Tidbits Quotations
To Accompany the October 13, 2011 edition of Tidbits
http://www.trinity.edu/rjensen/tidbits/2011/tidbits101311.htm                    
Bob Jensen at Trinity University




Two things fill the soul with always new and growing strong surprise and passion when we more often and longer think of them – the starlit sky over me and the moral law in me.
Immanuel Kant  


Sharpton claimed on his show Friday night that democrats supported the Civil Rights act of 1964, problem is, more republicans supported the bill than democrats.
Katie Pavlich, "Al Sharpton Gets Civil Rights History Wrong," Townhall, October 9, 2011 ---
http://townhall.com/tipsheet/katiepavlich/2011/10/09/al_sharpton_gets_civil_rights_history_wrong


Video on "Capitalism at Risk," by Dutch Leonard and Lynn Paine, Harvard Business Review Blog, September 2011 --- Click Here
http://blogs.hbr.org/video/2011/09/capitalism-at-risk.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date


The nation cannot continue to sustain the spending programs and policies of the past with the tax revenues it has been accustomed to paying," testified Douglas Elmendorf, director of the nonpartisan Congressional Budget Office. "Citizens will either have to pay more for their government, accept less in government services and benefits, or both.
Douglas Elmendorf. Director of the nonpartisan Congressional Budget Office --- http://accounting.smartpros.com/x72662.xml .

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

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

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

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


"Larry Summers: Gov't Is 'Crappy Venture Capitalist'," David A. Patten, Newsmax, October 3, 2011 ---
http://www.newsmax.com/InsideCover/summers-solyndra-obama-emails/2011/10/03/id/413118

. . .

Speaking of Solyndra, Jones wrote to top presidential economic adviser Lawrence H. Summers: “One of our solar companies with revenues of less than $100 million (and not yet profitable) received a government loan of $580 million. While that is good for us, I can’t imagine it’s a good way for the government to use taxpayer money.”

Jones added: “The allocation of spending to clean energy is haphazard; the government is just not well equipped to decide which companies should get the money and how much.”

Summers’ reply appeared to be an acknowledgement that government was ill-suited to the role of choosing winners and losers in the marketplace.

“I relate well to your view that gov. is a crappy v.c.,” Summers wrote, using “v.c.” as an abbreviation for venture capitalist investors.

Despite his admission that government was ill-equipped to vet taxpayers “investments,” Summers went on to tell Jones: “But suppose we think there are all kinds of externalities to renewable investments. What should we do?”

Summers did not state whether those “externalities” included political pressure from the White House or the Department of Energy to award loans in support of President Obama’s view that clean-energy jobs could lead America out of its economic doldrums.

Read more on Newsmax.com: Larry Summers: Gov't Is 'Crappy Venture Capitalist' Important: Do You Support Pres. Obama's Re-Election? Vote Here Now!

Continued in article

Read more on Newsmax.com: Larry Summers: Gov't Is 'Crappy Venture Capitalist' Important: Do You Support Pres. Obama's Re-Election? Vote Here Now!

"The Solyndra Economy:  Administration emails reveal the reality of politicized investing," The Wall Street Journal, October 9, 2011 ---
http://online.wsj.com/article/SB10001424052970204524604576610972882349418.html?mod=djemEditorialPage_t

. . .

As it happens, we're getting a look at what this world of political investment entails thanks to Administration emails released last week by House Democrats on the Subcommittee on Oversight and Investigations and the White House. Democrats say the emails reveal a "vigorous internal debate" about the Solyndra deal and dispel accusations of crony capitalism.

The opposite is closer to reality. Solyndra received federal help in 2009 and never turned a profit. In March 2010, PriceWaterhouseCoopers raised questions about the company's solvency. The next month, a White House Office of Management and Budget staffer worried that the Department of Energy "has one loan to monitor and they seem completely oblivious." Another said it was "terrifying" to consider that some of DOE's next projects would make Solyndra look "better."

Insiders raised alarms, too. Obama donor and venture capitalist Steve Westly wrote to senior White House aide Valerie Jarrett in May and said "many of us believe the company's cost structure will make it difficult for them to survive long term." Ms. Jarrett wrote to Vice President Joe Biden's chief of staff, Ron Klain, who contacted the Department of Energy. But DOE expressed confidence in Solyndra, with one official noting that "we believe the company is okay in the medium term, but will need some help of one kind or another down the road."

Instead of launching a more serious inquiry, Mr. Klain supported a pending Presidential visit to Solyndra's factory, advising Ms. Jarrett of "risk factors" but adding that "it looks like it is OK to me, but if you feel otherwise, let me know." Ms. Jarrett replied "I'm comfortable if you're comfortable," and Mr. Klain responded, "The reality is that if POTUS visited 10 such places over the next 10 months, probably a few will be belly-up by election day 2012—but that to me is the reality of saying that we want to help promote cutting edge, new economy industries."

Here's more "reality." On August 20, 2009, a DOE staffer asked "how can we advance a project . . . that generates a working capital shortfall of $50 [million] when working capital assumptions are entered into the model?," adding "it also simply won't stand up to review by oversight bodies." Solyndra's federal loan guarantee closed the following month.

Then there are the still-hazy insider dealings, another inevitable feature of government-led investment. An Obama fundraiser, Steven Spinner, took an advisory role at DOE and pushed for the loan to proceed, even as his wife's law firm advised on the same deal. (DOE and the couple deny any undue influence.) Earlier this year, DOE reworked the Solyndra loan guarantee as the company floundered and put private creditors ahead of taxpayers. This newspaper reported Friday that Treasury raised alarms about the legality of such a move, although it's unclear when that happened.

Brad Jones of Redpoint Ventures got to the heart of the Solyndra economy in a December 2009 email to then-National Economic Council director Larry Summers: "The allocation of spending to clean energy is haphazard; the government is just not well equipped to decide which companies should get the money and how much . . . One of our solar companies with revenues of less than $100 million (and not yet profitable) received a government loan of $580 million; while that is good for us, I can't imagine it's a good way for the government to use taxpayer money."

Which is precisely the point. The emerging sophisticated defense of Solyndra is Mr. Obama's suggestion that if China subsidizes its industries "of the future," then we must too. But in a free-market economy, which America used to be, private investors decide which industries will succeed in the future, and bet their own money on it. The proper role for government is to support basic research, not commercial ventures that become exercises in taxpayer risk but private reward.

When government takes $535 million and invests in a loser, it not only wastes taxpayer money but it also denies that capital to some other project in the private economy that might have succeeded. The Solyndra emails show how ill-equipped government is to predict the industries of the present, much less the future.


Ireland:
. . . two key competitive advantages: a skilled labor force and a business-friendly regulatory and tax environment

"Lessons of the Irish Comeback:  Investors would be shortsighted to overlook the country's progress. Other indebted governments would have to be blind," by Michael Hasenstab, The Wall Street Journal, October 9, 2011 ---
http://online.wsj.com/article/SB10001424052970203633104576620772810527498.html#mod=djemEditorialPage_t

Recently, headline news out of Europe has led investors on a vertigo-inducing roller-coaster ride. Markets have swung wildly on the latest rumors and fears. Skepticism regarding Greece's ability to pay back its debt seems to have hardened. However, lost in all the tumult is one of the euro zone's newly reformed members. Ireland's example could offer other indebted countries some inspiration for solving their own crises.

Ireland was brought down by its wayward, over-leveraged banking system, which fueled a private-sector credit boom and a real-estate bubble. But this financial froth belied strong economic fundamentals and two key competitive advantages: a skilled labor force and a business-friendly regulatory and tax environment.

Moreover, fiscal policy was prudent leading into the crisis. In 2007 Ireland's public debt was only 25% of its gross domestic product and its budget was balanced, albeit thanks, in part, to strong tax revenues from a credit-fueled economic boom.

The financial crisis and ensuing global downturn dealt a heavy blow. But Irish citizens and politicians rolled up their sleeves and quickly worked to repair and rebuild. The early results are promising.

Unable to rely on an exchange-rate adjustment, Ireland has engineered a more than 20% drop in unit labor costs in manufacturing since 2008—which boosts its competitiveness equivalent to a 20% currency depreciation. Broad-based wage cuts have been painful, but they are working: Since January 2008 Ireland's trade surplus has doubled, and now runs at more than 20% of GDP.

This robust export performance has more than offset the ongoing adjustment in the domestic economy. As a result, Ireland was Europe's second fastest growing economy in the second quarter of this year, expanding at an annual rate of 2.3%. The recovery in GDP growth in turn helped Ireland to meet and exceed the deficit-reduction targets set by the European Union and the International Monetary Fund.

Last year Ireland was also the first member of the euro zone's so-called periphery to return to an external current-account surplus, though it dipped back to a deficit this year. The IMF now expects it to return to a surplus of 2.3% of GDP by the end of next year. This is in sharp contrast to Greece and Portugal, which both have current-account deficits still hovering around 10% of GDP.

Meanwhile, the government has resisted pressure from its EU partners to raise its 12.5% corporate-tax rate. Dublin's regulatory touch also remains light. This business climate, along with a productive and educated work force, has served as a magnet for foreign direct investment. It rose 19% in the first half of this year, led by technology and services companies.

Ireland's policies have also pulled its banks back from the brink. The country has recapitalized its banking system, which continues to deleverage aggressively. The country's banking stress-tests have been among the most demanding and credible in Europe. They are the only ones to have relied on an independent external agency instead of just government regulators.

Beyond the country's strong economic fundamentals, broad social and political consensus sets Ireland apart. Austerity is bitter medicine to swallow, but Ireland's citizens understand there was no easy way out of their predicament, and that their short-term sacrifices are laying the groundwork for sustainable growth in the future. Thanks to this general social consensus—in contrast to the rioting and protests seen further south in Europe—and despite a change in government, Ireland's reforms remain fully on track.

While policy makers in the euro zone take the difficult steps to ensure the single currency's survival, markets will remain volatile and be tempted to paint all embattled European countries with the same brush. But that would only repeat an old mistake.

During the first 10 years of the euro's existence, markets ignored the fact that some member countries were accumulating unsustainable imbalances—only to be caught off-guard when sovereign spreads suddenly widened.

Continued in article

 


The Fed Audit
Socialist Bernie Sanders is probably my least favorite senator alongside Barbara (mam) Boxer. But he does make some important revelations in the posting below.

The first ever GAO audit of the Federal Reserve was conducted in early 2011 due to the Ron Paul, Alan Grayson Amendment to the Dodd-Frank bill, which passed last year. Jim DeMint, a Republican Senator, and Bernie Sanders, an independent Senator, led the charge for a Federal Reserve audit in the Senate, but watered down the original language of the house bill (HR1207), so that a complete audit would not be carried out. Ben Bernanke, Alan Greenspan, and various other bankers vehemently opposed the audit and lied to Congress about the effects an audit would have on markets. Nevertheless, the results of the first audit in the Federal Reserve nearly 100 year history were posted on Senator Sanders webpage in July.

The list of institutions that received the most money from the Federal Reserve can be found on page 131 of the GAO Audit and is as follows:

Citigroup: $2.5 trillion($2,500,000,000,000)
Morgan Stanley: $2.04 trillion ($2,040,000,000,000)
Merrill Lynch: $1.949 trillion ($1,949,000,000,000)
Bank of America : $1.344 trillion ($1,344,000,000,000)
Barclays PLC ( United Kingdom ): $868 billion* ($868,000,000,000)
Bear Sterns: $853 billion ($853,000,000,000)
Goldman Sachs: $814 billion ($814,000,000,000)
Royal Bank of Scotland (UK): $541 billion ($541,000,000,000)
JP Morgan Chase: $391 billion ($391,000,000,000)
Deutsche Bank ( Germany ): $354 billion ($354,000,000,000)
UBS ( Switzerland ): $287 billion ($287,000,000,000)
Credit Suisse ( Switzerland ): $262 billion ($262,000,000,000)
Lehman Brothers: $183 billion ($183,000,000,000)
Bank of Scotland ( United Kingdom ): $181 billion ($181,000,000,000)
BNP Paribas (France): $175 billion ($175,000,000,000)

 

"The Fed Audit," by Bernie Sanders, Independent Senator from Vermont, July 21, 2011 ---
http://sanders.senate.gov/newsroom/news/?id=9e2a4ea8-6e73-4be2-a753-62060dcbb3c3

The first top-to-bottom audit of the Federal Reserve uncovered eye-popping new details about how the U.S. provided a whopping $16 trillion in secret loans to bail out American and foreign banks and businesses during the worst economic crisis since the Great Depression. An amendment by Sen. Bernie Sanders to the Wall Street reform law passed one year ago this week directed the Government Accountability Office to conduct the study. "As a result of this audit, we now know that the Federal Reserve provided more than $16 trillion in total financial assistance to some of the largest financial institutions and corporations in the United States and throughout the world," said Sanders. "This is a clear case of socialism for the rich and rugged, you're-on-your-own individualism for everyone else."

Among the investigation's key findings is that the Fed unilaterally provided trillions of dollars in financial assistance to foreign banks and corporations from South Korea to Scotland, according to the GAO report. "No agency of the United States government should be allowed to bailout a foreign bank or corporation without the direct approval of Congress and the president," Sanders said.

