Sunday, August 21, 2011

No Easy Answers to the Budget, or Anything Else

It's campaign season again, the time when the tooth fairy, the leprechaun, Aladdin's Lamp, the four leaf clover, and every other lucky charm is invoked by some candidates as they make promises that are virtually impossible to keep.

"Want the U.S. to have a balanced budget? Vote for me!" "Want to buy gas for $2.00/gallon? Vote for me!" "Want to see millions of new jobs materialize in months? Vote for me!" "Want someone to dismantle the welfare state? Vote for me!" I suppose campaign season, like rutting season for the big bucks, can always be counted on to bring on outrageous behavior in hopes of getting some attention. With so many candidates vying for tomorrow's headline, going "over the top" may be the only way to score. So, Ben Bernanke will be "treasonous" if he loosens the money supply before the 2012 election, for example.

I wish it was easy to solve America's problems. It would be great if all the so-called Washington experts in politics and finance were wrong and the populists were right. I'd be delighted if Texas solutions could magically cure the American economy, just like I would have been delighted if "Just say no" had eliminated pregnancies for unwed mothers. However, reality has a way of kicking wishful thinking into the gutter. There are just no easy answers to the budget, or anything else. If there were, they'd already have been passed by the congress and signed by the president, since public opinion would force the politicians to do the obvious.

So, here we are in election season, waiting for a candidate with the magic touch, someone who will kiss and heal the boo-boo's that cover our nation like bruises on a defeated boxer. Perhaps it's not so strange that we're willing to listen to the ridiculous - "any port in a storm" is better than no port at all when the ship seems to be sinking. But, as the months of silly season wear on and we get close the vote-counting day, and the explanations for getting to $2 gas blow away like the fall leaves, we've got to get more serious and decide whose medicine we're really willing to take.

Will we cut defense spending by at least 1/3rd, putting a million more people out of work? Will we increase the social security retirement age and freeze payments for those who have assets exceeding a certain level? Will we require increased Medicare contributions from all recipients and reduce the procedures that some people will qualify for? Will we stop guaranteeing many student loads because so many of them are never repaid? Will we cut back the incredibly expensive care that the government now funds for people with special needs? Will we....?

Sadly, none of the lucky charms in candidate's pockets will work. In the end, it will come down to hard choices about giving things up - things that even the Tea Party won't want to forego. So, buckle your seat belts, folks, 'cause we'll be riding a rough political road for the next few years. Don't you mind too much about the wild statements we'll all be hearing - they're only the equivalent of promises made by carnival barkers, soon to be proven wildly overstated. Let's listen for those who state simple facts and propose simple choices, like "guns or butter", as they used to say in my economics class. In the end, the solutions to many of our problems will lie in the things we are willing to give up.

Sunday, July 17, 2011

Gutless Republicans!

I've been closely following the political back-and-forth regarding increasing the U.S. "debt limit", and I can't say I'm too happy with how the democrats are moving toward getting our nation's financial house in order. However, I'm downright angry about the conduct of the more radical republicans in the house of representatives, for two reasons.

First, it's absurd for them to refuse substantive compromise when they don't have control of the senate or the presidency. Second, since it is the duty of the house (majority party) to initiate all taxing/spending bills, the radicals' failure to define and pass a "debt limit" increase bill including their specific spending cuts is gutless.

In my view, the republican party knows that following through on their Tea Party bluster - putting their cards on the table - would cost them the 2012 presidential election and some of their own seats in congress. That's why they continue to call for the president to "lead" on the spending cuts and "no new taxes" - they don't have the guts to put their conservative prescription for America on paper, and then vote on it. They know their bill would not pass the senate, survive a presidential veto, or keep many independents in their corner. This sort of "stake in the ground" would become their own stake in the heart.

The simple truth is that America's financial woes are so dire that only a bipartisan solution has the chance to reverse our inexorable march to insolvency. All citizens must feel the pain, and all politicians need to take the grief. Anything less is gutless posturing, which is the hallmark of the current republican right.

