Tidbits Quotations on May 27, 2010
To Accompany the May 27, 2010 edition of Tidbits
Bob Jensen at Trinity University


Video on IOUSA Bipartisan Solutions to Saving the USA

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

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

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

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

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


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

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

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



Watch for the other possible solutions in the 30-minute summary video ---
(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)

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

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.

"Immigration and Liberty," by Walter E. Williams, Townhall, May 19, 2010 ---

My sentiments on immigration are expressed by the welcoming words of poet Emma Lazarus' that grace the base of our Statue of Liberty: "Give me your tired, your poor, your huddled masses yearning to breathe free." Those sentiments are probably shared by most Americans and for sure by my libertarian fellow travelers, but their vision of immigration has some blind spots. This has become painfully obvious in the wake Arizona's law that cracks down on illegal immigration. Let's look at the immigration issue step by step.

There are close to 7 billion people on our planet. I'd like to know how the libertarians answer this question: Does each individual on the planet have a natural or God-given right to live in the U.S.? Unless one wishes to obfuscate, I believe that a yes or no can be given to that question just as a yes or no answer can be given to the question whether Williams has a right to live in the U.S.

I believe most people, even my open-borders libertarian friends, would not say that everyone on the planet had a right to live in the U.S. That being the case suggests there will be conditions that a person must meet to live in the U.S. Then the question emerges: Who gets to set those conditions? Should it be the United Nations, the European Union, the Japanese Diet or the Moscow City Duma? I can't be absolutely sure, but I believe that most Americans would recoil at the suggestion that somebody other than Americans should be allowed to set the conditions for people to live in the U.S.

What those conditions should be is one thing and whether a person has a right to ignore them is another. People become illegal immigrants in one of three ways: entering without authorization or inspection, staying beyond the authorized period after legal entry or by violating the terms of legal entry. Most of those who risk prosecution under Arizona's new law fit the first category -- entering without authorization or inspection.

Probably, the overwhelming majority of Mexican illegal immigrants are hardworking, honest and otherwise law-abiding members of the communities in which they reside. It would surely be a heart-wrenching scenario for such a person to be stopped for a driving infraction, have his illegal immigrant status discovered and face deportation proceedings. Regardless of the hardship suffered, being in the U.S. without authorization is a crime.

When crimes are committed, what should be done? Some people recommend amnesia, which turns out to be the root word for amnesty. But surely they don't propose it as a general response to crime where criminals confess their crime, pay some fine and apply to have their crimes overlooked. Amnesty supporters probably wish amnesty to apply to only illegal immigrants. That being the case, one wonders whether they wish it to apply to illegals past, present and future, regardless of race, ethnicity or country of origin.

Various estimates put the illegal immigrant population in the U.S. between 10 and 20 million. One argument says we can't round up and deport all those people. That argument differs little from one that says since we can't catch every burglar, we should grant burglars amnesty. Catching and imprisoning some burglars sends a message to would-be burglars that there might be a price to pay. Similarly, imprisoning some illegal immigrants and then deporting them after their sentences were served would send a signal to others who are here illegally or who are contemplating illegal entry that there's a price to pay.

Here's Williams' suggestion in a nutshell. Start strict enforcement of immigration law, as Arizona has begun. Strictly enforce border security. Most importantly, modernize and streamline our cumbersome immigration laws so that people can more easily migrate to our country.

The bill, called the American Power Act, is designed to reduce greenhouse gas emissions and lay out a national energy strategy. Last year Congress seemed to be moving quickly on passing a climate and energy bill after the House passed such a bill in June, but Senate versions stalled. It's not clear when the Senate will officially take up the new bill, which was put together with the help of Lindsey Graham (R-SC), who recently withdrew his support. Meanwhile, the EPA is drawing up regulations for controlling greenhouse-gas emissions that could go into effect in January if Congress fails to pass a climate bill.