The non-partisan, investigative arm of Congress also determined that the Fed lacks a comprehensive system to deal with conflicts of interest, despite the serious potential for abuse.  In fact, according to the report, the Fed provided conflict of interest waivers to employees and private contractors so they could keep investments in the same financial institutions and corporations that were given emergency loans.

For example, the CEO of JP Morgan Chase served on the New York Fed's board of directors at the same time that his bank received more than $390 billion in financial assistance from the Fed.  Moreover, JP Morgan Chase served as one of the clearing banks for the Fed's emergency lending programs.

In another disturbing finding, the GAO said that on Sept. 19, 2008, William Dudley, who is now the New York Fed president, was granted a waiver to let him keep investments in AIG and General Electric at the same time AIG and GE were given bailout funds.  One reason the Fed did not make Dudley sell his holdings, according to the audit, was that it might have created the appearance of a conflict of interest.

To Sanders, the conclusion is simple. "No one who works for a firm receiving direct financial assistance from the Fed should be allowed to sit on the Fed's board of directors or be employed by the Fed," he said.

The investigation also revealed that the Fed outsourced most of its emergency lending programs to private contractors, many of which also were recipients of extremely low-interest and then-secret loans.

The Fed outsourced virtually all of the operations of their emergency lending programs to private contractors like JP Morgan Chase, Morgan Stanley, and Wells Fargo.  The same firms also received trillions of dollars in Fed loans at near-zero interest rates. Altogether some two-thirds of the contracts that the Fed awarded to manage its emergency lending programs were no-bid contracts. Morgan Stanley was given the largest no-bid contract worth $108.4 million to help manage the Fed bailout of AIG.

A more detailed GAO investigation into potential conflicts of interest at the Fed is due on Oct. 18, but Sanders said one thing already is abundantly clear. "The Federal Reserve must be reformed to serve the needs of working families, not just CEOs on Wall Street."

To read the GAO report, click here
http://sanders.senate.gov/imo/media/doc/GAO Fed Investigation.pdf

Bob Jensen's Rotten to the Core threads ---
http://www.trinity.edu/rjensen/FraudRotten.htm


Question
How does the government use fraudulent accounting to hide the cost of student loan defaults?

"Washington's Quietest Disaster Student loan defaults are growing, and the worst is still to come," The Wall Street Journal, September 30, 2011 ---
http://online.wsj.com/article/SB10001424053111903703604576587103028334580.html#mod=djemEditorialPage_t

When critics warned about rising defaults on government-backed student loans two years ago, the question was how quickly taxpayers would feel the pain. The U.S. Department of Education provided part of the answer this month when it reported that the default rate for fiscal 2009 surged to 8.8%, up from 7% in 2008.

This rising default rate doesn't even tell the whole story. The government allows various "income contingent" and "income-based" repayment options, so the statistics don't count kids who were given permission to pay less than they owed. Taxpayers shouldn't expect relief any time soon. Thanks to policy changes in recent years and fraudulent government accounting, the pain could be excruciating.

Readers who followed the Congressional birth of ObamaCare in 2010 may recall that student lending was the other industry takeover that came along for the legislative ride. Private lenders used to originate federally guaranteed loans, but the new law required all such loans to come directly from the feds. Combined with earlier changes that discouraged private loans sold without a federal guarantee, the result is a market dominated by Washington.

The 2010 changes did not happen simply because President Obama and legislators like Rep. George Miller and Sen. Tom Harkin distrust profit-making enterprises. The student-loan takeover also advanced the mirage that ObamaCare would save money.

Thanks to only-in-Washington accounting, making the Department of Education the principal banker to America's college students created a "savings" of $68 billion over 11 years, certified by the Congressional Budget Office. Even CBO Director Douglas Elmendorf admitted that this estimate was bogus because CBO was forced to use federal rules that ignored the true cost of defaults. But Mr. Miller had earlier laid the groundwork for this fraud by killing amendments in the House that would have required honest accounting and an audit.

Armed in 2010 with their CBO-certified "savings," Democrats decided they could finance a portion of ObamaCare, as well as an expansion of Pell grants. But as Bernie Madoff could have told them, frauds break down when enough people show up asking for their money. That's happening already, judging by recent action in the Senate Appropriations Committee, where lawmakers apparently realize that the federal takeover isn't going to deliver the promised riches.

To preserve Team Obama's priority of maintaining a maximum Pell grant of $5,550 per year and doubling the total annual funding to $36 billion since President Obama took office, Democrats recently decided to make student-loan borrowers pay interest on their loans for their first six months out of college. Washington used to give the youngsters an interest-free grace period. Taxpayers might cheer this change if the money wasn't simply being transferred to another form of education subsidy. But it seems almost certain to raise default rates as it puts recent grads under increased financial pressure.

None of these programs has anything to do with making it easier to afford college. Universities have been efficient in pocketing the subsidies by increasing tuition after every expansion of federal support. That's why education is a rare industry where prices have risen even faster than health-care costs.

This is also the rare market where the recent trend of de-leveraging doesn't apply. An August report from the Federal Reserve Bank of New York found that Americans cut their household debt from a peak of $12.5 trillion in the third quarter of 2008 to a recent $11.4 trillion. Consumers have reduced their debt on houses, cars, credit cards and nearly everything except student loans, where debt has increased 25% in the three years.

Perhaps this is because most federal student loans are made without regard to income, assets or credit history. Much like the federal obsession to finance a home for every American regardless of ability to pay, the obsession to finance higher education for every high school student ignores inconvenient facts. These include the certainty that some of these kids will take jobs that don't require college degrees and may not support timely repayment.

For this school year, even the loans that pay on time aren't necessarily winners for the taxpayer. That's because of a 2007 law that Mr. Miller and Nancy Pelosi pushed through Congress—and George W. Bush signed—that cut interest rates on many federally backed student loans. Stafford loans, the most common type, have been available since July at a fixed rate of 3.4%, barely above the historically low rates at which the Treasury is currently borrowing for the long term. The student loan rates are scheduled to rise back to 6.8% next year. But if our spendthrift government ends up borrowing money above 7% and lending it to kids at 6.8%, taxpayers will suffer even before the youngsters go delinquent.

Efforts to clean up this debacle are stirring on Capitol Hill, with House Republicans moving to limit Pell grants to students who have a high school diploma or GED. Oklahoma Sen. Tom Coburn would go further and have government leave the business of subsidizing the education industry via student loans and let private lenders finance college. That may be too radical at the moment, but it won't be if taxpayers ever figure out how much subsidized loans will cost them

The fact is, some schools represent terrific investments. At Caltech, financial aid recipients can expect to spend $91,250 for a degree that over 30 years will allow them to repay that investment and out-earn a high school graduate by more than $2 million. But schools like Caltech are the exception that proves the rule: most students would be better off investing their college nest eggs in the S&P 500 rather than a college education. So if you are going to choose college, it pays to choose wisely.
Louis Lavelle, Business Schools Editor Bloomberg Business Week, April 14, 2011

"The New Math: College Return on Investment," Bloomberg Business Week Special Report, April 2011 ---
http://www.businessweek.com/bschools/special_reports/20110407college_return_on_investment.htm?link_position=link1

The Case Against College Education ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#CaseAgainst

The Sad State of Governmental Accounting ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting


"What if the NFL Played by Teachers' Rules? Imagine a league where players who make it through three seasons could never be cut from the roster," by Fran Tarkington (NFL Hall of Fame Quarterback) , The Wall Street Journal, October 3, 2011 ---
http://online.wsj.com/article/SB10001424052970204226204576601232986845102.html?mod=djemEditorialPage_t

Imagine the National Football League in an alternate reality. Each player's salary is based on how long he's been in the league. It's about tenure, not talent. The same scale is used for every player, no matter whether he's an All-Pro quarterback or the last man on the roster. For every year a player's been in this NFL, he gets a bump in pay. The only difference between Tom Brady and the worst player in the league is a few years of step increases. And if a player makes it through his third season, he can never be cut from the roster until he chooses to retire, except in the most extreme cases of misconduct.

Let's face the truth about this alternate reality: The on-field product would steadily decline. Why bother playing harder or better and risk getting hurt?

No matter how much money was poured into the league, it wouldn't get better. In fact, in many ways the disincentive to play harder or to try to stand out would be even stronger with more money.

Of course, a few wild-eyed reformers might suggest the whole system was broken and needed revamping to reward better results, but the players union would refuse to budge and then demonize the reform advocates: "They hate football. They hate the players. They hate the fans." The only thing that might get done would be building bigger, more expensive stadiums and installing more state-of-the-art technology. But that just wouldn't help.

If you haven't figured it out yet, the NFL in this alternate reality is the real -life American public education system. Teachers' salaries have no relation to whether teachers are actually good at their job—excellence isn't rewarded, and neither is extra effort. Pay is almost solely determined by how many years they've been teaching. That's it. After a teacher earns tenure, which is often essentially automatic, firing him or her becomes almost impossible, no matter how bad the performance might be. And if you criticize the system, you're demonized for hating teachers and not believing in our nation's children.

Inflation-adjusted spending per student in the United States has nearly tripled since 1970. According to the Organization for Economic Cooperation and Development, we spend more per student than any nation except Switzerland, with only middling results to show for it.

Over the past 20 years, we've been told that a big part of the problem is crumbling schools—that with new buildings and computers in every classroom, everything would improve. But even though spending on facilities and equipment has more than doubled since 1989 (again adjusted for inflation), we're still not seeing results, and officials assume the answer is that we haven't spent enough.

These same misguided beliefs are front and center in President Obama's jobs plan, which includes billions for "public school modernization." The popular definition of insanity is doing the same thing over and over, expecting different results. We've been spending billions of dollars on school modernization for decades, and I suspect we could keep on doing it until the end of the world, without much in the way of academic results. The only beneficiaries are the teachers unions.

Some reformers, including Bill Gates, are finally catching on that our federally centralized, union-created system provides no incentive for better performance. If anything, it penalizes those who work hard because they spend time, energy and their own money to help students, only to get the same check each month as the worst teacher in the district (or an even smaller one, if that teacher has been there longer). Is it any surprise, then, that so many good teachers burn out or become disenchanted?

Perhaps no other sector of American society so demonstrates the failure of government spending and interference. We've destroyed individual initiative, individual innovation and personal achievement, and marginalized anyone willing to point it out. As one of my coaches used to say, "You don't get vast results with half-vast efforts!"

The results we're looking for are students learning, so we need to reward great teachers who show they can make that happen—and get rid of bad teachers who don't get the job done. It's what we do in every other profession: If you're good, you get rewarded, and if you're not, then you look for other work. It's fine to look for ways to improve the measuring tools, but don't let the perfect be the enemy of the good.

Continued in article


"A Short History of the Income Tax: One original sin was the separation of the corporate and personal tax, giving lawyers, accountants and the wealthy a chance to game the system," by John Steele Gordon, The Wall Street Journal, September 27, 2011 ---
http://online.wsj.com/article/SB10001424052970204422404576594471646927038.html?mod=djemEditorialPage_t

Whether the "millionaires and billionaires" are actually paying their fair share of taxes is a matter for the electorate to decide. After all, fairness is hardly an objective standard.

Before the modern era, however, the federal tax system was manifestly unfair by any reasonable standard, grossly biased in favor of the well off. Ironically, attempting to fix that unfairness is what has brought us to the present moment, with a federal tax system that is grotesquely complex, often arbitrary, and corrupted by mutual back-scratching between members of Congress and influential lobbyists.

After the Civil War, nearly all the wartime taxes—including the nation's first income tax—were repealed and the federal government relied mostly on the tariff for revenues. It provided the government with more than ample peacetime income. In 1882, the government had revenues of $403 million, but expenses were only $257 million, a staggering budget surplus of nearly 36%. The reason the tariff was so high was, ostensibly, to protect America's burgeoning industries from foreign competition.

Of course, the owners of those burgeoning industries—i.e., the rich—were greatly helped by the protection, which enabled them to charge higher prices and make greater profits than if they had had to face unbridled foreign competition.

But the tariff is a consumption tax, which is simply added to the price of the goods sold. And consumption taxes are inherently regressive. The poor, by definition, must spend all of their income on necessities and thus pay consumption taxes on all of their income. The rich, while living in luxury, bank most of their income and largely escape these types of taxes.

As the vast surpluses piled up in the Treasury, the political pressure to institute an income tax on the rich grew steadily. In 1894, with Democrat Grover Cleveland in the White House and Democratic majorities in both houses of Congress, a federal income tax became law. The new tax, however, was very different from the Civil War income tax, which had exempted only the poor. The new one hit only the rich, imposing a 2% tax on incomes above $4,000. Less than 1% of American households in 1894 met that income threshold.

Needless to say, the tax was attacked in court, in a 1895 test case called Pollack v. Farmers' Loan & Trust. The case turned on the definition of a "direct tax," which the Constitution requires to be apportioned equally among the states according to population, something obviously impossible with an income tax.