Tuesday, June 07, 2011

What Does Government Cost?

I've been cogitating on a subject that should be obvious to us all, but is almost totally hidden. That is, "the cost of government services". To clarify, I'll just state the obvious: we know the price (cost) of just about every product or service we receive from private sources, but we know almost nothing about the price (cost to us) of just about every public service. Without knowing the prices of government/public services, we have no way to evaluate whether or not we are getting our money's worth. And, in my opinion, this is exactly how our legislators want it to be. We should be demanding that this change, and that every major service in government budgets be presented to the public in terms of its fully loaded cost.

Here's a simple, hopefully non-controversial, example - the fire department. What is the annual average salary and benefits cost per fireman, the average annual facilities and equipment cost per fireman, and the average annual administrative cost per fireman? What is the average total fire department cost per "working fire" in one year? How many "working fires" did the average fireman respond to in the past year? What was the total property damage (insurance) cost of the fires in the district last year? These statistics would be easy to generate, and would take virtually no newspaper or internet space to present - but we never see them. Why? Because those in charge of the fire department have no interest in the public being able to evaluate their cost vs benefit, or to compare their numbers against those of other departments.

I'm sick of hearing pseudo-debates on public policy that are totally subjective, devoid of statistics that would help one make sense of the policy options. "Special Education" is important, yes, but how much is spent, on average, for each special education student versus each "normal (sorry)" student? What is the average hospital bill for each uninsured person who is brought to the emergency room, and what does the chart of costs for all uninsured patients look like? What is the direct cost and the fully-loaded cost for each state legislator, including staff costs? What is the average annual cost of keeping a person in the county jail, and what are the major elements of this cost? We are kept in the dark about these facts, and a host of other pertinent facts about public institutions, because the special interests do not want us to know the answers, and they don't want us to know the answers because they don't want to hear the follow-up questions that would ensue. "Transparency" is virtually non-existent.

Now for a little "compare and contrast" exercise. The same government that tells us almost nothing of use about its own operations requires giant reports like 10-K's, 990's, and tax returns from individuals, companies, and non-profits. These are the standard reports, but there are many others required from specific industries and occupations. In other words, government wears us out with information requirements while providing us with hardly anything about its own operations. Does this seem right to you?

I believe that every government agency, at every level, should have an independent citizens panel that sets public reporting requirements for it. Citizens interested in being on such a panel would submit their names and then, at random, be assigned to the various panels for that governmental unit. Citizens could not choose the specific panel they wanted to be assigned to, since that would simply result in the panels being packed with members sympathetic to one special interest or another.

In my career I've been part of "management" for many organizations, both large and small. The better ones always devise, produce, and evaluate statistics to aid in developing strategies and assessing performance. Board members and others not directly responsible for operations see this information and ask questions. Why do we not see similar processes regarding our government, which right now is far from "of the people, by the people, and for the people"?

Saturday, April 23, 2011

Selfish Seniors!

The U.S. has a huge accumulated financial debt and an equally huge current budget deficit. In other words, we owe a lot (about $14 trillion) and we are on track to owe a lot more. If we continue on this track, our country soon will be paying high interest rates on our debt and lenders will be skittish about refinancing it. Nobody will be able to "bail us out". This is very bad news, both politically and economically, for our nation and for each of us. So, what is the "right" thing to do?

For purposes of this essay, I am equating the term "right" with the term "fair"; you know, the old Golden Rule - "Do unto others as you would have them do unto you." This rule provides an excellent guide for solving the debt/deficit problem.

Before we start in earnest, a little background. Please take a quick look at the chart above, which I stole from Wikipedia. You can click on it to "embiggen".

