Would you like to write a check for $13,800 a day to a state government, as opposed to moving to another state where there's no state income tax or very low state income tax?

He established residence in Florida, which has no personal income tax.

Now Gov. David Paterson may have even seen the light.


"Black Colleges Need a New Mission Once an essential response to racism, they are now academically inferior," by Jason L. Riley, The Wall Street Journal, September 28, 2010 ---

President Obama has shown a commendable willingness to shake up the status quo in K-12 education by advocating reforms, such as charter schools, that have left his teachers union base none-too-pleased. So it's unfortunate that he has such a conventional approach to higher education, and to historically black colleges and universities (HBCUs) in particular.

Earlier this month, Mr. Obama hosted a White House reception to celebrate the contributions of the nation's 105 black colleges and to reiterate his pledge to invest another $850 million in these institutions over the next decade.

Recalling the circumstances under which many of these schools were created after the Civil War, the president noted that "at a critical time in our nation's history, HBCUs waged war against illiteracy and ignorance and won." He added: "You have made it possible for millions of people to achieve their dreams and gave so many young people a chance they never thought they'd have, a chance that nobody else would give them."

The reality today, however, is that there's no shortage of traditional colleges willing to give black students a chance. When segregation was legal, black colleges were responsible for almost all black collegians. Today, nearly 90% of black students spurn such schools, and the available evidence shows that, in the main, these students are better off exercising their non-HBCU options.

"Even the best black colleges and universities do not approach the standards of quality of respectable institutions," according to economist Thomas Sowell. "None has a department ranking among the leading graduate departments in any of the 29 fields surveyed by the American Council of Education. None ranks among the 'selective' institutions with regard to student admissions. None has a student body whose College Board scores are within 100 points of any school in the Ivy League."

Mr. Sowell wrote that in an academic journal in 1974, yet with few exceptions the description remains accurate. These days the better black schools—Howard, Spelman, Morehouse—are rated "selective" in the U.S. News rankings, but their average SAT scores still lag behind those at decent state schools like the University of Texas at Austin, never mind a Stanford or Yale.

In 2006, according to the Chronicle of Higher Education, the six-year graduation rate at HBCUs was 37%. That's 20 percentage points below the national average and eight percentage points below the average of black students at other colleges. A recent Washington Monthly magazine survey of colleges with the worst graduation rates featured black schools in first and second place, and in eight of the top 24 spots.

The economists Roland Fryer of Harvard and Michael Greenstone of MIT have found that black colleges are inferior to traditional schools in preparing students for post-college life. "In the 1970s, HBCU matriculation was associated with higher wages and an increased probability of graduation, relative to attending a [traditional college]," they wrote in a 2007 paper. "By the 1990s, however, there is a substantial wage penalty. Overall, there is a 20% decline in the relative wages of HBCU graduates in just two decades." The authors concluded that "by some measures, HBCU attendance appears to retard black progress."

Mr. Obama and Education Secretary Arne Duncan have urged HBCUs to improve their graduation rates—Mr. Duncan has said they need to increase "exponentially"—but the administration has brought little pressure to bear and is offering substantial financial assistance to keep them afloat. Howard and Spelman have endowments valued in the hundreds of millions of dollars, but a large majority of black colleges have very small endowments and more than 80% get most of their revenue from the government.

Instead of more subsidies and toothless warnings to shape up, Mr. Obama ought to use the federal government's leverage to remake these schools to meet today's challenges.

Uneconomically small black colleges could be consolidated. For-profit entities could be brought in to manage other schools. (For the past two years, the University of Phoenix, a for-profit college, has conferred more bachelor's degrees on black students than any other school.) Still other HBCUs could be repurposed as community colleges that focus on developmental courses to compensate for the poor elementary and secondary educations that so many black children still receive.

In 1967, two white academics, Christopher Jencks and David Riesman, published a bleak but prescient assessment of black colleges in the Harvard Educational Review. They predicted that these schools are "for the most part, likely to remain fourth-rate institutions at the tail end of the academic procession." Messrs. Jencks and Riesman were called racists, and honest comprehensive studies of black colleges have since been rare.

Black colleges are at a crossroads.At one time black colleges were an essential response to racism. They trained a generation of civil rights lawyers and activists who helped end segregation. Their place in U.S. history is secure. Today, however, dwindling enrollments and endowments indicate that fewer and fewer blacks believe that these schools, as currently constituted, represent the best available academic choice.

A black president is uniquely qualified to restart this discussion. Anyone who cares about the future of black higher education should hope that he does.

Mr. Riley is a member of the WSJ's editorial board.

"Black Education," by Walter E. Williams (a black economics professor), Townhall, December 23, 2009 ---

Detroit's (predominantly black) public schools are the worst in the nation and it takes some doing to be worse than Washington, D.C. Only 3 percent of Detroit's fourth-graders scored proficient on the most recent National Assessment of Education Progress (NAEP) test, sometimes called "The Nation's Report Card." Twenty-eight percent scored basic and 69 percent below basic. "Below basic" is the NAEP category when students are unable to demonstrate even partial mastery of knowledge and skills fundamental for proficient work at their grade level. It's the same story for Detroit's eighth-graders. Four percent scored proficient, 18 percent basic and 77 percent below basic.

Michael Casserly, executive director of the D.C.-based Council on Great City Schools, in an article appearing in Crain's Detroit Business, (12/8/09) titled, "Detroit's Public Schools Post Worst Scores on Record in National Assessment," said, "There is no jurisdiction of any kind, at any level, at any time in the 30-year history of NAEP that has ever registered such low numbers." The academic performance of black students in other large cities such as Philadelphia, Chicago, New York and Los Angeles is not much better than Detroit and Washington.

What's to be done about this tragic state of black education? The education establishment and politicians tell us that we need to spend more for higher teacher pay and smaller class size. The fact of business is higher teacher salaries and smaller class sizes mean little or nothing in terms of academic achievement. Washington, D.C., for example spends over $15,000 per student, has class sizes smaller than the nation's average, and with an average annual salary of $61,195, its teachers are the most highly paid in the nation.

What about role models? Standard psychobabble asserts a positive relationship between the race of teachers and administrators and student performance. That's nonsense. Black academic performance is the worst in the very cities where large percentages of teachers and administrators are black, and often the school superintendent is black, the mayor is black, most of the city council is black and very often the chief of police is black.