The court split 4-4 as to whether the new income tax was constitutional. One member of the court, Justice Howell Jackson of Tennessee, was absent because of illness (and died less than three months later). But with the case drawing enormous public attention, the court agreed to reargue it and Justice Jackson rose from his deathbed to hear it.

Jackson was known to favor the income tax and it was assumed that it would now be upheld 5-4. But one of the other justices switched his vote (the opinion is unsigned and we don't know by whom or why) and it was voted down 5-4.

The income tax was dead. But the pressure to tax the incomes of the largely untaxed rich only increased, especially as the Progressive wing of the Republican Party grew in strength under Theodore Roosevelt. By the time of the administration of President William Howard Taft (1909-13) the pressure was becoming overwhelming. One representative suggested simply repassing the 1894 tax bill and daring the Supreme Court to overturn it a second time.

That idea horrified Taft, who revered the court. He feared that it would weaken its position as the final arbiter of the Constitution. He came up with a brilliant, very lawyerly, alternative: He proposed a constitutional amendment to legalize a personal income tax, while meanwhile imposing a tax on corporate profits. In the early 20th century such a tax was, in effect, a tax on the rich. As the corporate income tax is technically an excise tax, there was no constitutional problem. Taft's solution was implemented and in 1913 the 16th Amendment was declared ratified, just as Taft was leaving office.

The new president, Woodrow Wilson, and the strongly Democratic Congress promptly passed a personal income tax. It kicked in at 1% on incomes above $3,000 (a comfortable upper middle-class income at the time) and reached 7% on incomes over $500,000. But there were many deductions, bringing the effective tax rates down sharply from the marginal ones—a feature of the tax system ever since.

Unfortunately the corporate income tax, originally intended as only a stopgap measure, was left in place unchanged. As a result, for the last 98 years we have had two completely separate and uncoordinated income taxes. It's a bit as if corporations were owned by Martians, otherwise untaxed, instead of by their very earthly—and taxed—stockholders.

This has had two deeply pernicious effects. One, it allowed the very rich to avoid taxes by playing the two systems against each other. When the top personal income tax rate soared to 75% in World War I, for instance, thousands of the rich simply incorporated their holdings in order to pay the much lower corporate tax rate.

There has since been a sort of evolutionary arms race, as tax lawyers and accountants came up with ever new ways to game the system, and Congress endlessly added to the tax code to forbid or regulate the new strategies. The income tax act of 1913 had been 14 pages long. The Revenue Act of 1942 was 208 pages long, 78% of them devoted to closing or defining loopholes. It has only gotten worse.

The other pernicious consequence of the separate corporate and personal income taxes has been a field day for demagogues and the misguided to claim that the rich are not paying their "fair share." Warren Buffett recently claimed that he had paid only $6.9 million in taxes last year. But Berkshire Hathaway, of which Mr. Buffett owns 30%, paid $5.6 billion in corporate income taxes. Were Berkshire Hathaway a Subchapter S corporation and exempt from corporate income taxes, Mr. Buffett's personal tax bill would have been 231 times higher, at $1.6 billion.

Just as in the late 19th century, the tax code is now hopelessly arbitrary and unfair. It requires a complete overhaul.

Mr. Gordon is the author of "An Empire of Wealth: The Epic History of American Economic Power" (HarperCollins, 2004).

"Hunting the rich:  The wealthy will have to pay more tax. But there are good and bad ways to make them do so," The Economist, September 24, 2011, Page 13 ---
http://www.economist.com/node/21530104

In general, this newspaper’s instincts lie with small government and against ever higher taxation to pay for an unsustainable welfare state. We reject the notion, implicit in much of today’s debate, that higher tax rates on the wealthy are justified because of the finance industry’s role in the crunch: retribution is a poor rationale for taxation. Nor is the current pattern of contribution to the public purse obviously “unfair”: the richest 1% of Americans pay more than a quarter of all federal taxes (and fully 40% of income taxes), while taking less than 20% of pre-tax income. And knee-jerk rich-bashing, like Labour’s tax hike, seldom makes for good policy. High marginal tax rates discourage entrepreneurship, and no matter how much Mr Obama mentions “millionaires and billionaires”, higher taxes on them alone cannot close America’s deficit.

So the debate is poisonously skewed. But there are three good reasons why the wealthy should pay more tax—though not, by and large, in the ways that the rich world’s governments currently propose.

First, the West’s deficits should not be closed by spending cuts alone. Public spending should certainly take the brunt: there is plenty of scope to slim inefficient Leviathan, and studies of past deficit-cutting programmes suggest they work best when cuts predominate. Britain’s four-to-one ratio is about right. But, as that ratio implies, experience also argues that higher taxes should be part of the mix. In America the tax take is historically low after years of rate reductions. There, and elsewhere, tax rises need to bear some of the burden.

Second, there is a political argument for raising this new revenue from the rich. Spending cuts fall disproportionately on the less well-off; and, even before the crunch, median incomes were stagnating. Meanwhile, globalisation has been rewarding winners ever more generously. Voters’ support for ongoing austerity depends on a disproportionate share of any new revenue coming from the wealthy.

But how? So far most governments have focused on raising marginal income-tax rates, something most rich people respond to quickly (see article). Capitalists shift their income into less-taxed forms, such as capital gains; they move; they work less; they take fewer entrepreneurial risks. Even if it is hard to be sure how big these effects are, the size of the very top level seems to matter, so Britain’s 50% rate is more dangerous than Mr Obama’s proposal to raise America’s top federal income-tax rate from 35% to 39.6%. Somebody earning $1m pays more tax in London than any other financial capital—madness for a place with so many mobile rich people. The excuse that it was worse in the 1970s hardly inspires confidence.

Simpler, bolder, better

Given the rich world’s need for faster growth, governments should be wary of sharp tax increases—especially since they are unnecessary. Indeed, the third argument for raising more money from the rich is that it can be done not by increasing marginal tax rates, but by making the tax code more efficient.

The scope for doing so is most obvious in America, which relies far more than other countries on income taxes and has a mass of deductions on everything from interest payments on mortgages to employer-provided health care, so taxes are levied on a very narrow base. Getting rid of the deductions would simplify the code and raise as much as $1 trillion a year. Since the main beneficiaries of the deductions are the wealthy, richer folk would pay most of that. And since marginal rates would be untouched (or reduced), such a reform would do less to discourage them from creating wealth.

In Europe, where tax systems are more efficient, one option would be to shift more of the burden from income to property, which would collect more from the rich but have less impact on their willingness to take risks. The “mansion tax” proposed by Britain’s Liberal Democrats would thus do less damage than the 50% rate. And on both sides of the Atlantic there is room to narrow the gap between tax rates on salaries and bonuses and those on dividends and capital gains. That gap explains why Mr Buffett, most of whose income comes from capital gains and dividends, has a lower average tax rate than his secretary. It is also the one hedge funders and private-equity people have exploited to keep the billions they rake in.

Continued in article


"Granholm's Perfect Bad Example:  What Governor Jennifer Granholm's Michigan tells us about President Barack Obama's America," The Wall Street Journal, September 27, 2011 ---
http://online.wsj.com/article/SB10001424052970204422404576594953193376710.html?mod=djemEditorialPage_t

Some politicians give us failure. Some politicians give us failure mixed with spectacle. Once in a generation, a politician gives us failure and misunderstanding so colossal that his or her bad example rises to the level of public service.

To this elite few belongs Jennifer Granholm.

In the Michigan she governed for eight long years, the roll call of despair is not in dispute. On her watch, the state's ranking in per capita GDP plummeted to 41st place from 24th, Detroit's population shriveled to its lowest level since 1910, and Michigan earned the dubious distinction of being the only state to suffer a net out-migration this past decade.

These refugees now include Ms. Granholm herself. Apparently her "Cool Cities" initiative—one of her many efforts that was supposed to halt Michigan's brain drain—wasn't cool enough. She and her husband have moved to Berkeley, where they are both teaching.

With this kind of record, most politicos might take refuge in prudence. Not Ms. Granholm. Today she is running around the nation selling a book and a message. The book is called "A Governor's Story: The Fight for Jobs and America's Economic Future." Her message—that Granholm's Michigan shows the way forward—has been taken seriously in all the places you might expect: the New York Times and Comedy Central's "The Daily Show."

At the top of Ms. Granholm's claims is that she knows that low taxes and lean government are no prescription for growth because she tried supply-side and found it wanting. To prove her point, her appendix lists 99 business and 17 individual "tax cuts" she approved. She notes likewise that both state spending and the number of state employees dropped during her time.

In fact, almost all Ms. Granholm's "tax cuts" are tax credits or other forms of tax preferences. A less delicate way of saying this is that far from reducing rates for everyone, Ms. Granholm played favorites. That meant a more complicated tax code where trendy businesses (green jobs, anyone?) that would fail without subsidies are effectively underwritten by non-favored businesses and other taxpayers.

A better indication of Ms. Granholm's tax record would thus include the $1.4 billion tax increase in business and personal taxes in 2007, not to mention the tax hike she tried to inflict on her way out. Much the same might be said of her claims to fiscal discipline. Far from an effort to re-engineer government as Mitch Daniels did in neighboring Indiana, Ms. Granholm's cuts were forced by the collapse in revenues resulting from the state's failing economy.

In fairness, the thing Ms. Granholm is most blamed for is likely the one most out of her control: the loss of an astounding 630,000 Michigan jobs over her tenure. She is certainly right that most of these losses were the result of larger economic trends and events. More contestable is her assertion that her industrial policy—throwing state and federal dollars at pet progressive industries such as advanced battery technology—is the answer.

Michael LaFaive of Michigan's free-market Mackinac Center puts it this way: "What Ms. Granholm's state investments were best at producing were press releases claiming thousands upon thousands of jobs—in the future." Thus her most infamous prediction, when in 2006 she assured the people of Michigan this: "In five years, you're going to be blown away by the strength and diversity of Michigan's transformed economy."

Michiganders are still waiting. In the teeth of competition that is keener than ever, of changes in technology that are coming faster than ever, and with a diffusion of knowledge and expertise that is vaster than ever, Ms. Granholm's conclusion is this: Politicians and their bureaucrats will channel capital better than a market representing tens of millions of individual investor decisions.

This logic can lead to embarrassment. A year and a half before Americans learned about Solyndra, Gov. Granholm stood next to Flint businessman Richard Short at a press conference and declared that the $9.1 million in state tax credits that her government had awarded his renewable energy company would mean 765 jobs. The next day, Mr. Short was arrested.

Turns out Ms. Granholm's people had not known that their champion of green jobs was a convicted felon out on parole. Two months ago he was sentenced to prison after pleading no contest to making fraudulent statements on his application for the energy credits.

In the end, Ms. Granholm's argument is simply a form of the same economic narcissism that animates people who never lose the charming faith that they know best how to spend other people's money. In some ways, she intimates, her leadership was the precursor to hope and change. "It's remarkable how in sync we are," she quotes her communications director saying of the governor and Barack Obama.

Yes, indeed. If you liked Gov. Granholm's Michigan, you'll love President Obama's America.


"The Truth About Who Fights for Us:  In 2007, only 11% of enlisted military recruits came from the poorest U.S. neighborhoods.," by Ann Marlowe, The Wall Street Journal, September 27, 2011 ---
http://online.wsj.com/article/SB10001424053111903791504576587244025371456.html?mod=djemEditorialPage_t


"What’s the Best Way to Measure Poverty: Income or Consumption?" by Mathew Phillips, Freakonomics, September 14, 2011 ---
http://www.freakonomics.com/2011/09/14/whats-the-best-way-to-measure-poverty-income-or-consumption/

Yesterday we learned that 15.1% of Americans were living in poverty in 2010, the highest level since 1993, and up nearly 1 percentage point from 2009, when it was 14.3%. That data is based on an income measurement which shows that in 2010, 46.2 million Americans were living below the poverty line, defined as $22,314 a year for a family of four.

But income is just one way to measure poverty, and a particularly tricky (and narrow) way at that – so says Notre Dame economist and National Poverty Center research affiliate, James Sullivan, who believes that to measure poverty strictly by income fails to accurately reflect people’s true economic circumstances. Income alone ignores the effects of things like the Earned Income Tax Credit, Medicaid, food stamps, and housing subsidies. From a Notre Dame press release on Sullivan’s recent poverty research:

“Income received from food stamps, for example, grew by more than $14 billion in 2009. By excluding these benefits in measuring poverty, the Census figures fail to recognize that the food stamps program lifts many people out of actual poverty,” Sullivan says. “If these programs are cut back in the future, actual poverty will rise even more.”

Using income-based numbers only also overlooks the struggles of many Americans who are tightening their belts – those who are worried about losing their jobs or facing foreclosure, or those who devote a large chunk of their paychecks to paying off medical bills. The standard of living for these people is lower than their income would suggest.