If you can read a graph, you will quickly come to two major conclusions. First, our country steadily paid down our national debt (as a % of GDP) from its very high level at the end of WWII through the Carter administration, including "paying as you go" for the Vietnam War. Second, starting with the Reagan presidency in 1981, we've been building that debt back up in a very big way. (I'll refrain at this point to comment on the administrations that built this new debt, but you can figure that out for yourself.) This debt-building occurred during a period when our country was not dealing with any cataclysmic problems like WWII.

In my view, the citizens who could vote during the past 30 years are the ones responsible for allowing this debt to accumulate. Those of us who are currently over 45 years of age are the ones who allowed the debt to happen and also benefited from the economic growth generated by the borrowing; e.g., rising wages, pensions, and accumulated fortunes during the past 30 years.

So, our country now faces a dilemma. Who should sacrifice to pay back this debt and reduce the current deficit? Should it be those who follow us, the younger generation, or should it be those 45 and over, the latter being the citizens who elected the politicians who spent this money and the ones who benefited from it? If one is interested in being "right", being "fair", then the answer is clear - we older folks spent it, and we should pay it back. If we were the kids, would we want the adults to saddle us with huge debt that did not benefit us in the slightest? We oldsters need to face up to our excesses and make it right for the younger generation, by paying back.

Now, how should us in the "forty-five and over" group pay back the money we overspent? To be "fair", we should take back benefits that we obtained but did not pay for. First, we need to pay more for Medicare and get fewer services. Second, we need to reduce Social Security outlays, probably by cutting out cost of living increases for many seniors and by slightly raising the retirement age. Third, we need to pay higher taxes on our income and our wealth, including our pensions and estates. If we do these things, we will leave our children and grandchildren a country that might give them a future beyond working for the Chinese at very low wages.

What bothers me a lot these days is that the debt/deficit problem has become politicized; the facts get lost in the midst of all the shouting and demagoguery. The republican Medicare solution doesn't penalize those currently over 55, for example, even though these are the very same people who allowed this program to get out of control and who stand to gain the most from it. The "Tea Party" folks, many of whom are oldsters, want dramatic spending cuts - except for Social Security and Medicare, their cash cows. As I write, republican congressmen who were elected on a platform of dramatic budget-cutting now face outraged seniors who want no change to Medicare. Selfish seniors! There is just no way to pay for the benefits they demand, and they seem to have no problem passing even higher debt onto their children and grandchildren.

If I was the benevolent dictator of America, I'd put the following changes into effect posthaste:

1) I'd change the Medicare guidelines for "end of life" care, eliminating hospitalization and costly procedures for seniors with terminal illnesses or advanced mental disabilities. These persons would be referred to hospice, which is covered by Medicare. To be blunt, death by natural causes should not be postponed at great cost for those whose quality of life is marginal at best. This one change would go a long way toward saving Medicare.

2) I'd review and strengthen the qualifications for "Social Security Disability", which now provides regular incomes for many individuals who are capable of working - not truly "disabled". I'd provide funds for retraining many of these people before cutting off their SSD benefits.

3) I'd eliminate Social Security cost of living adjustments for those whose income exceeds a certain threshhold - say, $50,000 annually - and also raise the Medicare premiums for this same group.

4) I'd let the Bush tax cuts for incomes exceeding $250,000 expire, institute a 1% annual "wealth tax" on those whose net worth exceeds $1 million, and repeal the tax laws that permit individuals to evade paying a reasonable estate tax.

5) I'd cut the defense budget by 5% immediately and freeze it for the next ten years, forcing the military to fund inflation out of its current budget. I'd commit the savings achieved here to massive subsidies of new technology aimed at gaining energy independence and less reliance on fossil fuels.

6) I'd dramatically increase government support of pre-K through 12th grade education, add many technical education opportunities, and give schools far more power to deal with unruly, disruptive children. I'd also take a very hard look at funds currently spent on "special education", which I believe has gotten out of hand.