Black people have accepted hare-brained ideas that have made large percentages of black youngsters virtually useless in an increasingly technological economy. This destruction will continue until the day comes when black people are willing to turn their backs on liberals and the education establishment's agenda and confront issues that are both embarrassing and uncomfortable. To a lesser extent, this also applies to whites because the educational performance of many white kids is nothing to write home about; it's just not the disaster that black education is.

Many black students are alien and hostile to the education process. They have parents with little interest in their education. These students not only sabotage the education process, but make schools unsafe as well. These students should not be permitted to destroy the education chances of others. They should be removed or those students who want to learn should be provided with a mechanism to go to another school.

Another issue deemed too delicate to discuss is the overall quality of people teaching our children. Students who have chosen education as their major have the lowest SAT scores of any other major. Students who have an education degree earn lower scores than any other major on graduate school admission tests such as the GRE, MCAT or LSAT. Schools of education, either graduate or undergraduate, represent the academic slums of most any university. They are home to the least able students and professors. Schools of education should be shut down.

Yet another issue is the academic fraud committed by teachers and administrators. After all, what is it when a student is granted a diploma certifying a 12th grade level of achievement when in fact he can't perform at the sixth- or seventh-grade level?

Prospects for improvement in black education are not likely given the cozy relationship between black politicians, civil rights organizations and teacher unions.

Dr. Williams serves on the faculty of George Mason University as John M. Olin Distinguished Professor of Economics and is the author of More Liberty Means Less Government: Our Founders Knew This Well.  

"Beggar the World Monetary instability is a threat to the global recovery," The Wall Street Journal, October 1, 2010 ---

Brazil's finance minister caused a stir in financial markets earlier this week when he committed a Lady Godiva moment by declaring that "We're in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness."

Thanks for noticing. Now if only the world's political and finance leaders—especially in the world's leading economy, America—would do something about it.

Since the financial panic began in 2008, global leaders have been at pains to stress their "cooperation" on numerous issues—stimulus spending, new bank rules, trade. Yet they still insist on going their own parochial, self-interested way on monetary policy and exchange rates. It's as if world leaders had consciously decided to deal with every economic issue except the most important one—the price of the global medium of economic exchange.

The result has been a world of monetary disruption and growing commercial and political disputes. Brazil has had to cope with surging capital inflows and a rising real, with government bond yields hitting double-digits. The rising yen has roiled Japanese politics and led its central bank to intervene. Other Asian nations—part of what is, or was, the dollar bloc—have taken to devaluation or interest rate adjustments to stop their currency shifts against the dollar.

Meanwhile, what Nobel economist Robert Mundell calls the world's single most important price—the euro-dollar rate—continues to fluctuate wildly. The nearby chart shows that the swings have become more frequent and severe since 2005, from 1.2 euros to the dollar to 1.6, then down to 1.25, back to 1.5 in a matter of months, down again to 1.2 and now back above 1.36.

Mr. Mundell—the father of the euro and the world's foremost expert on currency systems—recently said on Bloomberg TV that this "is a terrible thing for the world economy" and that "We've never been in this unstable position in the entire currency history of 3,000 years."

Such sharp currency moves lead to huge swings in prices, especially for commodities like oil. They disrupt business planning, as companies find it difficult to know what their real costs and return on investment will be. And they lead to the misallocation of resources, with investment decisions pegged as much to exchange-rate movements as to long-run productivity gains or potential breakthroughs in technology. Some $4 trillion now turns over daily in global currency markets.

The growing danger today is currency protectionism—what students of the 1930s will remember as competitive devaluation or "beggar-thy-neighbor" policies. As economic historian Charles Kindleberger describes in his classic "The World in Depression," nations under domestic political pressure sought economic advantage by devaluing their national currency to improve their terms of trade.

But that advantage came at the expense of everyone else. "As with exchange depreciation to raise domestic prices, the gain for one country was a loss for all," Kindleberger writes. "With tariff retaliation and competitive depreciation, mutual losses were certain."

We can see signs of similar behavior today, especially in the global economy's main potential flash point of U.S.-China relations. This week, the U.S. House of Representatives voted 348 to 79 to impose tariffs on Chinese goods if Beijing does not revalue its currency. Ominously, the vote was bipartisan. While the Senate has so far restrained itself, a similar rout in that body can't be ruled out after the elections—especially in the absence of Presidential leadership.

Yet so far President Obama and Treasury Secretary Timothy Geithner have been part of the political problem. They are feeding the Congressional stampede by publicly demanding that China revalue against the dollar (that is, that the dollar depreciate) to reduce the U.S. trade deficit, though Mr. Mundell and others say it would have no such effect. Japan revalued the yen starting 25 years ago under similar U.S. pressure, and the U.S. still runs a trade deficit with Japan. Asked yesterday if Mr. Obama would sign a tariff bill if it arrived on his desk, White House spokesman Robert Gibbs said, "I don't have any clarity on that."

That is for sure, because the root of this problem is also intellectual. For a decade, U.S. financial officials have behaved as if they don't believe U.S. monetary policy has any impact on the rest of the world. Yet dozens of countries peg their own monetary policies to the dollar, as a way to minimize currency fluctuations and attract foreign investment. China's currency peg to the dollar is fundamentally a way of subcontracting its monetary policy to the Fed.

Continued in article

Is Medicare a "Medicare is a good example of a government program that is highly efficient?"

-----Original Message-----
From: AECM, Accounting Education using Computers and Multimedia [mailto:AECM@LISTSERV.LOYOLA.EDU] On Behalf Of Peters, James M Sent: Thursday, September 23, 2010 10:37 AM

Subject: Re: accounting basics

I think it is time to push back against all this anti-government rhetoric that just isn't based on observed evidence. Whether goverments work best or markets work best is a function of the task to be performed and the nature of the product. Governments have proven they can provide better health insurance and health care than the private sector. Medicare is a good example of a goverment program that is highly efficient and spends 97% of your tax dollars on health care while private sector firms spend only 70% to 75% of your premium dollars on health care. Some firms reach 80%, but they are the exception. Government run hospitals in the US are now rated as among the best, if not the best in the nation. The Veterans Hospitals have better records of treatment success and lower costs that the vast majority of private hospitals.

Market advocates seem to forget free market theory. Free markets only work when certain, rather restrictive conditions are met. Among the most frequently violated are equal power and knowledge among all market participants. Even Adam Smith in the Wealth of Nations advocated a strong role for governments in keeping markets free. When conditions are right, markets work brilliantly. However, (a rhetorical question) how many market in the industrialize world really meet the conditions of truly free markets? My answer is very few.