In a recent paper, Sullivan and co-author Bruce D. Meyer of the University of Chicago, argue that consumption offers a more robust measurement of poverty than income. Their key point is that poverty, when measured correctly, has declined over time, which is contrary to official measurements. Here’s the full version of their paper. From the abstract:

This paper examines changes in the extent of material deprivation in the United States from the early 1960s to 2009. We investigate how both income and consumption based poverty have changed over time and explore how these trends differ across family types. Estimates of changes in poverty over the past five decades are very sensitive to how resources are measured. A poverty measure that incorporates taxes falls noticeably more than a pre-tax income measure. Sharp differences are also evident between the patterns for income and consumption based poverty. Income poverty falls more sharply than consumption poverty during the 1960s. The reverse is true for the 2000s, although in 2009 consumption poverty rises more than income poverty… Income based poverty gaps have been rising over the last two decades while consumption based gaps have fallen. We show that how poverty is measured affects the composition of the poor, and that the consumption poor appear to be worse off than the income poor.

Some quick highlights:

Here are three graphs from their paper demonstrating the differences between income-based measurements of poverty, and consumption based measurements over time:

Continued in article


"Million-Dollar Mascot And other ways to cut $1.4 trillion," The Wall Street Journal, September 21, 2011 ---
http://online.wsj.com/article/SB10001424053111904060604576572980844849252.html#mod=djemEditorialPage_t

ESPN college football analyst Lee Corso likes to dress up as a school mascot to show which team he's picking to win. Perhaps he'd be willing to serve his country in a similar way by choosing a mascot for the federal Department of Homeland Security. Turns out the feds have been creating various animated characters for materials intended to "prepare" kids for disasters, and Senator Ron Johnson (R., Wis.) reports that Washington could save $2.6 million over 10 years if the bureaucrats could simply settle on one mascot.

We trust Mr. Corso's impeccable judgment in selecting among Herman the Crab, Jett the Turtle and other worthies, and we also find compelling Mr. Johnson's new catalog of potential federal cost savings.

Going way beyond mascots, the Senator has identified $1.4 trillion in savings over 10 years for any Congressional "Super Committee" members looking to make sensible cuts on behalf of taxpayers. Reasonable people can argue over the details, but what's encouraging about the plan is that it shows how much leaner the federal government could be without even cutting back on services that many voters demand.

Relying heavily on the work of Oklahoma Senator Tom Coburn as well as independent groups like Third Way, Mr. Johnson has found impressive savings across federal operations. The biggest item takes $248 billion out of salaries for most federal workers, but no one gets fired or suffers a pay cut. The cuts are achieved through attrition and a pay freeze for civilians through 2015. Mr. Johnson reports that federal workers are now making 30% to 40% more in combined wages and benefits than comparable workers in the real economy. His plan therefore gives taxpayers a fighting chance to catch up with the public servants they're supporting.

The Johnson plan also has at least one element that President Obama should love: eliminating federal reviews on transportation projects whenever state and local rules meet or exceed federal standards. Cutting this duplicative red tape and streamlining approvals would save $50 billion. Mr. Obama should sign this—if we may borrow a phrase—right away.


"The Five Million Dollar Man How government unions rip off the taxpayer," by James Taranto, The Wall Street Journal, September 22, 2011 ---
http://online.wsj.com/article/SB10001424053111903703604576584881282113572.html?mod=djemEditorialPage_t

From the president's hometown comes an example of what he is actually supporting. The Chicago Tribune reports that an investigation it conducted with WGN-TV found "23 retired union officials from Chicago stand to collect about $56 million from two ailing city pension funds."

That's an average of $2.4 million each, and some will rake in even more. Dennis Gannon, a former president of the Chicago Federation of Labor, stands to collect some $5 million. In line for $4 million apiece are Liberato "Al" Naimoli, president of the Cement Workers Union Local 76, and James McNally, vice president of the International Union of Operating Engineers Local 150.

"Since the 1950s," the Trib explains, "city workers who take leaves of absence to work full time for unions have been able to remain in city pension funds if they choose. The time they spend at their union jobs counts toward their city pensions."

Union jobs, however, are far more lucrative than city jobs. Gannon's city salary was $56,000 a year; his union salary, $200,000. But he retired from his city job in 2004--at age 50, and 13 years after beginning a leave of absence. Between then and 2010, when he retired from the union, he collected both the $200,000 union salary and a $150,000 city pension.

How did the city end up paying him a pension nearly three times his salary? That's where things get interesting. Few labor leaders took city pensions, the Tribune reports, "until the law was changed in 1991 to base those workers' city pensions on their union salaries instead of their old city paychecks, dramatically boosting the amount they could receive"--a provision that "became law with no public debate among state legislators and, more importantly, no cost analysis."

And no accountability: "No one from either the state Legislature or city government will take credit for the law, which passed in 1991, and the process of drafting pension legislation in Springfield is so shrouded in secrecy that there's no way of knowing exactly whom to hold responsible."

And no possibility of reversal: "The state constitution says pension benefits cannot be diminished once they are earned."

"Gannon told the Tribune that he was only following the law in filing for a city pension," the paper reports. The scandal isn't that what they're doing is illegal but that it is legal.

This particular provision is unique to Obama's home state, the Tribune reports: "Pension experts from around the country say they've never heard of such a perk for union leaders." But unions have any number of perfectly legal ways to rip off the taxpayers. As we noted in July, the Wisconsin teachers union runs its own insurance company, the WEA Trust. Until Gov. Scott Walker's reforms took effect earlier this year, the union negotiated "collective bargaining" agreements obliging local school districts to pay above-market premiums for its health benefits.

And as The Daily's Jillian Melchior reported last month, state pension funds frequently make risky investments, knowing that if they don't pan out, taxpayers will have to make up the losses. What's more, the boards that manage these funds are stacked with union representatives and political appointees: "Because public unions are an influential constituency, they're inclined toward union priorities."

That is the system President Obama defended on Labor Day. And his support for it is not merely rhetorical. Both the 2009 stimulus and the recently proposed Stimulus Jr. include vast payments to states and localities--in effect, a federal taxpayer bailout for governments that have been so profligate with their own taxpayers' dollars. Some of that money, of course, gets kicked back as campaign contributions and independent expenditures to support the campaigns of Obama and other Democrats. It's all legal, but that doesn't mean it isn't a scam.

Continued in article


"How to Fight Black Unemployment: The tragedy of the failed stimulus is felt hard in minority communities. There's a better way," by Arthur Laffer, The Wall Street Journal, September 12, 2011 ---
http://online.wsj.com/article/SB10001424053111904836104576558590149858436.html?mod=djemEditorialPage_t

. . .

African-Americans are suffering inordinately in the Obama aftermath of the Bush Great Recession. While overall U.S. unemployment stands at 9.1%, black unemployment has jumped to 16.7%. Black teenage unemployment is bordering on 50%, and that figure doesn't even take into account "discouraged" workers, "involuntary" part-time workers and "underemployed" workers. But even these numbers don't tell the real story. They represent real people who are suffering deeply and have been suffering for a long, long time.

Behind these numbers are millions of lives discouraged and despondent. People who've lost their self-esteem and pride. The young who have given up on America and some of whom have even turned to crime. Scars are being made across a whole ethnic subset of America. Unemployment, underemployment and involuntary part-time employment represent the loss of a precious natural resource that can never be recouped. No one can feel good about himself if he's living on handouts from Uncle Sam. We as a nation can't wait until 2013 to address this issue.

Whether President Obama's base finds supply-side economics appealing or not, he should immediately join with all members of Congress from both parties to develop a full program for enterprise zones. And while enterprise zones are desperately needed in our inner cities, there are lots of areas in the hollows of Kentucky and West Virginia that need enterprise zones as well, not to mention barrios in California and New Mexico.

Enterprise zones should be areas that are geographically defined with exceptionally high concentrations of poverty, underachievement and unemployment. The policies applicable to enterprise zones should include:

A) For all employment within the enterprise zone of people whose principal residence is also the enterprise zone, there should be no payroll tax whatsoever, neither employer nor employee portions. The employer need not be headquartered in the enterprise zone to take advantage of the elimination of the employer's portion of the payroll tax. The locus of employment does have to be in the enterprise zone.

Don't for a moment think that this will be a budget buster. Right now there aren't many jobs in our inner cities anyway and the few dollars of tax revenues lost will be more than offset by reductions in welfare spending because people will have jobs and won't need welfare. The best form of welfare is still a good job.

B) Federal and state minimum wages must be suspended in the enterprise zone. If not for all employees, then at least for employees under 30. These young people need on-the-job training, and at the present minimum wage many of them aren't worth hiring. That is why they are unemployed.

Continued in article

Jensen Comment
These are not exactly untried programs. Some of the things Laffer proposes are failures from the start. A shiny factory in Camden is not going to do much for the rural unemployment in Mississippi and other parts of the deep south. Building a jet engine plant in Newark is not going to do a great deal for the surrounding tens of thousands of totally unskilled minorities having no skills to add more than janitorial and cafeteria services for the factory requiring machinists and engineers.

Planting urban ghettos with assembly factories paying wages lower than minimum wage is not going to do a whole lot for these workers who cannot lift themselves out of poverty at less than minimum wages.

The failed Renaissance Center in Detroit in a classic example where building luxury hotels in Detroit is not going to make them compete with tourist alternatives in Florida, California, the Caribbean, and Europe. Remember the scenes of the failed Flint Motor City Theme Center in the film Roger and Me.

It's probably too late to move Las Vegas to Detroit and not worth the cost since Las Vegas now has one of the highest unemployment rates in the United States.

We've found out that giving relatively nice and sturdy houses away for nothing does not do a whole lot for employment and real estate values in the ashes of Detroit. Few people want to live next to crack houses, gang centers, and whore houses. Who wants to send their children to inner Detroit schools?

The revival of luxury casinos in Atlantic City made poverty worse instead of better in the surrounding ghettos. San Antonio has a wonderful River Walk and downtown hotels and restaurants. It is very safe for tourists as long as they don't venture after dark outside the safety zone of the river's edge.

Building a red-brick and walled-in branch of Harvard University in East St. Louis won't do a whole lot for the surrounding illiterates who cannot pass admission tests.

We could probably move Lackland Air Force base to South Los Angeles, but this won't mean recruiting of more cadets from the tattooed, drug-invested surrounding gangs.

Of course this begs the question about what are better solutions to those solutions posed above by Laffer. If there were easy answers we would've had them in place long ago. Firstly, we have to face the fact that solving unemployment in rural Mississippi is different than solving unemployment in Camden, New Jersey.

Secondly we have to admit that what holds minorities back in modern times is less a problem of skin color than it is of ignorance and some cultural legacies such as the legacy of teen pregnancy in black and Latin cultures. Affirmative action schooling programs do little if the minority graduates are not genuinely equal in knowledge and skills because grading standards were lowered to let them graduate into a world where they can't compete.

More than half of the black and Latino students who take the state teacher licensing exam in Massachusetts fail, at rates that are high enough that many minority college students are starting to avoid teacher training programs, The Boston Globe reported. The failure rates are 54 percent (black), 52 percent (Latino) and 23 percent (white).
Inside Higher Ed, August 20, 2007 --- http://www.insidehighered.com/news/2007/08/20/qt

It might be better to build residential schools in poverty areas where private sector teachers and students from surrounding homes live in residence together at the schools.  The private sector education and teaching businesses would then profit handsomely for each graduate that can pass color-blind admission tests and skilled certification examinations such as examinations for plumbers, electricians, machinists, fire fighters, etc. Graduates can then go anywhere in the world to seek employment and higher education.

The above solution, however, fails with regards to students who do not have the aptitude, motivation, talent and good health (e.g. no drug addictions or gross obesity) needed to graduate from schools mentioned above. It does not solve the problem of teenage parents with three babies that have no care-giving grandparents. For these common hurdles in life I have no suggested solutions that have not already failed. I'm a strong believer in free birth control alternatives, but these alone are not enough in cultures where males control females with continuous pregnancies.

In any case, I think that public and private sector solutions to minority unemployment will do better with competency-based output criteria rather than simply throwing money at solutions that have failed time and time again. It will also help to toughen fraud prevention measures so that alternatives for getting though life without work (e.g., phony lifetime Social Security disability living). People that are able to work need incentives to work.


"Marx to Market:  The economic crisis has made the philosopher’s ideas relevant again, but the world shouldn’t forget what Marx got wrong," by Peter Coy, Business Week, September 14, 2011 ---
http://www.businessweek.com/magazine/marx-to-market-09142011.html 

. . .

Here’s the surprising thing, though: You don’t have to sleep in a Che Guevara T-shirt or throw rocks at McDonald’s to acknowledge that Marx’s thought is worth studying, grappling with, and possibly even applying to our current challenges. Many of the great capitalist thinkers did so, after all. Joseph Schumpeter, the guru of “creative destruction” who is a hero to many free-marketeers, devoted the first four chapters of his 1942 book, Capitalism, Socialism and Democracy, to explorations of Marx the Prophet, Marx the Sociologist, Marx the Economist, and Marx the Teacher. He went on to say Marx was wrong, but he couldn’t ignore the man.

As misguided as Marx was about many things, and as pernicious as his influence was in places like the U.S.S.R. and China, there are pieces of his (voluminous) writings that are shockingly perceptive. One of Marx’s most important contentions was that capitalism was inherently unstable. One only has to look at the headlines out of Europe—which is haunted by the specter of a possible Greek default, a banking disaster, and the collapse of the single-currency euro zone—to see that he was right. Marx diagnosed capitalism’s instability at a time when his contemporaries and predecessors, such as Adam Smith and John Stuart Mill, were mostly enthralled by its ability to serve human wants.