All in all, my policies would require significant sacrifices from those 45-and-older citizens who allowed politicians to create an unfunded welfare state for them. The policies would also promote the development of a future citizenry and an economic infrastructure that would be competitive in the world economy. Change is good, even if it is often painful! And, to you selfish seniors, "Man Up!" - you love to preach old time values of accountability, and now it's time to live up to them.

Friday, February 25, 2011

The Rich and the Unions: Two problems to solve.

Rich guys and unions; often there's something really nasty about both of them, and you really want a cure for what they're doing to you.

Rich guys. I suppose many rich guys have always been about conspicuous consumption and competition for higher ranking on the Fortune 500 (or local 50) list, but things have gotten out of control. Over the past half century, tax rates on the richest of us have dropped dramatically. As Warren Buffet so famously said, "There's something wrong when my marginal tax rate is 15% and my secretary's is 32%" (my paraphrase). Yet, if you listen to Faux News, the rich are getting hosed. It's true, as they repeat incessantly, that the richest of us pay, by far, the lion's share of tax dollars. However, it's also true that the rich own more of America's total wealth than ever before, and their incomes are higher than ever before. It seems rather evident, then, that these taxes have been pretty easy to bear.

Tax reform is the answer to the problem of the rich. We need some more brackets to grab a bigger share from those who are making many millions or billions. We need to reclassify hedge fund profits as ordinary income rather than capital gains. We need to reinstate an estate tax with teeth; perhaps a 25% rate but no exemptions for estates over $100 million. The fact is, without some significant financial leveling our country will soon resemble Saudi Arabia - princes and peons.

Those who favor unbridled capitalism often complain that those who work harder and smarter deserve to keep most of their economic success, while those who have achieved less have not worked so hard and are not so smart. This is baloney. The truth is that the great majority of those who are rich owe their success to the accident of their birth - they enjoyed an upbringing with social and educational advantages that gave them a huge head start over most others. To be honest, I'm one of them but not one who considered wealth to be the most important thing in life. Most of the rich are not "self-made"; they are the logical result of privilege, and they owe others the chance to grow up with many of the same advantages. That's what some of their increased taxes should fund. The great republican, Teddy Roosevelt, expressed this same opinion a century ago because he understood the reasons why he was so successful.

Now to the unions. As one who lived his entire employed life under the rather strong control of management, and was himself "management" for quite awhile, I learned that nothing is so important to an organization as flexibility, and secondly, the ability to discipline employees who are not performing to reasonable expectations. Think of a family with children: the parents have responsibility to set the agenda and expectations for the kids, both of which change over time and circumstances. Parents are "management", and few would disagree. If they say, "There's not enough money to buy you an IPod", that's the end of the story. If they say, "No TV untill the homework is done", there is no debate. For organizations to operate smoothly, management must set the agenda and expectations for employee performance without undue interference from those who must do the work. If management is not always perfect in its judgments, face it, who is? That's the environment that I worked in, for more than 30 years, and I saw very little management conduct that reached the level of "outrageous".

It's historical truth that unions were initially formed to deal with unreasonable hours, work practices (safety, for example), and to fight pay pegged to the lowest common denominator - all of which remain concerns that unions should today be addressing with management through collective bargaining. Over the decades, however, unions used various strategies to obtain agreements that eviscerated management's flexibility to respond to business changes and their ability to discipline or dismiss employees with poor performance. As a result, in many ways the unions, rather than management, gained control of the production process and companies became far more focused on meeting the needs of union employees rather than customers. My one extended contact with GM, in the mid-1990s, left me with the strong impression that the UAW would ultimately cause its demise, for example. And, it did, with the complicity of GM's salaried employees who demanded benefits and work rules equal to those achieved by the unions. I view today's teacher's unions and government employee unions with same level of concern that I did GM's unions many years ago.