The new bill seeks to reduce greenhouse gas emissions by 17 percent as of 2020 and by 83 percent by 2050, compared to 2005 levels, by limiting the amount that major emitters can release into the atmosphere. These limits will be enforced via a type of cap-and-trade system. This would require utilities, and eventually heavy industry and refiners, to obtain allowances for emissions, some of which will be given out, and some sold. Companies can decide to either reduce emissions or buy enough allowances to cover their emissions. The allowances can also be traded between emitters. Some of the proceeds from purchasing allowances will go to pay down the federal government deficit, some will go directly to consumers in the form of rebates, and some will fund programs to encourage the development of new technologies.

The bill includes incentives for nuclear power, natural-gas vehicles, and carbon-dioxide capture and storage technology, which would be most useful for coal power plants. It funds R&D for renewable energy and advanced vehicles, and includes a variety of measures to help decrease petroleum consumption. It includes incentives for offshore drilling, but states that could be affected by oil spills can veto projects.

Unlike the bill passed by the House last year, the Senate bill does not require utilities to use renewable energy, but such provisions exist in a separate energy bill sponsored by Sen. Jeff Bingaman (D-NM), and they could eventually be incorporated into the new bill. Another key difference with the new bill is the introduction of the rebate program for consumers that will offset the costs of the bill.

Continued in Article

Cost Saving Ideas from NYU's Professor Paul Light
"Washington's $1 Trillion Opportunity:  It's been 60 years since we streamlined our federal government. These days there are plenty of savings to be found," by Paul C. Light, The Wall Street Journal, May 25, 2010 ---

President Barack Obama's blue-ribbon fiscal commission began its work on a somber note last month. "Anything we eventually do in any way will be met by howls of anguish," said the commission's co-chair, former Republican Sen. Alan Simpson. "The debt is like a cancer that will destroy the country from within," said his co-chair, former Clinton White House Chief of Staff Erskine Bowles.

If the commission wants a more positive note the next time it meets, it should take a look at the $1 trillion opportunity that resides in comprehensive bureaucratic reform. Not only is the rate of return high, the reforms are well within reach and long overdue.

The savings will not be found in hiring freezes and pay cuts—which inevitably lead to backdoor pay increases through promotions and title creep—but in streamlining the government's antiquated systems, duplicative programs, and needlessly dense organization chart. Consider the following rough estimates of the possible 10-year savings:

• Save $1 billion by cutting the number of presidential appointees. Sens. Russ Feingold (D., Wis.) and John McCain (R., Ariz.) have already introduced a proposal to cut the number of appointments to 2,000 from 3,000, but cutting the number by half to 1,500 would make a bigger contribution in both dollars and clarity of command. Add in the savings from improving the government's ability to connect the dots and move appointees into office faster, and the total might reach $100 billion in improved performance

• Save $100 billion by eliminating needless management layers throughout the bloated federal hierarchy. The flattening of government should not be restricted to the political class at the top. It should also target the middle and lower-level managers who strangle information as it flows upward at agencies such as the Federal Bureau of Investigation, where early clues to the September 11 terrorist attacks were never advanced.

• Save $200 billion by eliminating many of the federal jobs about to be vacated by the baby boomers. It will be tempting to fill the roughly half million jobs with the next federal employee in line but many of the posts were created by automatic promotions as the baby boomers aged. There are only two ways to know whether the jobs are needed. The first is to examine each job as it is exited and make a deliberate decision to fill it. The default should be no.

The second is to leave the job open for six months and see if the work is done faster with fewer hands. Either way, the federal government's mid-level work force will likely become smaller at least until the evaluations are completed. Of course, great care will need to be taken to protect government's essential roles in research, regulation and law enforcement.