Governments do some things much better than markets. The key is recognizing the market conditions that lead to government advantage and letting governments handle those areas. Auditing is a prime candidate for government intervention because of no auditor can truly be objective when they are being paid by the client. The markets cannot function properly in auditing because the true customer, the general public, isn't a party to the transaction. Audits aren't just for the current owners, they are for perpsective owners as well, which means the general public. The general public needs to be represented at the table when auditors are hired.

The other key is to recognize that governments fail when people fail to be informed voters. All governments, like all markets, are not made equal. Some work better than others. In democracies, the effectiveness of the government is a function of the involvement and knowledge of the electorate. Thus, we are all responsible for our own government's success and failures. The fact that America seems to have a disfunctional government right now is that we have a disfunctional electorate that seems to enjoy mindless shouting matches over informed policy dialog. Other nations don't suffer from this disease.

Let's all join John Stewart in Washington DC for the "Return Sanity to America" rally. It is a start to building a government that can live up to its potential.


September 23, 2010 reply from Bob Jensen

Hi Jim,

If this is your idea of "observed evidence" then I've no hope for you in the academy. For one thing a good academic would be more precise about definitions like “better health care.” For example, some other nations come out “better” in infant mortality because they throw away very premature small babies and don’t count them into survival rates. What does “better” mean in terms of who invents the latest and greatest medications to fight cancer?

Medicare, for example, is one of the least-efficient government programs that arguably has the worst internal accounting controls of all other government programs except, possibly, the defense program. An "efficient" program would have stellar internal controls preventing fraud and error.

President Obama repeatedly asserts that "Medicare and Medicaid are largest deficit drivers" ---

And Medicare is not a very good example of "government" efficiency since the private sector delivers virtually all the medical services. The Medicare service providers are notoriously inefficient by prescribing billions of dollars in unneeded services, medications, non-existent medical equipment, and lifetime disability benefits to crooks that are not disabled.

I don't care to continue on in the AECM with debates over extreme political dogma since this is truly outside what subscribers expect from the AECM. They wanted to learn more about the PwC re-branding and the future of auditing/assurance services. I doubt that they want to hear a rant about joining a Glenn Beck-bashing by Jon Stewart in Washington DC. Most of us do not support the extremes of Beck or Stewart and certainly do not want the AECM to be a rallying call for either extreme. That is not in the mission of the AECM.

Also I see no need to censor the other subscribers of the AECM if they happen to disagree with Jim Peterson’s political dogma. Even if I were a Glenn Beck supporter (which I’m not) I would not urge AECM subscribers to join me in Beck’s big Washington DC rally (where you would never find me).

It’s a free country, and I suspect you will be among the Glenn Beck bashers at Jon Stewart’s rally for liberals. But I don’t think you should plead with AECM subscribers to join you in this political burning of Beck’s books.

Bob Jensen

"National Lampoon's Obamacare: America's Griswald Family Truckster!" by Rob Binsrick, Examiner.com, September 23, 2010 ---

Yesterday marked the six-month anniversary since the passage of the Democrats' healthcare reform package and just over six months since Nancy Pelosi pronounced to a leery public that "We have to pass the bill so that you can find out what is in it."

Hearing those remarks from Pelosi conjures up memories of the scene from the movie "National Lampoon's Vacation" in which the title character Clark W. Griswald goes to pick up the new car that he has bought to take his family on a cross-country vacation. When Griswald arrives at the dealership, rather than getting the sports wagon that he ordered he is instead presented with a green and faux wood station wagon known as the 'Wagon Queen Family Truckster.' Using his best sales pitch skills, the car salesman tells Griswald about the Truckster, "You think you hate it now, wait 'til you drive it."

The salesman was of course trying to convince Griswald that he would like the Family Truckster once he actually drove it. As the movie portrays though, the Truckster turns out to be every bit the lemon that it looked like on the lot. That pretty much sums up the story of the general public's reaction to the Democrats' healthcare reform bill. The Democrats tried to convince the American public that they would love their healthcare reforms once the bill was passed, but clearly the opposite has happened - to the point that a full 60% of the public now wants to see the bill repealed completely. The bill is so bad that the only Democrats even campaigning on the healthcare reform bill are those who opposed it, and they are proclaiming with pride in their ads the fact that they did indeed oppose it.

How could it go so wrong in just six months? Well, the simple answer is that the Democrats completely lied about the facts, figures and merits of their healthcare plan. Just like when being sold a lemon from a car dealer, most people get very upset when they have been sold a political lemon by their elected representatives.

The entire healthcare reform consisted of over 2,000 pages of legislation. The lies presented about it by the Democrats can be summed in just a few simple points:

Obamacare will not cut healthcare costs for the government or reduce the deficit as Barack Obama and the Democrats suggested it would.  This was a complete fantasy from the beginning given that the CBO was asked to score only 6 years of costs versus 10 years of new revenues.

Obamacare will not allow individuals to keep their current insurance plans if they like them, as suggested many times by Obama himself.  Because of the new mandates on what insurance plans must cover, most companies will be forced to pick new plans for their employees.

Obamacare will not reduce insurance premiums.  This was another to suggest that insurance companies would be able to lower premiums even though they were being asked to cover more people, cover pre-existing conditions, eliminate lifetime caps on benefits, and allow 'children' of their insured members to remain on their parents' coverage up to the age of 26.  This provision raises the issue of whether or not someone can actually be considered a 'child' at the age of 26.  Plus it seems like all it does is create a new wave of young adults who will choose to stay at home with their parents rather than getting out on their own and becoming productive members of the society.

Obamacare will increases costs to businesses since they will now have to send out 1099s to all of its vendors that they pay more than $600 in a given year.  Small businesses will suffer the most because of this provision because there will be time wasted recoding all of their vendors as 1099 recipients, making modifications to existing accounting software and/or purchasing additional forms to accomodate the increased number of their 1099 recipients.

Obamacare is tantamount to a new tax which will be enforced by the Internal Revenue Service despite Obama's now infamous declaration that the 'absolutely rejected the notion' that the healthcare reforms would be a new tax on individuals and businesses.  For the Democrats, it is just tax and spend all over again.