Marx has gotten an attentive reading recently from the likes of New York University economist Nouriel Roubini and George Magnus, the London-based senior economic adviser to UBS Investment Bank. Magnus’s employer, Switzerland-based UBS, is a pillar of the financial establishment, with offices in more than 50 countries and over $2 trillion in assets. Yet in an Aug. 28 essay for Bloomberg View, Magnus wrote that “today’s global economy bears some uncanny resemblances” to what Marx foresaw. (Personal opinion only, he noted.)

Consider the particulars. As Magnus notes, Marx predicted that companies would need fewer workers as they improved productivity, creating an “industrial reserve army” of the unemployed whose existence would keep downward pressure on wages for the employed. It’s hard to argue with that these days, given that the U.S. unemployment rate is still more than 9 percent. On Sept. 13 the U.S. Census Bureau released data showing that median income fell from 1973 through 2010 for full-time, year-round male workers aged 15 and up, adjusted for inflation. The condition of blue-collar workers in the U.S. is still a far cry from the subsistence wage and “accumulation of misery” that Marx conjured. But it’s not morning in America, either.

Marx loved to bash French economist Jean-Baptiste Say, who argued that general gluts cannot exist because the market will always match supply and demand. Marx argued that overproduction was in fact endemic to capitalism because the proletariat isn’t paid enough to buy the stuff that the capitalists produce. Again, that theory has lately been hard to dispute. The only way blue-collar Americans managed to maintain consumption in the last decade was by overborrowing. When the housing market collapsed, many were left with crippling debt. The resulting default nightmare is still playing itself out.

Admirers of Marx view all this with a rueful I-told-you-so. The radical geographer David Harvey, 75, has taught Marx’s Capital for 40 years at schools including Oxford University, Johns Hopkins University, and now the City University of New York Graduate Center. Harvey’s office, a block from the Empire State Building, is decorated with a silk-screen portrait of Marx, glowering from a bookcase. Harvey believes, as Marx did, that capitalists tend to sow the seeds of their own destruction. Unbridled capitalism tends toward wild excess, so complete deregulation is actually disastrous for it in the long run, the professor argues. “The Republican Party is en route to destroy capitalism,” Harvey says in a pleasant tone, “and they may do a better job of it than the working class could.”

But wait. What Marx and his acolytes underappreciated was capitalism’s power to heal itself. It may have been his fatal intellectual mistake. The Communist Manifesto said that when the workers’ revolution came, it would bring free public education for children and the abolition of “children’s factory labor in its present form.” And yet, as it turned out, the world didn’t require a proletarian revolution for those social reforms to occur; all it took was enlightened capitalism.

Doctrinaire Marxists love to say that the economic “base” determines and controls the sociopolitical “superstructure,” but the reverse can be true as well. Political leaders have corrected capitalism’s excesses again and again, as in President Teddy Roosevelt’s trustbusting campaign, President Franklin Roosevelt’s New Deal, and President Lyndon Johnson’s Great Society.

Now, once again, unbridled capitalism is threatening to undermine itself. The world’s biggest banks, financially weak but politically powerful, are putting the screws on borrowers in an attempt to rescue their own balance sheets. Likewise, creditor nations such as China and Germany are attempting to shift the pain of rebalancing onto debtor nations, even though squeezing them too hard threatens to cause an economic and financial disaster.

It’s time for another burst of enlightenment. In years past, Britain’s John Maynard Keynes and America’s Hyman P. Minsky (author of Stabilizing an Unstable Economy) did capitalism a service by diagnosing its tendency toward crisis and advising on ways to make things better. The sooner policymakers today “recognize we’re facing a once-in-a-lifetime crisis of capitalism,” as Magnus writes, “the better equipped they will be to manage a way out of it.” Grasping the ways in which Marx was right is the first step toward making sure that his predictions of capitalism’s downfall remain wrong.


"Obama’s Cap on Tax Deductions: Not What It Seems," by Howard Gleckman, Tax Policy Center, September 13, 2011 ---
http://taxvox.taxpolicycenter.org/2011/09/13/obama%E2%80%99s-cap-on-tax-deductions-not-what-it-seems/ 

It turns out that President Obama’s plan to limit the benefit of itemized deductions is much more than that. Not only would it reduce tax savings for mortgages, charitable gifts, high medical costs, and the like, it would also curb tax breaks for owners of municipal bonds, workers who buy health insurance, and those who earn money overseas. 

The $400 billion plan is the centerpiece of Obama’s $467 billion package of tax increases aimed at paying for the stimulus package he announced on Sept. 8. It would limit to 28 percent the value of many tax preferences for those whose adjusted gross income is more than $200,000 ($250,000 for couples). Today, these tax breaks are worth 35 cents on the dollar for someone in the top tax bracket. Under Obama’s plan they would be worth just 28 cents.  

The plan is often described as a cap on itemized deductions but in fact aims at a number of other politically popular tax breaks as well, including several exclusions that reduce the amount of income subject to tax.        

An across-the-board cap on the benefit of deductions and the like is often seen as rough justicea way to tackle the Revenue Code’s trillion dollars in tax expenditures without  fighting over each one. The theory: It is an easier political lift to curb such popular breaks as the mortgage interest deduction through a broad reduction of  all subsidies than to fight the powerful housing industry head-on.

But Obama does pick and choose the preferences he wants to target. He nails all itemized deductions, all right, but he also goes after some–but not all–above the line deductions. Of the roughly two dozen write-offs available to those who take the standard deduction, Obama targets just eight, including health insurance for the self-employed, medical savings accounts, health savings accounts, and some higher education expenses.

He also reduces the benefit of two other hot-button breaks—the tax exclusions for municipal bond interest and the value of employer-sponsored health insurance. In other words, for those making more than $200,000, some muni bond interest and some of the value of their medical coverage would be taxed.     

However, Obama would protect other exclusions, including those for retirement savings. Picking winners and losers this way is likely to defeat any claims of rough justice and make passing the plan that much tougher.

And on the merits, some of his choices are dubious. For instance, nearly all mainstream economists believe Congress should fix the tax treatment of health insurance costs. Today, the income tax exclusion perversely gives the biggest benefit to those who make the most money and the smallest to those who earn the least and need the most help paying for insurance.

Continued in article

Jensen Comment
Since higher income taxpayers buy a larger share of tax exempt bonds, this Obama plan could significantly raise the cost of capital for  towns, cities, counties states and school districts. Thus some of the added Federal revenue in reality is taken from towns, cities, counties states and school districts where poor and middle class pay sales taxes and property taxes directly or indirectly when they pay for rental housing. It's naive to think that increases in income taxes of the rich do not, in least in part, come out of the incomes of the poor and the middle class.

Sneaky isn't it!
For example, nearly half the taxpayers in the United States pay no Federal income tax. But they do pay sales and property taxes in one way or another such that creating less demand for tax exempt bonds is a way to transfer part of incomes of the poor to the Federal government even if the poor still pay zero amounts on their Federal tax returns. The outflow is buried in their increased rents and cash register sales taxes. Sneaky isn't it!

Investors who make slightly less than $200,000 but have substantial portions of their portfolios in in long-term tax exempt bonds may benefit from the annual higher returns on rolled-over of matured bonds resulting from this Obama tax-the-rich proposal. Sneaky isn't it! 

Although I favor raising taxes at all income levels with much higher marginal rates for the wealthy, keep in mind that there are limits. A close friend in Sweden argued that at one point for certain wealthy Swedes like him the marginal tax rate exceeded 100% --- which has to really discourage both working and investing risk capital.


In the 1970s and 1980s economic growth in Sweden was very low compared to other Western European nations, and much of this is attributed to high marginal tax rates (80+%) on workers in general and even higher for wealthy Swedes, many of whom shifted their wealth and even themselves out of Sweden ---
http://en.wikipedia.org/wiki/Sweden

 
A bursting real estate bubble caused by inadequate controls on lending combined with an international recession and a policy switch from anti-unemployment policies to anti-inflationary policies resulted in a fiscal crisis in the early 1990s.] Sweden's GDP declined by around 5%. In 1992, there was a run on the currency, with the central bank briefly jacking up interest to 500%.


The response of the government was to cut spending and institute a multitude of reforms to improve Sweden's competitiveness, among them reducing the
welfare state and privatising public services and goods. Much of the political establishment promoted EU membership, and the Swedish referendum passed with 52% in favour of joining the EU on 13 November 1994. Sweden joined the European Union on 1 January 1995.


Marginal
Tax Rates by Country ---
http://www.nationmaster.com/graph/tax_hig_mar_tax_rat_ind_rat-highest-marginal-tax-rate-individual


By 2009, Sweden had dropped its marginal tax rate of well over 80% to 57%. This still leaves Sweden with the third-highest marginal tax rate. At a marginal tax rate of 35%, the United States is tied with many nations at Rank 37. The reason almost half of U.S. taxpayers, many of whom are well above the poverty level, pay zero or very low income tax is that there are so many ways to avoid or defer income taxes, especially with all the newer types of credits available in the revised U.S. Tax Code.


For example, I live quite well and am able to save a great deal of income taxes with energy credits and by having a substantial portion of my life savings in tax exempt bonds that over the past few years have earned a surprisingly high return in a Vanguard Insured Tax Exempt Mutual Fund that also offers instant liquidity (by check) if I need to withdraw funds.


Naive liberals want to eliminate tax exempt interest altogether or greatly increase the alternative minimum tax. However, this gets tricky if these actions clobber the cost of capital of school districts, towns, cities, counties, and states.


Keep in mind that wealthy people (who have much more savings than me) and some comfortable middle class taxpayers (like me) are achieving tax breaks by providing lower cost of capital to school districts, towns, cities, counties, and states by investing in somewhat risky and lower yielding tax exempt bonds.. It's not so simple to eliminate some income tax breaks without severe social and economic, actually dire, consequences on poor and middle class people in the U.S.


Sometimes what appears to be a raising of income taxes is merely a shifting of taxes such as when huge and painful increases on a state's cost of capital are passed to its more regressive sales and property taxes and apartment rentals.It will be very tough if school districts, towns, cities, counties, and states must compete head-to-head in bond markets with corporations.



The problem with tax exempt bonds is that there are gazillions of dollars invested in these bonds such that even small increases in tax-exempt cost of capital can clobber citizens in need of schools, road repairs, welfare, etc.

"The Preferential Treatment of Employer-Provided Health Care," by Paul Caron, TaxProf Blog, September 17, 2011 ---
http://taxprof.typepad.com/

Benjamin D. Gehlbach (J.D. 2011, Catholic), Note, The Preferential Treatment of Employer-Provided Health Care: Time for a Change?, 27 J. Contemp. Health L. & Pol'y:

This Note argues that the current treatment of employer-provided health insurance is inequitable and needs reform in order to drive down overall health care costs and to provide revenue for other provisions of the ACA (or for a replacement, should repeal be successful), or alternatively, to help bring down the budget deficit. Part II examines the history and scope of the exclusion, as well as the rationales advanced prior to its adoption. Part III studies criticisms of the exclusion to understand better the weaknesses of the current system, including job lock, excess insurance, and loss of revenue. Part IV evaluates some of the proposals for changing the current exclusion, including those proposed by members of Congress and by outside policy groups. Some of these proposals include repealing the exclusion, capping the exclusion based on income or value of the insurance policy, and providing new tax incentives altogether. Part V argues that the best option for reforming this flawed system is to cap the exclusion based on income and the cost of the insurance plan. A cap on the exclusion would accomplish the dual objectives of bringing overall health care costs down and providing necessary revenue to finance other provisions of the ACA or its replacement, or alternatively, to reduce the deficit. In addition, a cap would not create some of the drawbacks of the other proposals

Bob Jensen's threads on health care are at
http://www.trinity.edu/rjensen/Health.htm


Teaching Case
From The Wall Street Journal Accounting Weekly Review on September 16, 2011

Treasury Weighs New Tax Scheme
by: Damian Paletta and John D. McKinnon
Sep 10, 2011
Click here to view the full article on WSJ.com
 

TOPICS: Corporate Tax, Financial Reporting, Financial Statements, Segment Analysis, Tax Laws, Tax Policy, Taxation

SUMMARY: "The Treasury Department is considering a proposal to eliminate some but not all taxes on the overseas profits of U.S. multinational companies...The Treasury plan under consideration would create what officials refer to as a "tough" territorial system...." The plan is designed to solve the problem stemming form the fact that our current "... system of taxing overseas profits has had the unintended consequence of discouraging companies from bringing earnings back to the U.S." the "tough" version of the territorial system is designed to avoid the problem with "...some versions of 'territorial' that simply incentivize multinationals to create jobs overseas instead of here [in the U.S.]...."

CLASSROOM APPLICATION: The article may be used in a corporate tax class to discuss repatriating overseas profits and the policy reasons for our current system of taxing worldwide profits. It also may be used in a financial reporting class discussing segment and geographic earnings disclosures since the article refers to that information--as quoted by the Business Roundtable that, "in 2009, U.S. firms in the S&P 500 that reported foreign earnings had 55% of their income generated overseas." Finally, the related article brings in the implications for U.S. companies' cash balances.