• Save $200 billion by cutting the contracting work force. The federal government is not the only employer where padding has occurred. The Obama administration is already planning on capturing nearly $40 billion in contractor waste through tighter contracts on so-called indefinite quantity agreements. A parallel cut in the number of contract employees could capture much more. The Obama administration should also prohibit the use of contractors as de facto civil servants. Too many are hired from outside government because the hiring and disciplinary process within government is broken.

• Save $100 billion by increasing federal productivity. Federal employees have some of the most important jobs in the world, but many do not have the basic materials needed for a high-productivity era. Relatively small investments in integrated information technology that allows agencies to communicate with each other could generate huge productivity savings across government.

So could the elimination of the federal government's antiquated regional office structure, which is a bastion of micromanagement, costly overhead, and needless dead-ends on information and decisions.

• Save $300 billion by merging duplicative programs. Duplication produces more than confusion for lower-level employees and government beneficiaries. It also creates wasteful spending through multiple accounting, oversight and processing systems. The federal government could save enormous overhead by consolidating the "back office" operations in high-volume agencies such as the Social Security Administration, which has an impressively low administrative cost per case.

• Save $200 billion by eliminating programs that either do not produce results or are too trivial to save. Alexander Hamilton wrote that government should only be involved in "extensive and arduous enterprise for the public benefit." Using that metric, one can easily assemble a long list of programs that should be dropped from the statute books, such as agricultural price supports, a sacred cow that does little to create public benefit.

Although the back-of-the-envelope savings add up to more than $1.1 trillion over 10 years, some of the savings would have to be spent on new technologies, buy-out packages, and accelerated training as the federal work force adjusts to its new shape. It costs money to save money. Even if Congress and the president set aside $100 billion for productivity investments, taxpayers would still reap $1 trillion in potential savings.

It is not clear how the Congressional Budget Office or the Office of Management and Budget would score these ideas. Both long ago lost their capacity to monitor administrative costs. Nor is it clear that federal employment would fall. The federal government still needs more workers at the bottom of the hierarchy where its goods and services such as veterans care are delivered and laws are enforced. It is entirely possible that the number of midlevel jobs could fall by 300,000 even as the number of front-line jobs rises by the same number, albeit at a much lower cost per hire.

What is clear is that the federal government is long overdue for comprehensive reform. It's been nearly 60 years since Herbert Hoover led the last streamlining effort. During that time, our federal bureaucracy has steadily thickened with reporting chains to nowhere, micromanagement, ineffective accounting systems, and needless red tape. There are dollars to be found in another government-wide review.

If the fiscal commission wants to delegate this work, George H.W. Bush would be the perfect former president to lead the effort. Mr. Bush made total quality management the centerpiece of his abbreviated management agenda, and he was always interested in good government. Mr. Bush would need full authority to put every bureaucratic process on the table, including the hopelessly sluggish presidential appointments process, the antiquated civil-service system, and the anachronistic federal organization chart.

Yet even if comprehensive reform does not save a dime, the nation deserves a faster, more responsive government. The federal government needs the right employees in the right programs with the right resources to honor the promises being made today. If doing so saves $1 trillion or so, all the better.

Mr. Light is a professor at New York University's Robert F. Wagner School of Public Service and the author of "A Government Ill Executed: The Decline of the Federal Service and How to Reverse It" (Harvard University Press, 2009).

"Rand Paul's Constitution:  The Kentucky candidate's bad history,: The Wall Street Journal, May 24, 2010 ---

A Senate campaign is not a libertarian seminar, a lesson that Kentucky Republican Rand Paul has learned the hard way since his primary victory on Tuesday. He has now renounced the doubts he expressed last week about some parts of the Civil Rights Act of 1964 and has declared the matter closed. But before we move on, it's important to understand why Mr. Paul was wrong even on his own libertarian terms.

In his acceptance remarks on Tuesday night, Mr. Paul sounded mainstream conservative themes on spending, taxes and the reckless expansion of state power. But in his first brush with national scrutiny, the eye doctor let himself be drawn into a debate over the landmark 46-year-old law. Some conservatives want to blame liberal journalists for asking the questions, but Mr. Paul agreed to appear on MSNBC, and such queries were predictable given the liberal stereotype that all conservatives are secretly racists.