Continued in article

Americans stubbornly resist this landmark legislation in part because virtually every major claim about its benefits is turning out to be false—and people recoil when misled.
Karl Rove, The Wall Street Journal, September 30, 2010 ---

Bob Jensen's threads on health care are at

"Fiscal Policy Report Card on America's Governors: 2010," Cato Institute, September 30, 2010
Download the PDF of Policy Analysis no. 668 (493 KB) --- http://www.cato.org/pubs/pas/PA668.pdf
View this Policy Analysis in HTML --- http://www.cato.org/pubs/pas/html/PA668/PA668index.html

"GM, Chapters 1 to 10 The whole story of why GM failed has yet to be told," by Holman W. Jenkins, Jr., The Wall Street Journal, September 22, 2010 ---

A pallid celebration of the General Motors bailout is being ginned up in time for the elections. Steve Rattner, the retired car czar, has a book out on how he saved GM from its own stupidity. The company is preparing an IPO to put itself on a slow road to privatization.

The bailout certainly proved that government, using bankruptcy, can wipe out a failing company's debts and then inject public money to keep it afloat—a power not in doubt. But call us an economic determinist—we still don't believe large, long-lived businesses like GM fail in the first place because an improbable series of CEOs defied the odds by making one dumb decision after another.

Technological and legal, political and institutional factors prevail over time—which is why it was not poetically lacking that GM ended up owned by the United Auto Workers (UAW) union and the government.

We've said enough about the UAW's labor monopoly over the years. But Mr. Obama was supposed to "surprise" us by being a smart regulator. That was the word from his future regulatory czar and then-colleague at the University of Chicago, Cass Sunstein. What a misguided call that turned out to be. Had Mr. Obama represented anything new under the sun, he would have said what economists and engineers have said for a generation—that the fuel economy mandate known as CAFE is a failure, producing only perverse results.

It undermined the homegrown, UAW-staffed auto makers by forcing them to throw capital at cars they couldn't deliver profitably, and that undermined their reputation for quality.

It subsidized Americans to drive more miles, live farther from work, travel farther for shopping, thereby contributing to the misallocation of capital to large houses far from town.

Properly seen, the GM bailout is but a Rube Goldbergian necessity conditioned by previous Rube Goldbergism inflicted on the car makers for 35 years.

CAFE may be small in the scheme of things, but it is symbolic of a nation that digs itself into a hole with bad policy, then elects a young, smart, supposedly free-thinking politician who ends up being the human equivalent of a see-through building.

From Mr. Obama we've gotten only a metastization of Rube Goldbergism, a doubling down on fuel economy, with consequences already visible on the horizon. Oil prices have been sinking, not rising as Mr. Obama's auto czars predicted—which means the auto companies he just bailed out now will lose even more money trying to sell the fuel-efficient cars that the public doesn't want.

At least an unadvertised upside for Detroit was supposed to be delayed arrival of upstart Chinese auto makers in the U.S. market because they lack the requisite fuel-saving technology. Oops, not so fast. As the Journal reported Friday, China has discovered a quick and easy way to get the necessary technology—extort it from Western auto makers in return for access to China's booming car market.

For years CAFE winked at the German luxury car makers, letting them dodge the rules by paying the negligible fines prescribed by law.

Why didn't the Big Three do the same and just pay the fines and build the cars they could sell profitably? As a 2007 study by the Government Accountability Office put it, they feared being slammed for "unlawful conduct" in a way politicians wouldn't find it worth slamming the German auto makers.

Now, under Mr. Obama's new rules, the fines are larger and the politics trickier, so the administration is considering a partial waiver for those auto makers selling fewer than 400,000 cars here annually. Politicians, in short, still see no upside in making the U.S. market untenable for the luxury cars that wealthier Americans want to buy. We're not looking to cause trouble for BMW and Mercedes, but is there a better illustration of how weirdly politicized the U.S. auto market has become after 35 years of CAFE?

In a world where politicians did not surrender to pre-existing idiocy simply because it exists, Mr. Obama would have been the leader Mr. Sunstein foresaw. He would have asked Americans if they want to pay slightly higher gas prices to create demand for higher-mileage vehicles. Then he would have lived with the answer.

That's not going to happen, so put aside the slashing rhetoric aimed at GM under its previous management, especially the unjustly vilified Rick Wagoner.

Business leaders come and go, some more mediocre than others. In Alan Mulally, Ford is widely judged to have recruited a winner. But even Mr. Mulally, after arriving from Boeing, confessed surprise at how "CAFE regulations distort the market," requiring Ford to make and sell small cars at a loss "so we could also make and sell cars customers really wanted."

Making and selling products that customers really want? What business would do otherwise? Answer: Detroit, thanks to the new and stricter CAFE rules that are Mr. Obama's other auto legacy.


"The Universal Law of Wealth," by James Martin, MAAW Blog, September 30, 2010 ---

Although the following article was published eight years ago, it is relevant to some current political-economic issues.

Buchanan, M. 2002. Wealth happens. Harvard Business Review (April): 49-54.

The purpose of the article is to describe a universal law of wealth based on a network effect that appears to have some important implications for economic policy.

According to Buchanan, the universal law of wealth is simply stated in the following way. Each time you double the amount of wealth, the number of people involved falls by a constant factor to form a Pareto curve, e.g., in the U.S. approximately 80% of the wealth is held by 20% of the people. In some other countries it might be 90% of the wealth held by 20%, or 95% held by 10%, but the point is that in any society a small percentage of the people always own a large proportion of the wealth. This Pareto curve distribution of wealth appears to be based on a network effect that is applicable across societies and has little to do with differences in backgrounds, talents, and the education of an area's citizens.

For what this has to do with economic policy see my note at http://maaw.info/ArticleSummaries/ArtSumBuchanan2002.htm 

"Obama's CNBC Townhall Was a Disaster," by Hugh Hewitt, Townhall, September 23, 2010 ---

President Obama's CNBC "townhall" was a disaster for the White House message machine, so much so you have to wonder if the president isn't suggesting that Robert Gibbs leave along with Rahm and Larry.

Lost among the coverage given to the "I'm exhausted" exchange between the president and Velma Hart was a stunner from the president that went this way:

"The rhetoric and the politicizing of so many decisions that are out there has to be toned down. We've got to get back to working together. And this is part of my job as leader. It's not just a matter of implementing good policies, but also setting a better tone so that everybody feels like we can start cooperating again instead of going at loggerheads all the time."

Coming from President "I Won, You Lost" just as Harry Reid ginned up his re-election campaign by bringing before the Senate for certain defeat the so-called "Dream Act," the so called "Disclose Act," and an attempt to repeal "Don't Ask, Don't Tell" months before the Pentagon's review of that proposed repeal is completed or circulated for comment is too much even for cynics to accept as garden variety White House hypocrisy. President Obama used his enormous majorities to jam through a wildly wasteful "stimulus" and the wildly unpopular Obamacare, but now that he is on the brink of losing those majorities, he wants a new era of cooperation.