QUESTIONS: 
1. (Advanced) Summarize how U.S. corporate tax law currently taxes profits earned by U.S. multinational firms. In your answer, compare the treatment of foreign branches versus foreign corporations and include a description of the foreign tax credit.

2. (Introductory) Define the terms "global taxation system" and "territorial taxation system" in relation to corporate tax. Which of these terms summarizes the current U.S. tax system you described in answer to question 1 above?

3. (Introductory) What is the unintended consequence of our U.S. tax law provision for a deferral provision on earnings by foreign corporations? You may refer to the related article to answer this question.

4. (Advanced) How would the U.S. Treasury Department proposal relieve some of this unintended consequence of the current U.S. tax law? How might that relief help with the high unemployment in our current U.S. economy?

5. (Introductory) Will this potential change have an impact on total tax revenues paid by corporations with overseas profits? According to the article, how is the answer to this question being assessed?

6. (Advanced) What is the Business Roundtable? What information about overseas earnings does this group report?

7. (Advanced) From where in U.S. companies' financial statements could the Business Roundtable obtain the information about foreign earnings? What authoritive accounting guidance requires this financial statement disclosure? In your answer, provide a reference to your source.

8. (Advanced) Do you think that the objective of the accounting requirements to disclose foreign earnings information is to assess the impact of potential tax law changes such as this one currently being considered? Support your answer with references to authoritative accounting literature.
 

Reviewed By: Judy Beckman, University of Rhode Island
 

RELATED ARTICLES: 
Why Investors Can't Get More Cash Out of U.S. Companies
by Jason Zweig
Feb 19, 2011
Page: A1

"Treasury Weighs New Tax Scheme," by: Damian Paletta and John D. McKinnon, The Wall Street Journal, September 10, 2011 ---
http://online.wsj.com/article/SB10001424053111904103404576561020226498738.html?KEYWORDS=Treasury+Weighs+New+Tax+Scheme

The Treasury Department is considering a proposal to eliminate some but not all taxes on the overseas profits of U.S. multinational companies, a central element of the administration's broader plans to overhaul the corporate-tax code, according to two people familiar with the deliberations.

U.S. businesses have pushed hard to exempt all overseas earnings from U.S. taxes, claiming the current system puts them at a disadvantage to foreign competitors.

The taxation of overseas income is a political hot potato. Liberals and trade unions have warned that eliminating U.S. taxes on overseas earnings could encourage businesses to shift operations and jobs overseas. Conservatives and businesses, meanwhile, could be disappointed that the proposal from the Obama administration, which is still in the discussion stage, doesn't go far enough.

The U.S. is rare among major industrial powers in maintaining a global taxation system, which often subjects the overseas earnings of companies to U.S. levies after they've been taxed by their overseas hosts. Most large countries primarily tax domestic earnings, in what is known as a territorial taxation system.

The Treasury plan under consideration would create what officials refer to as a "tough" territorial system, which would shield some overseas profits from U.S. taxes. A key issue is what kind of profits would be excluded. The details of the plan couldn't be learned.

The provision is part of a broader Treasury rewrite of the corporate-tax code that has been in the works for months. The rewrite could have a major impact on U.S. corporations. It is expected to include a significant cut from the current 35% corporate-tax rate and changes to various deductions that are a staple of American corporate finance.

The White House had hoped to release its overall proposal in May or June, but shelved it after the debt-ceiling debate consumed Washington. Treasury officials intend to go public with the plan sometime in the fall. Any changes would require congressional approval. The chances of enactment as the 2012 election season heats up are slim.

A Treasury Department spokeswoman declined to comment, saying no final decisions have been made.

The system of taxing overseas profits has had the unintended consequence of discouraging companies from bringing earnings back to the U.S. That is because the U.S. allows companies to postpone federal tax on their overseas earnings indefinitely, as long as the money remains offshore. U.S. multinationals have more than $1 trillion in profits parked overseas, according to some estimates.

The goal of the hybrid approach under consideration is to prevent companies from restructuring their businesses in a way that would shift U.S. jobs to other countries by concentrating assets or businesses in countries with lower tax rates.

"There are some versions of 'territorial' that simply incentivize multinationals to create jobs overseas instead of here, and that's a version we want to avoid," said Jared Bernstein, a former economic adviser to Vice President Joe Biden who is now at the liberal-leaning Center on Budget and Policy Priorities.

A territorial tax system would be a big win for U.S. multinationals. That includes many companies in the high-tech and pharmaceutical sectors, as well as consumer-goods makers. Large domestic companies such as utilities and retailers would prefer that overall tax rates be lowered, setting up a clash of priorities within the world of U.S. business.

Because the White House wants any possible revamp to raise the same amount of money as the current system, domestic companies could see their tax breaks crimped to compensate for reduced revenues from taxing overseas profits. But multinationals could be concerned if a tough territorial system raised their tax burdens instead.

"We would favor a territorial system that brings the U.S. in line with those adopted by other developed countries," said David Lewis, vice president of global tax at Eli Lilly & Co. "However, the inclusion of limits or other restrictions in a U.S. territorial regime that disfavor U.S. companies versus their foreign competitors would be counterproductive."

In 2009, U.S. firms in the S&P 500 that reported foreign earnings had 55% of their income generated overseas, according to the Business Roundtable.

On Aug. 12, Barack Obama summoned chief executives from some large U.S. companies to the White House to sound them out on ideas for his jobs proposal. Xerox Corp. chief executive Ursula Burns pressed him to include corporate-tax simplification and a territorial tax system, according to people familiar with the meeting.

A partial move towards a territorial system could be used by the White House as an olive branch to U.S. corporations, who have battled the administration over a range of regulatory and tax issues.

Continued in article


Sneaky isn't it!
After I wrote Wednesday's module about the (sneaky) harm that limiting tax exempt income for the rich can do to poor people,  towns, cities, counties states and school districts, I found it interesting that the WSJ also picked up on this theme on the very same day although I did not  read the following article about a Harvard University study until Thursday.

"A Blue-State Bailout in Disguise:  Our new study shows that under the Obama jobs bill, debt-ridden states will get another big handout," by Paul E. Peterson and Daniel Nadler, The Wall Street Journal, September 14, 2011 ---
http://online.wsj.com/article/SB10001424053111904353504576568352231645730.html?mod=djemEditorialPage_t

Mr. Peterson, a senior fellow at the Hoover Institution, is the director of Harvard's Program on Education Policy and Governance, where Mr. Nadler is a research fellow. The study mentioned in this op-ed is available at www.ksg.harvard.edu/pepg

Last Thursday, the president urged Congress to pony up roughly $200 billion in taxpayer money to "provide more jobs for teachers [and] more jobs for construction workers" and more money to carry out other state and local activities. He urges Congress to spend this money even after handing out hundreds of billions of dollars for similar purposes as part of the 2009 stimulus package, as well as a score and more billion dollars again in 2010.

These vast contributions to the coffers of state and local governments, though pitched as a jobs bill, are in reality the latest in a series of bailouts for debt-ridden state and local governments. They are of special benefit to states in the blue regions of the country where the president's most fervent supporters reside.

In many blue states, legislators have copied the politicians in Washington by running up state debts to extraordinary levels. Nationwide, state debt is running around $3 trillion. If unfunded pension liabilities are factored in, estimated liabilities leap forward by another $1 trillion to $3 trillion, depending on the optimism of the assumptions made.

The bond market has taken notice. Before the 2008 financial crisis, state sovereign debt was just about the safest place to invest. Because investors did not pay taxes on the interest, states were able to borrow money at rates below those paid for federal securities. With the onset of the financial crisis, not only did borrowing costs rise across the board, but differences in interest rates among states widened dramatically. Bond holders concluded that some states, like Greece, had been extraordinarily profligate and, even worse, lacked the will to rein in their expenditures.

In a new study at Harvard's Program on Education Policy and Governance, we discovered why the Obama administration is so interested in helping out the states. States with a bluish hue—that is, states with legislatures that are heavily Democratic and have a highly unionized public-sector work force—must pay interest rates that are often an extra half a percentage point higher than states with a reddish coloring.

Specifically, a 20 percentage-point increment in either the Democratic share of the state legislature or a comparable increase in the share of the public work force that is unionized drives up interest rates by nearly a half a percentage point on a five-year security note. That amount is nontrivial. In Obama's home state of Illinois, it is costing governments over $700 million annually.

The impact of these political factors on interest rates is in addition to the impact of standard economic factors, such as a state's unemployment rate, its gross domestic product growth, and its debt-to-GDP ratio, all of which are themselves shaped in part by the state's political climate.

In short, the bond market has concluded that the more unionized the state and the bluer its political coloring, the riskier it is to hold bonds marketed by that state.

States will face even higher interest rates if the president's proposed limit on the deductibility of state and municipal bond interest income (to help pay for the jobs plan) is enacted. If the interest is no longer deductible, investors will demand a higher rate of return for buying bonds, and state calls for more federal aid will intensify.

Federal rescue of states is a dramatic departure from past practice. State bankruptcies date back to the 1840s when, amid a financial crisis, Pennsylvania, Michigan, Illinois and five other states discovered they had invested too heavily in infrastructure. The last state bankruptcy was in Arkansas during the 1930s. But overall the instances were few; in each case the federal government refused to come up with a fix.

Bankrupt states paid the price, but for the country as a whole, a system of fiscally sovereign states has proven incredibly beneficial to the nation's economic well-being. Every state is responsible for its own police, fire, schools, transport and much more, and most of the time they do reasonably well. If they manage their affairs so as to attract business, commerce and talented workers, states prosper. If states make a mess of things, citizens and businesses vote with their feet, marching off to a part of the country that works better.

It is this exceptional federalist system that helped drive the rapid growth of the American economy throughout the first two centuries of the country's history. Because state and local governments competed with one another for venture capital, entrepreneurial talent and skilled workers, governments generally had to be attentive to the needs of both citizens and commerce.

When it comes to fiscal sovereignty, U.S. federalism is exceptional. Hardly any other country in the world has anything like it. Only Switzerland and Canada—two nations that aren't doing that badly these days—come close.

But federal fiscal bailouts put our federal system at risk. In essence, the national government is acting as if states are too big to fail. In the next financial crisis, the federal government may decide that states need to be treated like General Motors or, at least, be given ever bigger handouts of the kind the Obama administration seems committed to making.

But if the federal government is going to tacitly assume responsibility for state debts, then those $3 trillion in sovereign state debt must be added to the $14 trillion national debt that has already caused grave concern, pushing the current U.S. debt into the danger zone. Even if pension liabilities are ignored, the combined federal-state-local debt runs in excess of 120% of GDP.

The costs go beyond dollars and cents. The more often the federal government bails out the states, the more Washington bureaucrats will insist on regulating state and local affairs. At some point the United States will see the end of state fiscal sovereignty and the demise our federal system of government.

Continued in article


"Biden, Axelrod Send Conflicting Messages on New Stimulus," by Kyle Olson, Townhall, September 17, 2011 ---
http://townhall.com/columnists/kyleolson/2011/09/17/biden,_axelrod_send_conflicting_messages_on_new_stimulus

. . .

The two national teachers’ unions – the National Education Association and American Federation of Teachers – recently hosted a closed-media conference call with Vice President Biden to rally support for Obama’s “American Jobs Act.”

According to a recording first revealed at PublicSchoolSpending.com, Biden told the audience:

“Nobody is saying this [plan] isn’t positive for the economy. We’re ready to compromise with the Republicans. But only compromise on things if they have a better way. …”

But less than 24 hours later, Campaign Manager David Axelrod appeared on Good Morning America and told host George Stephanopolous that “the package works together.”

“So it’s all or nothing,” Stephanopolous stated, attempting to pin Axelrod down. Not answering the question (shock!), Axelrod responded, “We want them to act now on this package. We’re not in a negotiation to break up the package – it’s not an ala carte menu.”

In other words, no, they’re not willing to compromise. Take it or leave it, America.

So not only is the Obama administration bereft of any fresh ideas about how to fix the economy, it can’t even clearly state its position on compromising with Republicans and skeptical Democrats.

To paraphrase Johnny Paycheck, America should tell Axelrod to take his jobs package and shove it.

Continued in article

 


"When Health Insurance is Free," by John C. Goodman, Townhall, September 10, 2011 ---
http://townhall.com/columnists/johncgoodman/2011/09/10/when_health_insurance_is_free

Did you know that an estimated one of every three uninsured people in this country is eligible for a government program (mainly Medicaid or a state children’s health insurance plan), but has not signed up?

Either they haven’t bothered to sign up or they did bother and found the task too daunting. It’s probably some combination of the two, and if that doesn’t knock your socks off, you must not have been paying attention to the health policy debate over the past year or so.

Put aside everything you’ve heard about Obama Care and focus on this bottom line point: going all the way back to the Democratic presidential primary, Obama Care was always first and foremost about insuring the uninsured. Yet at the end of the day, the new health law is only going to insure about 32 million more people out of more than 50 million uninsured. Half that goal will be achieved by new enrollment in Medicaid. But if you believe the Census Bureau surveys, we could enroll just as many people in Medicaid by merely signing up those who are already eligible!