Mr. Paul then handed his opponents a sword by saying that while he favored the civil rights statute's ban on public discrimination, he thought it was mistaken to prohibit private bias. Asked if a restaurant should be able to refuse service to blacks, Mr. Paul was at first evasive but eventually replied, "Yes."

Even if Mr. Paul was speaking out of a principled belief in the rights of voluntary association, he was wrong on the Constitutional and historic merits. The Civil Rights Act of 1964—and its companion laws, such as the Voting Rights Act of 1965—were designed to address abuses of state and local government power. The Jim Crow laws that sprang up in the South after Reconstruction and prevailed for nearly a century were not merely the result of voluntary association. Discrimination—public and private—was enforced by police power and often by violence.

In parts of the mid-20th-century South, black men were lynched, fire hoses and vicious dogs were turned on children, and churches were bombed with worshippers inside. By some accounts, two-thirds of the Birmingham, Alabama, police force in the early 1960s belonged to the Ku Klux Klan. State and local government officials simply refused to acknowledge the civil rights of blacks and had no intention of doing so unless outside power was brought to bear.

The federal laws of that era were necessary and legal interventions to remedy the unconstitutional infringement on individual rights by state and local governments. On Thursday Mr. Paul finally acknowledged this point when he told CNN, "I think there was an overriding problem in the South so big that it did require federal intervention."

One tragedy of that era is that the frequent use of "states rights" arguments to defend Jim Crow discredited those arguments for decades and eased the way for federal intrusions on state power that really are unconstitutional. ObamaCare would be exhibit A. By giving his opponents an opening to portray him and his tea party supporters as racial revanchists, Mr. Paul has let them change the campaign subject from the Obama Administration's willy-nilly expansion of the corporate state. He owes his supporters, and his own libertarian principles, better than that.

Many of us view Nobel Laureate and Princeton University's left of liberal Economics Professor Paul Krugan's incessant encouragements for unrestrained deficit spending and adding trillions more to the National Debt as irresponsible to say the least.

Finance Professor Jim Mahar clued me to the link below. Jim claims that Krugman's case is unimpressive for a supposed scholar. I think Jim's correct.
I also think Krugman is a really, really, really dangerous nut case contributing to the implosion of the debt-ridden U.S. economy.

"We’re Not Greece," by Paul Krugman, The New York Times, May 20, 2010 ---

It’s an ill wind that blows nobody good, and the crisis in Greece is making some people — people who opposed health care reform and are itching for an excuse to dismantle Social Security — very, very happy. Everywhere you look there are editorials and commentaries, some posing as objective reporting, asserting that Greece today will be America tomorrow unless we abandon all that nonsense about taking care of those in need.

The truth, however, is that America isn’t Greece — and, in any case, the message from Greece isn’t what these people would have you believe.

So, how do America and Greece compare?

Both nations have lately been running large budget deficits, roughly comparable as a percentage of G.D.P. Markets, however, treat them very differently: The interest rate on Greek government bonds is more than twice the rate on U.S. bonds, because investors see a high risk that Greece will eventually default on its debt, while seeing virtually no risk that America will do the same. Why?

One answer is that we have a much lower level of debt — the amount we already owe, as opposed to new borrowing — relative to G.D.P. True, our debt should have been even lower. We’d be better positioned to deal with the current emergency if so much money hadn’t been squandered on tax cuts for the rich and an unfunded war. But we still entered the crisis in much better shape than the Greeks.

Even more important, however, is the fact that we have a clear path to economic recovery, while Greece doesn’t.