Anyone who disputes the idea that union controls over government and some businesses have gone too far should take the time to read a typical union contract. At the simplest level, you will find absolute dependence on seniority and unbelievable protections against discipline. The average person on the street would disagree that tenure, alone, implies ability or dedication, but the unions build their power on this very foundation - a foundation that penalizes many able and dedicated employees to the advantage of some who are neither able or dedicated. And when it comes to discipline, the rules can go past the absurd - as evidenced by the heavily populated "rubber room" of paid teachers that NYC schools will not allow in the classroom but who cannot be terminated for many years if ever. The cost of pursuing endless hearings exceeds the benefit of getting rid of any teacher who does not do something so egregious that even the contract won't protect them. This insanity needs to stop, now.

If unions are to remain a factor in America, they need to adjust to protecting the interests of members who deserve protection - it's that simple. If companies or governments need to make workforce adjustments, they must be able to do so on the basis of merit rather than seniority; objective factors should be part of the process, but not the entire process. If an employee has performance issues, the performance improvement and termination process should be simple and relatively timely. Organizations should be able to move employees from one job to another without impediments other than a fair and prompt appeal process. What bothers me right now is that unions are resisting changes like this; they want to continue to make the rules that govern their members and take away both management's flexibility and its ability to discipline poor performers. It's a battle they should not and likely will not win over the next few years.

So, there you have it. I've got strong feelings about issues other than these, but I do regard throttling back both the rich and the unions as key to progress in America. Both have accumulated too much power and too little accountability over the past 50 years, and both seem adamant about retaining their current destructive positions. Time for change!

Thursday, February 17, 2011

Reducing the Deficit and Debt

The 2010-11 federal deficit is now estimated at $1.6 trillion, and the national debt is over $14 trillion. The increasing debt is a major threat to national security because the interest will ultimately consume a huge percentage of the national income, especially if our government's credit rating slips and interest rates rise. We must deal with this issue sooner rather than later, and I agree wholeheartedly with those in congress who are facing this problem honestly. But, what should we do?

The President's bipartisan committee did an excellent job of defining the problem and identifying solutions. Entitlements, including Social Security, Medicare, federal pensions and Medicaid need to be put on a more secure financial footing by adjusting benefits and increasing the contributions of those who participate in these programs. These adjustments are required because the assumptions in place when these programs were approved or last adjusted are no longer valid, and have not been valid for some time. The benefits and contributions adjustments must compensate for prior year "overpayments" as well as the higher future costs of these programs.

With respect to non-entitlement spending, including the defense budget, a serious belt-tightening regime is required. However, across the board cuts make no sense. Some programs must be increased, others eliminated entirely, and some consolidated. All spending needs to be ranked on criteria related to the mission of the larger cabinet functions and the relative "value" of the outputs produced, using objective criteria. Overall, it should not be too difficult to cut the entire pot of non-entitlement spending by 5% without losing anywhere near 5% of the perceived "value" of all programs. That is due to the simple fact that the marginal utility of the last 5% of spending is often close to zero, especially if budget reductions have not been done on a regular basis.

Although I consider myself a political liberal, I do not believe that the government has a responsibility to be a "jobs" program. Rather, it is to provide necessary services in the most professional way at the lowest possible cost. This gives the private sector far more discretionary resources to grow our economy and compete with the productive capabilities of other world economies.

The approach outlined above would result in many government and private sector employees losing their jobs. I don't mind this outcome, for two reasons. First, in environments where layoffs have not occurred for some time, at least 5% of employees are not performing to minimal job requirements - they deserve to be laid off. Second, if capable people are laid off, for example in programs that are totally eliminated, these people will find jobs fairly quickly; the cream rises to the top, as they say.

Will fixing the deficit and debt be painful? Yes. However, many of those who will feel the pain also benefited for many years from government overspending. As Robert Heinlein famously popularized, "TANSTAFFL" - there ain't no such thing as a free lunch. Time to pay up, America! When the paying is taken care of, life in the U.S.A. will be much less precarious for many years to come.