Except in the Senate. Or the House. Or when he is off stage and demanding of his generals a slow walk to defeat in Afghanistan and calculating that we could absorb another major terrorist attack, if Bob Woodward is to be believed.

The training wheels have come off, and not even the combined effort of all the Beltway media to keep the president on his bike and moving forward is working. The economic policy "team" is scattering like a too-popular-too-soon boy band after a second album, and the White House's "enforcer" Rahm wants out to run the efficient-and-thoughtful-by-comparison city bureaucracy of Chicago.

And we aren't even at the halfway point of the term yet.

This isn't a rerun of the Clinton knock-down and recovery. Clinton never swerved so far to the left, didn't actually burden the economy with Hillary-care and, while he raised taxes, he also got his policy in place and left it there, providing predictability at the start of the dot-com boom.

By contrast, Obama has thrown massive uncertainty on to every employer's balance sheet and has loosed the EPA to try and regulate carbon emissions on every manufacturer in the land. Even if there was a magical second dot-com boom ahead, the president has already spent all the tax revenues it would generate.

"Two Cheers for the New Bank Capital Standards:  Why do we still rely on the rating agencies, and why are we still allowing Lehman Brothers levels of leverage," by Alan S. Blinder, The Wall Street Journal, September 30, 2010 ---

On Sept. 12 the heads of the world's major central banks and bank-supervisory agencies met to bless what is called "Basel III," the latest international agreement on bank capital requirements. Should we be applauding or frowning upon this agreement? A little of each.

The first big achievement, and it is a big achievement, is that 27 countries, each with its own disparate views and parochial interests, were able to agree at all—just 18 months after many of them were still fighting the last acute phase of the financial crisis.

But what about the substance of the agreement? What was it supposed to fix, and did it?

Remember, the essence of the Basel accords is establishing a minimum ratio—of capital to risk-weighted assets—and ratios have both numerators and denominators. It turns out that defining the numerator, a bank's capital, is fraught with difficulties: What counts and what doesn't? Most of the changes from Basel II to Basel III are about the numerator: raising the amount of capital required and stiffening the definition of what counts. Measuring assets is more straightforward, but risk-weighting them is not, which is the essence of the denominator problem.

Before the crisis, at least three major shortcomings of Basel II were apparent:

• Once you cut through the complexities, Basel II actually reduced capital requirements relative to Basel I. Even before the financial wreckage of 2007-2009, that looked like a mistake. After the crisis, it looked absurd.

• In determining risk weights for the denominator, Basel II assigned a major role to risk assessments by credit rating agencies like Moody's and Standard & Poor's. Once again, that looked dubious before the crisis and ludicrous thereafter.

• Basel II allowed the largest—did someone say, the "most sophisticated"?—banks to use their own internal models to measure risk. Let me repeat that: The biggest foxes were allowed to assess the safety of the chicken coops—another serious risk-weighting (denominator) problem.

Then along came the crisis, revealing two more glaring weaknesses:

• One was the startling extent to which some banks had used structured investment vehicles (SIVs) and similar arrangements to avoid capital requirements by shifting assets off balance sheet. This loophole cried out for plugging.

• The Basel Accords have always focused on minimum capital requirements. But the crisis demonstrated that, in a crunch, shortages of liquidity can be just as hazardous as shortages of capital. Indeed, it was often hard to tell one from the other. That made the need for minimum liquidity requirements apparent.

Those five issues should have formed the core of the Basel III agenda. What was actually accomplished? Let's go down the list.

First the good news: Capital requirements will be raised substantially. Right now so-called Tier 1 capital must be at least 4% of risk-weighted assets and Tier 2 capital must be at least 8%. The Basel II definition of Tier 1 capital includes some things that are not common equity, such as some types of preferred stock; and Tier 2 includes many more things, such as certain types of reserves and subordinated debt. Basel III places the focus squarely where it belongs: on common equity, which is undoubtedly real capital. And, after a long phase-in period, it will raise the minimum common-equity requirement to 7%. Hooray for both. But, folks, couldn't we have asked the world's bankers to comply with the higher standard before 2019? Maybe if we said, "pretty please"?

Because of demonstrable problems in assigning appropriate risk weights, Basel III also resurrects, as a kind of backstop, the old-fashioned leverage ratio: Tier 1 capital divided by total assets, with no risk weighting. Good idea. But, once again, why must we wait until 2018 for full implementation? Furthermore, the chosen capital requirement is only 3%—which you may know by its other name: 33-to-1 leverage. Isn't that about what Lehman Brothers had?

Second, while the Dodd-Frank Act wisely removed most provisions in U.S. law that gave the rating agencies special exalted status, Basel III did not. So the agencies that did so poorly in rating mortgage-backed securities and collateralized debt obligations will continue to play major roles in the risk-weighting process.

It gets worse. Didn't the Basel Committee notice that the internal risk models of most of the world's leading financial institutions led to disaster? Whether it was gross-but-honest errors in assessing risk or self-serving behavior is an important moral question, though not an important operational one. Either way, letting banks grade themselves worked out about as well as letting students grade themselves. Yet this grotesque shortcoming of Basel II remains in place.

Fourth on the list is the off-balance-sheet entities that caused the world so much grief. Here, some technical improvements were made, thank goodness. For example, SIVs and the like will be put back on banks' balance sheets for purposes of computing the leverage ratio. But unfortunately not for the main risk-weighted capital requirements.

Last, but not least, genuine progress was made toward new minimum liquidity requirements. The technical problems and novelty in defining liquidity proved to be formidable, as did the opposition from the banking industry. So this job is not finished. But the Basel Committee did at least institute a new liquidity requirement that will become effective in 2015.

Beyond that, the committee kicked most of the novel ideas down the road. For example, imposing higher capital requirements on systemically-important institutions is left for the future.

So let's applaud Basel III, though one-handedly. More capital, better capital, a leverage ratio, and a liquidity requirement are all important steps forward. But the unwarranted reliance on rating agencies, the disgraceful internal risk models of banks, and the disastrous SIVs should have been easy marks for reformers.

Should the U.S. adopt the Basel III changes? Absolutely, with no hesitation. But work on Basel IV should begin immediately.

Mr. Blinder, a professor of economics and public affairs at Princeton University and vice chairman of the Promontory Interfinancial Network, is a former vice chairman of the Federal Reserve Board.