The U.S. economy has been growing since last summer, thanks to fiscal stimulus and expansionary policies by the Federal Reserve. I wish that growth were faster; still, it’s finally producing job gains — and it’s also showing up in revenues. Right now we’re on track to match Congressional Budget Office projections of a substantial rise in tax receipts. Put those projections together with the Obama administration’s policies, and they imply a sharp fall in the budget deficit over the next few years.

Greece, on the other hand, is caught in a trap. During the good years, when capital was flooding in, Greek costs and prices got far out of line with the rest of Europe. If Greece still had its own currency, it could restore competitiveness through devaluation. But since it doesn’t, and since leaving the euro is still considered unthinkable, Greece faces years of grinding deflation and low or zero economic growth. So the only way to reduce deficits is through savage budget cuts, and investors are skeptical about whether those cuts will actually happen.

It’s worth noting, by the way, that Britain — which is in worse fiscal shape than we are, but which, unlike Greece, hasn’t adopted the euro — remains able to borrow at fairly low interest rates. Having your own currency, it seems, makes a big difference.

In short, we’re not Greece. We may currently be running deficits of comparable size, but our economic position — and, as a result, our fiscal outlook — is vastly better.

That said, we do have a long-run budget problem. But what’s the root of that problem? “We demand more than we’re willing to pay for,” is the usual line. Yet that line is deeply misleading.

First of all, who is this “we” of whom people speak? Bear in mind that the drive to cut taxes largely benefited a small minority of Americans: 39 percent of the benefits of making the Bush tax cuts permanent would go to the richest 1 percent of the population.

And bear in mind, also, that taxes have lagged behind spending partly thanks to a deliberate political strategy, that of “starve the beast”: conservatives have deliberately deprived the government of revenue in an attempt to force the spending cuts they now insist are necessary.

Meanwhile, when you look under the hood of those troubling long-run budget projections, you discover that they’re not driven by some generalized problem of overspending. Instead, they largely reflect just one thing: the assumption that health care costs will rise in the future as they have in the past. This tells us that the key to our fiscal future is improving the efficiency of our health care system — which is, you may recall, something the Obama administration has been trying to do, even as many of the same people now warning about the evils of deficits cried “Death panels!”

So here’s the reality: America’s fiscal outlook over the next few years isn’t bad. We do have a serious long-run budget problem, which will have to be resolved with a combination of health care reform and other measures, probably including a moderate rise in taxes. But we should ignore those who pretend to be concerned with fiscal responsibility, but whose real goal is to dismantle the welfare state — and are trying to use crises elsewhere to frighten us into giving them what they want


"The Bankrupting of America:  We have a ruinous collaboration of elected officials and unionized public workers," by Mortimer Zuckerman, The Wall Street Journal, May 21, 2010 ---

The American public feels it is drowning in red ink. It is dismayed and even outraged at the burgeoning national deficits, unbalanced state and local budgets, and accounting that often masks the extent of indebtedness. There is a mounting sense that taxpayers are being taken for an expensive ride by public-sector unions. The extraordinary benefits the unions have secured for their members are going to be harder and harder to pay.

The political backlash has energized the tea party activists, put incumbents at risk in both parties, and already elected fiscal conservatives such as Republican Gov. Chris Christie of New Jersey. Over the next fiscal year, the states are looking at deficits approaching hundreds of billions of dollars. The Center on Budget and Policy Priorities, a liberal think tank, estimates that this coming year alone states will face an aggregate shortfall of $180 billion. In some states the budget gap is more than 30%.

How did we get into such a mess? States have always had to cope with volatility in the size and composition of their populations. Now we have shrinking tax bases caused by recession and extra costs imposed on states to pay for Medicaid in the federal health-care program. The straw (well, more like an iron beam) that breaks the camel's back is the unfunded portions of state pension plans, health care and other retirement benefits promised to public-sector employees. And federal government assistance to states is falling—down by roughly half in the next fiscal year beginning Oct. 1.