What brought this to mind was a series of editorials by Paul Krugman and Health Affairs blog and at my blog) asserting that government is so much more efficient than private insurers. Can you imagine Aetna or UnitedHealth Care leaving one-third of its customers without a sale, just because they couldn’t fill out the paperwork properly? Well that’s what Medicaid does, day in and day out.

Put differently, half of everything Obama Care is trying to do is necessary only because the Medicaid bureaucracy does such a poor job — not of selling insurance, but of giving it away for free!

Writing in Health Affairs the other day, health policy guru Alain Enthoven and health care executive Leonard Schaeffer revealed some of the gory details of what people encounter when they do try to sign up for free health insurance from Medi-Cal (California Medicaid) in the San Diego office:

Continued in article

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


 

"Groupon, Zynga and Krugman's Frothy Valuations," by Jeff Carter, Townhall, September 2011 ---
http://finance.townhall.com/columnists/jeffcarter/2011/09/13/groupon,_zynga_and_krugmans_frothy_valuations


"Mystery Diagnosis: An Era of Uncertainty for the Health Care Sector," Knowledge@Wharton, September 14, 2011 ---
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2847

The U.S. health care sector is experiencing a time of enormous change and uncertainty. Although President Obama's health care reform plan was signed into law last year, several legal challenges to the legislation are working their way through the courts. Questions also remain about whether the law will deliver on its promises of greater access to care and stricter containment of soaring health care costs.

Meanwhile, the pharmaceutical industry is also dealing with a period of insecurity, with generic markets soon opening up for some of the world's best-selling drugs. And although the health care sector is one of the few employment bright spots in a stagnant job market, questions arise as to whether it is in danger of becoming too bloated. Wharton health care management professors Arnold Rosoff, Patricia Danzon, Lawton Burns and Mark Pauly discussed their research on these issues and others during a recent presentation to incoming health care MBA students.

Politics over Policy?

After decades of debate over national health care reform, Wharton legal studies and health care management professor Arnold Rosoff warned that struggles over the Affordable Care Act (ACA), signed into law by President Obama in March 2010, may be far from over. It is uncertain whether the reform legislation, which was passed in a greatly compromised form after years of "partisan wrangling," can deliver on its promises of cost containment and expanded access to health care for the uninsured, Rosoff noted. "But before we get to that, we have to ask, 'Will ACA even stay on the books?'"

Continued in article

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


"GOP lawmakers seek answers from Sebelius regarding CLASS Act," by Tina Korbe, Hot Air, September 22, 2011 ---
http://hotair.com/archives/2011/09/22/gop-lawmakers-seek-answers-from-sebelius-regarding-class-act/

Last week, a report from a Republican working group revealed that administration officials, in the rush to pass Obamacare, ignored internal warnings from government experts about the fiscal sustainability of a long-term care insurance entitlement program included in the health reform law. Throughout the health care debate, officials within the Centers for Medicare and Medicaid Services, as well as the Health and Human Services Department, repeatedly warned that the CLASS Act would be a fiscal disaster. Yet, the final version of Obamacare not only included the CLASS Act; it even counted CLASS as a cost-saving measure.

Now, the Republicans behind the report want to know how high the warnings reached: Was HHS Secretary Kathleen Sebelius, for example, aware of the concerns about CLASS even before Obamacare passed? Amid rumors the administration might reassign CLASS personnel or close the CLASS office entirely, they also want to know what the administration plans to do moving forward to ensure — if the CLASS program is, in fact, implemented — that the program is sustainable.

To that end, House Oversight Committee Chairman Darrell Issa (R-Calif.) and House Energy and Commerce Committee Chairman Fred Upton (R-Mich.), along with key drivers Sens. Jeff Sessions (R-Ala.), John Thune (R-S.D.) and others, today sent a letter to Sebelius asking her to clarify how many people have been reassigned or asked to leave the CLASS office, to put forward a plan to make CLASS sustainable if the program is going to be implemented and to divulge when concerns about CLASS were first made known to her and what steps she took to address them.

. . .

As Sessions explained in a statement, the central question is “whether a deliberate effort was made by administration officials to conceal CLASS’s true cost in order to advance the president’s agenda. Accountability goes to the top. Lawmakers and the American people deserve to know when internal concerns over CLASS were first communicated to Secretary Sebelius and what, if any, actions she took to address them. Out of control government spending is threatening our nation’s future, making a prompt and thorough explanation all the more imperative.”

Thune said it appears the administration sought to uphold its own agenda with the inclusion of the CLASS Act in the PPACA.

“Our recent Congressional investigation revealed that the Obama Administration ignored repeated warnings about the fiscal insolvency of the CLASS Act in the effort to score a political win with the passage of the new health care law,” he said. “The time is long overdue for Secretary Sebelius to come forward with more details on what the administration knew about the insolvency of the program, when they knew about it, and how they propose to remedy this fiscal disaster for taxpayers. The American people deserve to know more about this massive new entitlement program.”

In the meantime, you can bet that, if Sebelius doesn’t provide adequate answers, the calls for a CLASS Act repeal will grow ever louder. In fact, the Senate Appropriations Committee has already decided not to fund implementation of the Act.

Update: Because of a scheduling error, this post appeared briefly on the HotAir.com homepage at around 11:25 a.m. ET today. At the time, the letter had not yet been sent to Secretary Sebelius. The post above is essentially unchanged, but the second and third paragraphs have been updated to include information that recently emerged that the administration might shuffle CLASS personnel.

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


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

Jensen Comment
When I made this assertion over a year ago, Jagdish Gangolly objected on the premise that Social Security was just a pay-as-you go program that was not a Ponzi fraud.. This begs the question about when a pay-as-you go system becomes a Ponzi fraud. I think it becomes a Ponzi fraud when the probability of sustaining future obligations with price-level-adjusted (PLA) payments becomes highly improbable.

Social Security Trust Funds filled with worker and employer contributions have played out without any hope that trust fund buildup with premiums can meet current or future entitlements obligations. A huge part of the problem is that Congress added billions of entitlements to persons at any age that are declared disabled who never paid anywhere near enough premiums to cover their future takeouts. Another huge part of the problem is that Congress wiped out these trust funds with IOUs so the trust fund cash could be spent on current programs and wars rather than being invested for the future like most trust funds in the private sector.

Be that as it may, is Social Security a Ponzi fraud as argued by Catanach, Ketz, Rick Perry, and many others?
My argument is that Social Security will always meet pension and disability entitlements contracted obligations, at least nominally, as long as the United States itself does not totally implode due to more serious entitlements obligations like Medicare and Medcaid, The reason is that Ben Bernanke, Paul Krugman, the Weimar Republic, and Robert Mugabe have shown us how to meet government's contractual obligations simply by printing its legal tender without borrowing or taxing.

Of course in 2060 a $1,000,000 USD may not buy a single chicken egg --- as is the case for a million Zimbabwe dollars today.

Thus, whether Social Security is a Ponzi scheme really depends upon whether we're talking meeting entitlements obligations with nominal dollars or dollars indexed for changes in purchasing power. If were talking meeting entitlements with PLA dollars, Social Security is a hopeless Ponzi fraud, because there's virtually no hope of meeting obligations in 2060 with PLA dollars.

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


Dangerous Knowledge: 4 Brilliant Mathematicians & Their Drift to Insanity --- Click Here
http://www.openculture.com/2011/09/dangerous_knowledge_4_brilliant_mathematicians_their_drift_to_insanity.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+OpenCulture+%28Open+Culture%29

John Nash is one of the most famous schizophrenic mathematicians--- http://en.wikipedia.org/wiki/John_Nash_%28mathematician%29

"Paul Krugman is Insane," by John Ransom, Townhall, September 2011 ---
http://finance.townhall.com/columnists/johnransom/2011/09/12/paul_krugman_is_insane

We always knew that Krugman couldn’t add or subtract. As an economist, the guy is a terrific writer. And fantasy is his genre.

But the fact that he thinks that we’ve all been secretly ashamed of our reactions to 9/11 for the last ten years should be enough to place him in observation for indulging in too much fantasy.

“What happened after 9/11 — and I think even people on the right know this, whether they admit it or not,” writes Krugman as his sick 9/11 tribute, “was deeply shameful. The atrocity should have been a unifying event, but instead it became a wedge issue.”

Way to unify us Paul.

“Fake heroes like Bernie Kerik, Rudy Giuliani, and, yes, George W. Bush,” says Krugman “raced to cash in on the horror. And then the attack was used to justify an unrelated war the neocons wanted to fight, for all the wrong reasons.”

This is not a country that has a great fear of expressing itself. We have way too much self-love for that. If we were secretly ashamed, we’d go on Oprah and proclaim our secret shame to the world, as many liberals like Krugman have done. Or we'd write a book about it.

There were no fake heroes, as Krugman has called Rudy Guiliani and George W. Bush, after 9/11. No one was anxious to cash in on the war that was declared by Osama bin Laden in 1996 against the U.S.

Mistakes? Yes. There were many.

As Winston Churchill observed, wars are made of up surprises and disappointments. But that doesn’t mean they aren’t worth waging.

Contrast Bush’s reactions at 9/11 to the “Osama bin Laden is still dead” World Tour that Obama engaged in after he watched Seal Team Six dispatch bin Laden on his TV set.

All that was missing in front of Obama was popcorn and a Snuggie. No fake hero there.

Just a faux one.

The outpouring after the cowardly attack on the Twin Towers and the Pentagon was universal. So was the coalition that went into Afghanistan to kick out Al Qaeda and the Taliban sheltering them.

You had all the elements that liberals love including UN authorization, abuse of women, oppression, blight, gobs of government grant money and Congressional approval to wage war in Afghanistan.

Oh. That’s right. Scratch that last one. Liberals don’t care about Congressional authorization as long as Obama’s doing something to hurt Israel and support jihadists in North Africa.

Certainly the war that we have waged against radical Islam since 9/11, including the war that has still produced the Arab world’s only true democracy in Iraq, has cost America something.

Continued in article


"Growth and Inequality: 2010:  The latest news on spreading the wealth," The Wall Street Journal, September 14, 2011 ---
http://online.wsj.com/article/SB10001424053111904265504576568973957080358.html#mod=djemEditorialPage_t .

An abiding—make that the primary—goal of the Obama Administration has been to reduce income inequality. When the Affordable Care Act finally passed, White House economists and liberal pundits did a victory dance in their favorite publications boasting about how the bill would spread the wealth. So how's that inequality project working out?

One answer came yesterday with the Census Bureau's annual snapshot on living standards. The official poverty rate—defined as a family of four earning less than $22,314—rose to 15.1%. That's up from 14.3% in 2009 and 12.5% in 2007. The official rate significantly overstates poverty by missing government income transfers, but this increase is faster than during any three-year period since the early 1980s.

Meanwhile, the share of Americans without health insurance rose to 49.9 million, or 16.3%, from 48.99 million, or 16.1% in 2009. The share of Americans on private insurance continued to decline while those on Medicare and Medicaid rose. ObamaCare doesn't fully kick in until 2014, but we already know that it isn't reducing the cost of health insurance.

President Obama inherited a recession, and some increase in poverty was inevitable on his watch. But the magnitude of the increase underscores how feeble the current economic recovery has been, and how essential rapid economic growth is to lifting incomes for lower-income Americans in particular.

The lesson we draw is that politicians who support policies that make economic growth their top priority raise everybody's incomes even if some incomes rise more rapidly than others. Politicians who put income redistribution above overall economic growth do worse by everybody, especially the poor.


"Too Much Higher Education," by Walter E. Williams, Townhall, September 14, 2011 ---
http://townhall.com/columnists/walterewilliams/2011/09/14/too_much_higher_education

Too much of anything is just as much a misallocation of resources as it is too little, and that applies to higher education just as it applies to everything else. A recent study from The Center for College Affordability and Productivity titled "From Wall Street to Wal-Mart," by Richard Vedder, Christopher Denhart, Matthew Denhart, Christopher Matgouranis and Jonathan Robe, explains that college education for many is a waste of time and money. More than one-third of currently working college graduates are in jobs that do not require a degree. An essay by Vedder that complements the CCAP study reports that there are "one-third of a million waiters and waitresses with college degrees." The study says Vedder -- distinguished professor of economics at Ohio University, an adjunct scholar at the American Enterprise Institute and director of CCAP -- "was startled a year ago when the person he hired to cut down a tree had a master's degree in history, the fellow who fixed his furnace was a mathematics graduate, and, more recently, a TSA airport inspector (whose job it was to ensure that we took our shoes off while going through security) was a recent college graduate."