Bob Jensen's threads on the recent banking scandals ---

Rotten to the Core ---


"College Employees Give Millions to Federal Campaigns, Especially to Democrats," by Kevin Kiley, Chronicle of Higher Education, September 22, 2010 --- http://chronicle.com/article/College-Employees-Give/124572/

Employees of colleges and other educational entities have donated a total of about $13.5-million to candidates for federal offices this election cycle, with most of that money going to Democrats, says a report released on Wednesday by the Center for Responsive Politics.

The center, a Washington-based research group that compiles and analyzes federal campaign contributions, explored the donations made by employees of educational institutions through July 31. While nonprofit colleges cannot contribute directly to political campaigns, administrators, faculty members, and other employees are allowed to make individual contributions.

The University of California, which employs more than 180,000 faculty and staff members, topped the list of colleges whose employees contributed the most. They gave a total of $483,981 to various campaigns, 86 percent of which went to Democrats.

The list of the top-10 college contributors, based on employee donations, includes other large and selective universities, including Harvard University in second place, Stanford University in third, and the University of Texas in sixth. Some for-profit education companies and groups also ranked in the top 10, including the Apollo Group, which owns the University of Phoenix and ranked fourth, and the Association of Private-Sector Colleges and Universities, formerly the Career College Association, which represents for-profit colleges and ranked fifth.

Royall & Company, a marketing company for for-profit universities, topped the list of education entities whose employees gave the most to Republican candidates, but it was not ranked among the top 20 institutions for overall contributions. Company employees gave $80,367 to Republican campaigns.

The report also mentions individual employees who made large contributions to political campaigns. Carol H. Winograd, an associate professor emerita of medicine and human biology at Stanford, topped the list, contributing $136,300 to various Democratic campaigns this election cycle.

The top three recipients in the Senate were all Democrats. Barbara Boxer of California, who received $175,019, Charles E. Schumer of New York, who took in $170,175, and Harry M. Reid of Nevada, who took in $143,700. In the House, the top three recipients were also Democrats. Bill Foster of Illinois took in $126,945, George Miller of California took in $115,961, and Paul W. Hodes of New Hampshire received $93,700.

Liberal Bias in the Media and Academe ---

"Why Business Bashing Has Flopped Former CEOs and Wall Street vets are holding up well against Democratic attacks," by Kimberly A. Strassel, The Wall Street Journal, September 24, 2010 ---

National Economic Council director Larry Summers is exiting the White House, and Team Obama is saying it may replace the Harvard academic with a "senior corporate executive." Consider it the White House catching up with the political winds.

Something significant is happening on the electoral battlefield, and it has an "Inc." by its name. Many candidates running as Republicans could as easily be sitting for a business profile. Twenty months of Democratic business-bashing has not turned the electorate against entrepreneurs. Quite the opposite. This election is highlighting a political turn, not unlike that of the late 1970s, in which voters are looking to free-market, pro-growth candidates to turn back government.

The Senate field? California's Carly Fiorina stewarded Hewlett Packard. Washington's Dino Rossi was in commercial real estate. Wisconsin's Ron Johnson and Arkansas's John Boozman have both built family businesses. Pennsylvania's Pat Toomey even worked on Wall Street. Gubernatorial candidates? Ohio's John Kasich was until last year an investment banker. California's Meg Whitman helmed eBay. In House races you'll find GOP small-business founders, venture capitalists, farmers.

Democrats initially greeted this boardroom flood with glee. The country was angry at Wall Street bailouts, a fury the left believed transferred to the business class as a whole. President Obama was blaming corporate America for the nation's financial woes, for health-care costs, for dodging taxes. His agenda was designed to allow Democrats to brag that they had rescued Americans from corporate tyranny, class envy, populist wrath—the ground looked fertile for this most classic of liberal attacks.

Entire campaigns were crafted around the approach, no more so than in Ohio. Within hours of Mr. Kasich's nomination, Ohio Democrats declared the race between him and Gov. Ted Strickland "a battle between Wall Street and Main Street." Democrats poured millions into the theme, with Strickland ads asking: "Does Ohio really need a congressman from Wall Street for governor?" One Reuters article declared Mr. Kasich's opponents had painted a "scarlet 'L'" (as in Lehman) on his chest.

Democrats (incorrectly) credited Mr. Toomey with being the "Wall Street wheeler-dealer" who had helped "pioneer the use of derivatives" that "wound up nearly destroying our economy." Ms. Whitman and Ms. Fiorina are routinely described as "ex-CEOs." Mr. Rossi is accused of love for "corporate" lobbyists. The fat-cat, robber-baron slur has been a staple in most Democratic campaigns.

The attacks have largely washed over GOP candidates. Seventeen points down, the Strickland campaign has now abandoned its Wall Street complaints. Mr. Toomey continues to lead Democrat Joe Sestak. The trend is so widespread that Hotline recently declared: "Dems find anti-Wall-Street flops."

One reason for the failure has been the ease with which Republicans have been able to shift the debate back to their opponents' toxic records. But the fact that many GOP candidates are actually touting their business experience suggests they are reading a turn in the polls. A recent survey, from Independent Women's Voice, found 63% of independents said they'd prefer a businessman who has new ideas to an experienced politician. A Bloomberg poll this week found that 77% of U.S. investors find Mr. Obama "anti-business."

What's behind this shift? Call it a supercharged dose of Democrats and failing liberal governance. As Americans for Tax Reform head Grover Norquist notes, the country has been witness to "pure, distilled government." It has been led by an administration staffed with career politicians and academics who have insisted that government can solve all. It hasn't worked. "When Washington fails, what's the alternative?" asks Mr. Norquist. "It's people with real-life experience, who can do real-live things." Business folk have real-life experience.

Americans have little tolerance for redistributionist policies, especially in periods of economic hardship. Voters see not an administration focused on jobs, but one obsessed with ballooning government and with taking from some and giving to others. Growth, they think, would be nice for a change. Business folk create growth.

Mike Connolly of the Club for Growth—which is backing some of the GOP entrepreneurs—notes that voters realize all businesses, not just the Fortune 500, are hurt by Obama policies. "Small business is hugely popular. And when these guys start having to lay off people, it's not chalked up to corporate greed," says Mr. Connolly. "Voters are understanding this is about health care, and regulations and taxes."

The business community has belatedly started to help itself. Corporate America never understood that its rush to cut deals with the White House—to buy protection—only fed a public perception that it stood guilty as charged. It has accomplished far more since groups such as the Business Roundtable rebelled and began explaining to the public the damage administration policies have wreaked on the economy. Even the White House now feels the need for cover by hiring one of those "senior corporate executives."