It is galling for private-sector workers to see so many public-sector workers thriving because of the power their unions exercise. Take California. Investigative journalist Steve Malanga points out in the City Journal that California's schoolteachers are the nation's highest paid; its prison guards can make six-figure salaries; many state workers retire at 55 with pensions that are higher than the base pay they got most of their working lives.

All this when California endures an unemployment rate steeper than the nation's. It will get worse. There's an exodus of firms that want to escape California's high taxes, stifling regulations, and recurring budget crises. When Cisco CEO John Chambers says he will not build any more facilities in California you know the state is in trouble.

The business community and a growing portion of the public now understand the dynamics that discriminate against the private sector. Public unions organize voting campaigns for politicians who, on election, repay their benefactors by approving salaries and benefits for the public sector, irrespective of whether they are sustainable. And what is happening in California is happening in slower motion in the rest of the country. It's no doubt one of the reasons the Pew Research Center this year reported that support for labor unions generally has plummeted "amid growing public skepticism about unions' power and purpose."

In New York, public-service employees have received gold-plated perks for much of the 20th century, especially generous health-insurance benefits. Indeed, where once salaries were lower in the public sector, the salary gaps in the public and private sectors have disappeared or even reversed.

A Citizens Budget Commission report in 2005 showed that for most job categories in the greater New York City region, public-sector workers received higher hourly wages than private-sector workers. And according to a 2009 survey by the same group, this doesn't even count the money that New York City pays in full premiums for comprehensive health-insurance policies for workers and their families. Only 8% of workers in private firms enjoy that subsidy. In virtually all cases, the city also pays the full health-care premium costs for retirees and their spouses. And city pensions are "defined benefit" plans, which are more expensive since they guarantee specific benefits on retirement.

By contrast, private-sector workers in the survey were mostly in "defined contribution" plans, which means that, unlike their cushioned brethren in the public sector, they do not have a predetermined benefit at retirement. If New York City were to require its current workers to pay contributions toward health insurance equal to the amounts paid by the employees of local private-sector firms, the taxpayer savings would be $628 million a year. In New Jersey, Gov. Christie says government employee health benefits are 41% more expensive than those of the average Fortune 500 company.

What we suffer is a ruinously expensive collaboration between elected officials and unionized state and local workers, purchased with taxpayer money. "Scratch my back and I'll scratch yours."

No wonder the Service Employees International Union has become the nation's fastest-growing union: It represents government and health-care workers. Half of its 700,000 California members are government employees. More and more, it wins not on the picket line but at the negotiating table, where it backs up traditional strong-arming with political power. It spends vast amounts of money on initiatives that keep the government growing and the gravy flowing.

The state's teachers unions operate in a similar fashion—with the result that California's various municipalities, especially Los Angeles, face budget shortfalls in the hundreds of millions of dollars. California can no longer rely on a strong economy to support this munificence. Its unemployment rate of 12.5% runs several points higher than the national rate and its high-tech companies are choosing to expand elsewhere. Why stay in a state with such higher taxes and a cumbersome regulatory environment?

California is a horrible warning of how dreams can turn to dust. In most states, politicians face a contracting local economy and shortfalls in tax receipts. Naturally, they look to cut expenses but run into obstruction from politically powerful unions that represent state and local government employees, teachers and health-care workers who have themselves caused pension and health-care insurance costs to soar. It is not an accident that in framing the national stimulus program in 2009 Congress directed a stunning $275 billion of the $787 billion as grants to the states to support public-service employees in health care, education, etc.

The lopsided subsidies for pension and health costs are a large part of the fiscal crises at the state and local levels. The subsequent squeeze on education and infrastructure investment is undermining the very programs that have made it possible for our economy to grow.

Between New York and California, the projected deficits run about $40 billion—and that doesn't account for projected billions of dollars in the operating deficits in the states' mass transit systems or the multibillion-dollar unfunded liability in many of the state pension plans. New York would be badly hit because it is on the verge of being deprived of tax revenues by Washington's increased regulations on the financial industry, especially the hugely profitable, multitrillion-dollar market in derivatives—an industry that is critical to the economy of New York state and the country.

City government was developed to serve its citizens. Today the citizenry is working in large part to serve the government. It is always hard to shrink government spending. It is particularly difficult when public-sector unions have such a unique lever of pressure.

We have to escape this cycle or it will crush us. One way is to take labor negotiations out of the hands of vulnerable legislators and assign them to independent commissions. They would have a better shot at achieving a fair balance between appropriate salary increases and the revenues and services of local municipalities. The electorate won't swallow any more red ink.

Mr. Zuckerman is chairman and editor in chief of U.S. News & World Report.

"The Real Pending Crisis: Public Pensions," by Bruce Bialosky, Townhall, November 2, 2009 ---

Bob Jensen's threads on entitlements are at

"Senate Energy Bill Less Costly than Alternatives:  Economists and utilities say the draft legislation could help avoid costly regulations," by Kevin Bullis, MIT's Technology Review, May 20, 2010 ---

A proposed climate bill unveiled last week by senators John Kerry (D-MA) and Joe Lieberman (I-CT) is getting the support of some economists and utilities as a relatively inexpensive way to reduce carbon-dioxide emissions that will initially have almost no impact on electricity prices. The supporters, however, worry that the legislation won't be passed, which would open the way for far more expensive regulations from the U.S. Environmental Protection Agency (EPA).

"California Implodin':  The state now faces a "Sophie's Choice" of bad and worse," by Stephen Moore, The Wall Street Journal, May 20, 2010 ---

Last week California Governor Arnold Schwarzenegger said revised budget numbers show the state is now $19 billion in debt. Say what? This is like a Hollywood horror story that has a new sequel every six months. The income and sales tax increases enacted last year were supposed to stanch the red ink, but the debt keeps rising.

Mr. Schwarzenegger said that the "budget process is broken" -- no kidding -- and that the state now faces a "Sophie's Choice" of bad and worse options. His new budget calls for the elimination of whole programs and large reductions in health and welfare services.

Democrat Darrell Steinberg, the senate president, called the proposals a "non-starter" and said he was "disappointed that the governor has chosen to surrender." Democrats hope to wait out the crisis until lame duck Arnold is gone from office in seven months, but by then California might be Greece. The state already has the worst bond rating in the country.

Everyone knows that a main source of these fiscal woes is pension obligations, yet Democrats continue to resist substantive reform. "The cost of employee retirement benefits this year is $6.1 billion," said Mr. Schwarzenegger. "That is more than what it would cost to keep [the welfare-to-work program] CalWorks, child care, mental health services and in-home supportive services."

Mr. Steinberg wants the governor to agree to another income tax increase on the rich, even though California currently has one of the highest tax rates in the U.S. This is a state that IRS statistics indicate has lost some $10 billion in wealth from out-migration in the past five years. Another tax hike won't help to reverse that trend. "The Democrats in Sacramento don't get it," says Republican Congressman Darrel Issa. "Our high tax rates are driving this state off a financial cliff."

Continued in article

From The Wall Street Journal Accounting Weekly Review on May 21, 2010

The Revenue Limits of Tax and Spend
by: David Ranson
May 17, 2010
Click here to view the full article on WSJ.com

TOPICS: Forecasting, Governmental Accounting, Taxation

SUMMARY: This opinion page piece by the head of research at H.C. Wainwright & Co. Economics highlights the relationship between tax revenues to the U.S. government and Gross Domestic Product (GDP). The ratio has never exceeded 20%, and has fallen very close to that mark since 1945 or so, regardless of enacted tax rates. Mr. Ranson emphasizes that this relationship exists because the economy is "a living economic system that makes its own collective choices" in which high-income earners will seek out "ambiguities and loopholes" that apparently tend to maintain this relationship. He recommends that this relationship be considered when forecasting tax receipts based on increases in future tax rates which are prone to over-predict revenue under conventional forecasting methods and that "current projections of federal revenue are...unrealistically high."