It was exactly this sort of political shift that helped buoy the Reagan Revolution. We're still a long way from a repeat, but a new crop of real-world, creative business thinkers certainly can't hurt. Thank you, Democrats.


HUD IG Exposes More ACORN Fraud ---

Teaching Case on Unfunded Pension "Liabilities"

From The Wall Street Journal Accounting Weekly Review on September 24, 2010

Pension Gaps Loom Larger
by: David Reilly
Sep 18, 2010
Click here to view the full article on WSJ.com

TOPICS: Pension Accounting

SUMMARY: "Many of America's largest pension funds are sticking to expectations of fat returns on their investments even after a decade of paltry gains, which could leave U.S. retirement plans facing an even deeper funding hole and taxpayers on the hook for huge additional contributions."

CLASSROOM APPLICATION: The article clearly describes and assesses the expected rate of return and the discount rate used in pension calculations.

1. (Introductory) What does it mean to say that a pension fund is facing a "funding gap"? Describe exactly how this gap is calculated. Also state whether this concept applies to defined benefit or defined contribution pension plans, including definitions of these two types of plans.

2. (Advanced) As used in accounting for pension plans, define the terms "expected rate of return on plan assets" and "discount rate".

3. (Introductory) As described in the article, how are these two rates used? How are they estimated differently by governmental pension funds, such the California and the Oregon Public Employees Retirement Systems, versus corporate pension plans?

4. (Advanced) Why can pension plans' assumptions about returns "affect the size of so-called funding gaps"?

5. (Introductory) What is the estimated total amount funding gap for corporate pension plans and for public plans?

6. (Advanced) What is the average expected rate of return on plan assets for corporate and for public pension plans? Where can this information be found for individual corporate plans?

Reviewed By: Judy Beckman, University of Rhode Island

"Pension Gaps Loom Larger," by: David Reilly, The Wall Street Journal, September 18, 2010 ---

Many of America's largest pension funds are sticking to expectations of fat returns on their investments even after a decade of paltry gains, which could leave U.S. retirement plans facing an even deeper funding hole and taxpayers on the hook for huge additional contributions.

The median expected investment return for more than 100 U.S. public pension plans surveyed by the National Association of State Retirement Administrators remains 8%, the same level as in 2001, the association says.

The country's 15 biggest public pension systems have an average expected return of 7.8%, and only a handful recently have changed or are reconsidering those return assumptions, according to a survey of those funds by The Wall Street Journal.

Corporate pension plans in many cases have been cutting expectations more quickly than public plans, but often they were starting from more-optimistic assumptions. Pension plans at companies in the Standard & Poor's 500 stock index have trimmed expected returns by one-half of a percentage point over the past five years, but their average return assumption is also 8%, according to the Analyst's Accounting Observer, a research firm.

The rosy expectations persist despite the fact that the Dow Jones Industrial Average is back near the 10000 level it first breached in 1999. The 10-year Treasury note is yielding less than 3%, and inflation is running at only about 1%, making it tougher for plans to hit their return targets.

Return assumptions can affect the size of so-called funding gaps—the amounts by which future liabilities to retirees exceed current pension assets. That's because government plans use the return rates to calculate how much money they need to meet their future obligations to retirees. When there are funding gaps, plans have to get more contributions from either employers or employees.

The concern is that the reluctance to plan for smaller gains will understate the scale of the potential time bomb facing America's government and corporate pension plans.

"It's unrealistic," John Bogle, founder of mutual fund giant Vanguard, says of the return assumptions in place at most pension plans.

Pension funds at companies in the S&P 500 faced a $260 billion shortfall at the end of 2009, according to Standard & Poor's. Estimates of the fund deficits faced by state and local governments range from $500 billion to $1 trillion.

Some plans are beginning to trim their return forecasts.

Earlier this month, New York State Comptroller Thomas DiNapoli said he would reduce the expected rate of investment return for his state's pension system, the third-largest in the nation, to 7.5%, from 8%.

The country's two biggest plans—the California Public Employees Retirement System, or Calpers, and the California State Teachers' Retirement System, or CalSTRS—both are undergoing reviews of projected investment returns that could lead to reductions later this year.

Many plans have held onto an 8% return expectation though thick and thin. Such return assumptions partly reflect the heady years of the 1990s bull market. Public pension plans posted a median, annualized return of 9.3% over the past 25 years, but just 3.9% over the past 10, according to consulting firm Callan Associates.

The Oregon Public Employees Retirement System has had an 8% assumption since 1989. Its actual return averaged 10.7% annually from 1970 through 2009. The Teachers Retirement System of Texas has had a similar expectation since 1986, with an annual return of 9% return since then.

A spokeswoman for the Texas system said it doesn't change assumptions "in response to short-term situations," and currently "sees no reason to change our investment-return assumption." A spokesman for the Oregon system said there are no special plans to review its return expectation.

The challenge for many plans, given investment horizons that can stretch out 50 years, is gauging which time period to look at when charting a future course.

George Diehr, vice president of the Calpers board, said in May that the question is whether the credit crisis has "dramatically altered long-held assumptions about investing in the world's financial markets. Are investors in for a sustained period of meager or below-market growth? Or will the traditional business and economic cycles, the ones investors have grown accustomed to over the past couple of decades, return?"

The outcome of Calpers's ongoing review "hangs on how we answer that question," a spokesman says.

Depressed stock prices aren't the only thing putting pressure on potential returns. Plummeting bond yields mean that plans' fixed-income portfolios will likely earn less in the future. A lower inflation outlook means that funds will have to generate greater real returns to meet their return targets.

Funds use a so-called discount rate to estimate the size of future obligations to retirees, and thus the contributions needed to fund them. Corporate plans use a discount rate based on corporate bond yields. But government plans use their expected return rate on all investments as their discount rate.

The higher the discount rate, the smaller a fund's pension obligation. That gives public plans another big reason to hesitate before cutting their expected return rates.

The Colorado Public Employees Retirement Association showed in its 2009 financial report the impact of reducing the rate. Using a 8% expected return rate, the plan faced a $23.4 billion deficit, based on market values, at the end of 2009. If the rate was cut to 6.5%, the shortfall would jump to $34 billion.

Meredith Williams, the Colorado plan's chief executive, says cutting the rate "creates pain." Nevertheless, Colorado at year-end of 2009 cut its return assumption to 8%, from 8.5%. Mr. Williams says the rate may be lowered again later this year.

Others have been more hesitant. In 2009, Matt Smith, state actuary for Washington state, recommended that its retirement system cut its return expectation to 7.5%, from 8%. That advice was rejected by the state's pension-funding council.