CLASSROOM APPLICATION: This article is an excellent one to use in introducing governmental accounting topics in setting budgets and forecasting revenues. It also might be used to discuss the policy implications of setting tax rates in a tax class.

1. (Introductory) What is the historical relationship between tax revenues to the federal government and gross domestic product (GDP)? In your answer, define each of these terms.

2. (Introductory) According to the article, who first introduced this relationship analysis by publishing it in the Wall Street Journal? Who is now reviewing that relationship in this opinion page piece?

3. (Advanced) What is the reasoning offered in the article for the consistency of the relationship between tax revenues and GDP?

4. (Advanced) How should this relationship be used by the federal government in establishing a budget? In your answer, define the concept of forecasted revenues and budget deficit.

5. (Introductory) What does the author believe is the current issue with the U.S. federal government's forecast of its budget deficit?

Reviewed By: Judy Beckman, University of Rhode Island

"The Revenue Limits of Tax and Spend," by: David Ranson, The Wall Street Journal, May 17, 2010 ---

The Greeks have always been trendsetters for the West. Washington has repudiated two centuries of U.S. fiscal prudence as prescribed by the Founding Fathers in favor of the modern Greek model of debt, dependency, devaluation and default. Prospects for restraining runaway U.S. debt are even poorer than they appear.

U.S. fiscal policy has been going in the wrong direction for a very long time. But this year the U.S. government declined to lay out any plan to balance its budget ever again. Based on President Obama's fiscal 2011 budget, the Congressional Budget Office (CBO) estimates a deficit that starts at 10.3% of GDP in 2010. It is projected to narrow as the economy recovers but will still be 5.6% in 2020. As a result the net national debt (debt held by the public) will more than double to 90% by 2020 from 40% in 2008. The current Greek deficit is now thought to be 13.6% of a far smaller GDP. Unlike ours, the Greek insolvency is not too large for an international rescue.

As sobering as the U.S. debt estimates are, they are incomplete and optimistic. They do not include deficit spending resulting from the new health-insurance legislation. The revenue numbers rely on increased tax rates beginning next year resulting from the scheduled expiration of the Bush tax cuts. And, as usual, they ignore the unfunded liabilities of social insurance programs, even though these benefits are officially recognized as "mandatory spending" when the time comes to pay them out.

The feds assume a relationship between the economy and tax revenue that is divorced from reality. Six decades of history have established one far-reaching fact that needs to be built into fiscal calculations: Increases in federal tax rates, particularly if targeted at the higher brackets, produce no additional revenue. For politicians this is truly an inconvenient truth.

The nearby chart shows how tax revenue has grown over the past eight decades along with the size of the economy. It illustrates the empirical relationship first introduced on this page 20 years ago by the Hoover Institution's W. Kurt Hauser—a close proportionality between revenue and GDP since World War II, despite big changes in marginal tax rates in both directions. "Hauser's Law," as I call this formula, reveals a kind of capacity ceiling for federal tax receipts at about 19% of GDP.

What's the origin of this limit beyond which it is impossible to extract any more revenue from tax payers? The tax base is not something that the government can kick around at will. It represents a living economic system that makes its own collective choices. In a tax code of 70,000 pages there are innumerable ways for high-income earners to seek out and use ambiguities and loopholes. The more they are incentivized to make an effort to game the system, the less the federal government will get to collect. That would explain why, as Mr. Hauser has shown, conventional methods of forecasting tax receipts from increases in future tax rates are prone to over-predict revenue.

For budget planning it's wiser and safer to assume that tax receipts will remain at a historically realistic ratio to GDP no matter how tax rates are manipulated. That leads me to conclude that current projections of federal revenue are, once again, unrealistically high.

Continued in article




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