Continued in article

"How States Hide Their Budget Deficits:  The SEC's charges against New Jersey for misleading investors should warn other states against sweeping the truth under the rug," by Steve Malanga, The Wall Street Journal, August 23, 2010 ---

Bob Jensen's threads on pension accounting are at

The Sad State of Government Accounting and Accountability ---

"ObamaCare's Hotel California The state moves to impose price controls you can never leave," The Wall Street Journal, September 28, 2010 ---

California, the novelist Wallace Stegner famously wrote, is like the rest of America, only more so—meaning that wherever the country is headed, the Golden State is probably there already. So the state's ObamaCare advance planning deserves closer scrutiny, given that it mirrors the regulatory and ideological model that the White House favors for everyone else.

In a matter of days, California will set a precedent for the future of the U.S. individual and small-business insurance markets via ObamaCare's "exchanges," where people will purchase coverage at heavily subsidized rates. The exchanges don't start up until 2014, but the states were given wide bureaucratic latitude in how they're run, and Sacramento is using this flexibility to convert them into a pretext for imposing de facto price controls on the insurance industry.

That may be what Democrats had in mind when they passed the bill, but it's particularly unfortunate because in principle exchanges could be a useful reform. States could sponsor transparent, neutral clearinghouses that compare costs and benefits among plans, encouraging insurers to compete to offer the products that consumers find most valuable. An exchange could operate much like travel websites such as Expedia.com, and a good one along those lines started in Utah last year.

California looked further east for inspiration—to Massachusetts, which has the only other exchange in the country. Known as the connector, it's the centerpiece of the ObamaCare beta test that Mitt Romney passed in 2006 and is now the power center of the state's public utility-style insurance regulation. In the daisy chain of "expertise" that is the health policy world, California's regulations were shaped by Jon Kingsdale, a devout White House ally who used to run the Massachusetts connector and is now a consultant.

The most dangerous precedent in the California plan is known as "selective contracting." Under ObamaCare, all benefits will be mandated and standardized at the federal level, so all individual and small business plans will be essentially identical except at the margins. Those margins include their brand names, the hospital-doctor networks they've set up, the size of their book of business as pricing leverage and so forth.

In theory, then, all plans that meet ObamaCare's minimum standards should be allowed onto the exchanges. But in California, a five-member board of political appointees will pick winners and losers. If an insurer wants entrée to the pool of subsidized individuals and businesses with fewer than 50 employees—and of course all of them do—they'll have to genuflect to whatever dictates this board happens to decree.

Selective contracting will allow the state to "negotiate" more favorable terms, the preferred euphemism for industrial policy. The result in practice will be submarket price controls. As a condition of admittance insurers will also have to justify their premium levels and rate changes over time. Plans will still be allowed to sell outside the exchange, but in practice almost all consumers will gravitate to the exchange because of the subsidies.

This is clearly the template the Obama Administration favors. Heath and Human Services Secretary Kathleen Sebelius recently warned the insurance industry that there would be "zero tolerance" for political misbehavior or "unreasonable" premium increases, which means anything Ms. Sebelius deems too expensive. To run the HHS exchange department, Ms. Sebelius has tapped Joel Ario, formerly the Pennsylvania insurance commissioner and a caustic industry opponent. Mr. Ario was last heard demanding that Keystone State insurers "cleanse"—that is, lower—their premiums as a kind of pre-ObamaCare indulgence for purported sins.

The California plan passed the legislature in August with the support of soon-to-depart Governor Arnold Schwarzenegger, who will sign them before the end of the month. The overwhelming sentiment among the authors we spoke with is that the brute force of limiting the number of plans will lower costs. "The only way to drive price, to drive value, is the power to say no," as one of them told us.

In other words, less competition is the best way to drive down costs. The irony is that the California insurance market today functions reasonably well because consumers have plenty of choices. By historical accident—the political left that dominates Sacramento is preoccupied with single payer and has killed incremental proposals—state regulatory authority is divided between two state agencies, one loaded with mandates, and the other loosely regulated. Naturally, the second group has climbed to 91% of the small-business market and 48% of the individual one.

In April, the lame-duck Mr. Schwarzenegger cheered on this process, claiming that "California always leads the way, we all know that . . . California is the incubator state. It provides the ideas and the hard work. It all starts right here." Alas, he's right.

Bob Jensen's threads on health care are at

"San Franciscans Try to Take Back Their Streets:  Even the liberal mayor is backing an initiative that would make public spaces safe again from the homeless industry and young thuggish vagrants," by Heather MacDonald, The Wall Street Journal, October 2, 2010 ---

The charge that San Francisco has been stiffing social-welfare spending in favor of what homeless advocates sneer at as the "sacred cows" of police and fire protection is absurd. In fiscal year 2009, the city spent $175 million on homelessness—that's $26,865 on each of the city's 6,514 "homeless" persons, the majority of whom are housed in city-subsidized lodgings. Its police budget was $442 million, or $52 per San Franciscan. The gargantuan outlay for the homeless has done little to dent the vagrancy problem.

Seventy-one percent of voters backed the sit-lie ordinance in a poll conducted by David Binder Research in February, compared to 24% who opposed it. Nevertheless, San Francisco's left-wing Board of Supervisors (the equivalent of a city council) voted it down, eight to three, in June. The law's supporters, who include Mayor Gavin Newsom and Police Chief George Gascón, have put the law on the November ballot as a voter initiative.

Perhaps the lock of the homeless advocates on San Francisco's politics will finally be broken. It is auspicious that the current push for civil sidewalks is coming from the Haight, long viewed as the epicenter of San Francisco's "progressive" movement. Two other ballot initiatives next month are aimed at reforming the city's bloated pensions and dysfunctional transit union. If these pass, it might signal a sea change in the political culture, especially since the pension reform measure is sponsored by Jeff Adachi, the city's impeccably progressive public defender.

San Francisco's magical topography has allowed it to indulge in antiurban policies for decades. Even as its economic base peeled off under the pressure of high taxes, ignorant regulations and government-inflated housing costs, tourists have kept pumping billions into the city's coffers. The homeless industry could champion policies that preserved street disorder and squalor, confident that the city's Bay and architecture would keep the tourist tax dollars pouring in.

Such self-indulgence is particularly foolish in a recession. But the sit-lie law is about more than business viability, however important such viability is to a city's lifeblood and energy. It is also about the basic rules of a civilized society, which include the idea that public spaces should be shared by the public, not monopolized by the disorderly few.




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