The nation's college problem is far deeper than the fact that people simply are overqualified for particular jobs. Citing the research of AEI scholar Charles Murray's book "Real Education" (2008), Vedder says: "The number going to college exceeds the number capable of mastering higher levels of intellectual inquiry. This leads colleges to alter their mission, watering down the intellectual content of what they do." In other words, colleges dumb down courses so that the students they admit can pass them. Murray argues that only a modest proportion of our population has the cognitive skills, work discipline, drive, maturity and integrity to master truly higher education. He says that educated people should be able to read and understand classic works, such as John Locke's "Essay Concerning Human Understanding" or William Shakespeare's "King Lear." These works are "insightful in many ways," he says, but a person of average intelligence "typically lacks both the motivation and ability to do so." Mastering complex forms of mathematics is challenging but necessary to develop rigorous thinking and is critical in some areas of science and engineering.

Continued in article

Jensen Comment
I might add that our UPS driver and good friend has a masters degree in finance. And the woman who just painted our back porch has two degrees in etymology. Both got their degrees over 20 years ago.

I am not making a case that education is not intrinsically valuable to workers in any occupation. However, if the college degrees are increasingly watered down to attract more and more tuition revenue then there are bound to be negative externalities for our nation as a whole. Prosperous nations like Finland and Germany place great value having workers highly skilled from training and apprenticeship in the trades. Why does everybody in the U.S. prefer a B.S. degree (the abbreviation has a double meaning)?

The Case Against College ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#CaseAgainst


"Armed Services chairman: Obama is anti-military," by Shaun Waterman, The Washington Times, September 12, 2011 ---
http://www.washingtontimes.com/news/2011/sep/12/armed-services-buck-mckeon-criticizes-obama/

The chairman of the House Armed Services Committee, in a harsh attack on the Obama administration Monday, accused the president of viewing American military power as a negative force in the world, and planning to “gut” defense spending through the congressional deficit-reduction committee.

“It is my suspicion that the White House and congressional Democrats” designed the supercommittee process “for one purpose: to force Republicans to choose between raising taxes or gutting defense,” said California Rep. Howard P. “Buck” McKeon, the House Armed Services Committee chairman.

Mr. McKeon also lashed out at the administration’s defense and security policies that he asserted are based on a negative view of U.S. power in the world.

“President Obama’s policies often seem reflective of an ideology that treats American power as the principal adversary, not ally, to world peace,” he told an audience at the American Enterprise Institute.

That view “flies in the face of both history and experience. And it resigns us to national decline,” he added.

“Power in benevolent hands is a virtue, not a vice.”

White House officials declined to respond.

Under the deficit reduction act passed by Congress this summer, if the supercommittee cannot agree on a package of measures to reduce the national debt, the Defense Department, already facing spending cuts of $350 billion over 10 years, will face another half trillion or more dollars in automatic cuts — what defense officials have termed a “doomsday trigger.”

“That political gamesmanship is simply unacceptable,” Mr. McKeon said of the deal, which he voted to approve while expressing grave concerns about the potential impact on defense spending.

Even if the supercommittee is able to reach a deal and avoid pulling the defense cut trigger, Mr. McKeon said he remained concerned that the White House planned to make cuts of almost the same half-trillion dollar amount through the supercommittee process.

“Recent statements from the Office of Management and Budget indicate that the administration could be pushing for defense cuts that near the size and scope of the trigger, within the confines of the supercommittee,” he said.

Such cuts would be “beyond what the Defense Department is prepared to absorb,” he added, and would “open the door to aggression, as our ability to deter and respond to an attack would be severely crippled.”

“Folks, it is impossible to pay our entitlement tab with the Pentagon’s credit card,” he stated.

Officials at the Office of Management and Budget had no immediate comment on Mr. McKeon’s remarks.

Concern about cuts to defense spending is widely shared by Republicans conservatives. Some have taken a more optimistic view of the outcome of the supercommittee process.

Continued in article


Medicaid is America’s single biggest health programme. This year roughly one in five Americans will be covered by Medicaid for a month or more. It gobbles more federal and local money than any state programme, other than education. Costs will rise even more when Barack Obama’s health-care reform expands the programme by easing eligibility rules in 2014. Congress’s “supercommittee” is already considering cuts. However, there are more immediate pressures behind the present drive for change.
"Health Care:  A new prescription for the poor:  America is developing a two-tier health system, one for those with private insurance, the other for the less well-off," The Economist, October 8-14, 2011 ---
http://www.economist.com/node/21531491

“IT’S time for Dancing with the Stars!”, a woman announces enthusiastically. At this New York health centre, wedged between housing projects to the east and Chinatown to the west, “dancing with the stars” means dancing with a physical therapist. An old man stands up with a nurse and begins a determined samba.

Comprehensive Care Management (CCM), which runs this centre, tries to keep old people active. To do so, explains Joseph Healy, the chief operating officer, is in the company’s best interest. The government pays CCM a capped rate for the care of its members. If someone gets sick, his health costs rise and the company’s margin shrinks. Mr Healy argues that the system is the best way to provide good care at a low cost. Increasingly others seem to agree.

Medicaid, America’s health programme for the poor, is in the process of being transformed. Over the next three years, New York will move its entire Medicaid population into “managed care”, paying companies a set rate to tend to the poor, rather than paying a fee for each service. New York is not alone. States from California to Mississippi are expanding managed care. It is the culmination of a steady shift in the way most poor Americans receive their health-care treatment.

Medicaid is America’s single biggest health programme. This year roughly one in five Americans will be covered by Medicaid for a month or more. It gobbles more federal and local money than any state programme, other than education. Costs will rise even more when Barack Obama’s health-care reform expands the programme by easing eligibility rules in 2014. Congress’s “supercommittee” is already considering cuts. However, there are more immediate pressures behind the present drive for change.

Enrolment in Medicaid jumped during the downturn, from 42.7m in December 2007 to 50.3m in June 2010. Mr Obama’s stimulus bill helped to pay for some of this, but that money has dried up. Faced with gaping deficits, some desperate governors slashed payments to hospitals and doctors, or refused to pay for trips to the dentist or oculist. But much the most important result has been structural: the expansion of managed care.

States have dabbled in managed care for decades. The trend accelerated in the 1990s, with the share of Medicaid patients under this form of care reaching 72% by 2009. Now, however, there is a strong push for the remainder. States that did not have managed care, such as Louisiana, are introducing it. Other states are extending it to people previously deemed off limits: California and New York, for example, are moving the elderly and disabled into that system of care. Texas is targeting more than 400,000 Medicaid beneficiaries in the Rio Grande Valley. Local politicians had resisted the move, nervous that care might deteriorate. But the yawning deficit meant that they were overruled.

The result is a country with two distinct tiers of health care. Most Americans with private insurance are still horrified by thoughts of health-management organisations and prefer to pay fees for each medical service. For the poor, managed care is becoming the norm.

Advocates of managed care have high expectations. First, they hope that it will make costs more predictable. Second, they believe that the change will improve patients’ health. In managed care, a patient has a network of doctors and specialists. If the programme works properly, doctors can monitor all aspects of care, in contrast to the fragmented fee-for-service system. The contracts that states have with firms can set standards for quality. Texas, for instance, will cut 5% from a company’s payment if it does not meet what is required.

The next step is to integrate care for those eligible for both Medicaid and Medicare, the federal programme for the old. These “duals” account for almost 40% of Medicaid’s costs and just 15% of its population. “If managed care can really deliver better care than fee-for-service”, says Diane Rowland, chair of the commission that advises Congress on Medicaid, “this is the population that could prove it.”

But some, such as Norma Vescovo, are sceptical. As the head of the non-profit Independent Living Centre of Southern California (ILCSC), Ms Vescovo serves Medicaid patients with severe health problems. Over the years she has often sued California on policies that she thinks will hurt her vulnerable clients. On October 3rd her case moved to the Supreme Court.

The outcome of Douglas v Independent Living Centre will have profound implications for the future of Medicaid. Ms Vescovo’s suit concerns cuts to hospitals and doctors. But the case will also guide the course of managed care. If ILCSC and its co-plaintiffs win, private groups will continue to be able to challenge states on policies they think violate federal Medicaid law. Ms Vescovo, who argues that California’s payment cuts would eviscerate her clients’ access to services, worries that under managed care the disabled might not be able to see the specialists they need.

The question is how to supervise the experiments with managed care that are being carried out in various states. To date, Medicaid beneficiaries have been able to challenge the states in court. However, if the Supreme Court rules against ILCSC, that avenue will be closed. The Centres for Medicare and Medicaid Services (CMS) technically can intervene if states do not provide proper access to care. In reality, CMS has few tools to do so.

Continued in article

Jensen Comment
Actually various nations like Germany have a two-tier health system where those who can afford it supplement the national health care program with private insurance.

February 8, 2010 message from a friend in Germany

Hello Bob and Erika,

as it is Super Bowl Sunday I am sitting here reminiscing about my time in the US, and, of course, thinking about the people that I met. So I’m sending you an email as I am waiting for the Super Bowl to come on in about an hour. Once again they will show the big game on German TV. I have to take the rest of my vacation time from last year until the end of March of this year, so I decided to take tomorrow off to get rid of some of the vacation time (I have done this almost every year since I came back from the US, and two years ago I was even so lucky to be in the US for the Patriots-Giants Super Bowl, the greatest Super Bowl I have seen). So I am still quite busy at work, and still enjoy what I do very much. Since I am in an energy-related field, I am so to speak ‘part of’ this huge ‘push’ (for lack of a better word) that is going on towards renewable energy right now. Even though superconducting power cables are not a renewable energy source but rather one form of transmitting energy , there is a lot of interest in the technology right now. Taking a day off tomorrow turned out to be a good choice, as all public transportation workers in the city of . . .  will be on strike, so I would have had to take the car to get to work.

I hope you are doing well in the mountains of New Hampshire, which I assume didn’t get hammered by the snowstorm the last few days, but are covered in snow anyway. I am reading Bob’s emails with great interest, especially regarding the banking situation and the health insurance situation. These are also two significant issues over here (you could actually argue that the strike tomorrow has a little to do with the bank bailout, see below….).

The new German government is trying to reform our health care system. Medical care in Germany is probably among the best in the world, and costs are quite high (so I guess it’s quite similar to the US in these manners…). We have this system of public option insurance, which covers ~ 80% of the population, and private insurance, which covers almost everyone else (except for the few percent that fall through the cracks). In any case, the underlying idea of the system is not so bad, but the administration is so complex that a) only the Germans could come up with it and b) only the Germans can run it without going nuts. What is interesting is that Germany is one of only a few countries in Europe that has this private insurance option, most have only the public option (or so I read in an article recently, I am not the expert on health insurance). The public option insurance had to curtail what they reimburse quite a bit in recent years to cut costs, so more and more people try to get into private insurance. This, however, is not so easy: You have to earn a certain amount of money, and the insurance companies can deny coverage or exclude certain pre-existing conditions. (I have pre-existing conditions, so for me private insurance would be almost useless, as they would exclude these conditions, or rack up my premiums, or both). Plus, my wife (while she is not working, when she is working she will be covered herself again, and have to pay the premium (percentage of income))) and kid are covered with no additional premium in the public option, so it is always a safe bet, despite the fact that it may not pay for all the treatments the private insurance pays for (they generally pay for everything that is medically necessary though, even quite complex and costly procedures). So in any case, if you are interested I can tell you a bit more about health insurance in Germany. (There is actually another similarity between Germany and the US: With Germany being the biggest economy in Europe, medication costs a lot more here than in neighboring countries (or so I’ve read), which to me seems similar to the US/Canada medication cost issue).

As I said before, there will be a strike here in . . .  tomorrow as the greedy public works employees (part of which are the transportation workers) show little solidarity to all the poor bankers bailed out by government funds. Since German governments (state and federal) had to fund the solidarity fund for starving bankers to keep them from bankruptcy and local governments have lower tax receipts due to the economic crisis, there is very little money for pay raises for public works employees, which, of course, should be happy to have a job and be able to collect a paycheck. (But thanks to the banks and the great work the bankers do, they all have jobs (except for the ones that got laid off, of course, but hey, if we laid off some bankers or let their banks go belly up, more people doing real work would be sure to get laid off too, because it’s a trickle-down economy, as we all know)). Collecting a paycheck is obviously something the greedy workers couldn’t do if it wasn’t for banks having money (and handing it out via ATMs, and central banks printing as much of it as is necessary, or maybe even more), which goes to show that there is a true lack of solidarity from the general public towards the poor starving bankers bailed out by government funds.

So the poor bankers will have a hard time driving their BMWs and Mercedes to work tomorrow, as the roads will be clogged up by the cheap and smelly cars of people that would otherwise take public transportation to work (I assume that everyone that can take the day off will do so, just like I do. People were actually advised to take the day off if they can). Maybe I should check the newspaper again to make sure there isn’t an impromptu bank holiday tomorrow, after all, when bankers do so much good for us year-round they shouldn’t have to suffer through such a rough commute to work because of some greedy workers going on strike.

In any case, I would normally ride my bike to work if it wasn’t for this rather rough winter, which for me is the latest piece of evidence that global warming is maybe not all it’s cracked up to be. It’s pretty reasonable to assume that human activity has an influence on climate, obviously, but when almost every seasonal forecast is dead wrong, it’s hard to se how the source can be believed to be correct in forecasts over many decades. In any case, I hope to be able to live to see, and wouldn’t be surprised if indeed it gets warmer, but I wouldn’t be shocked if it gets colder or stays the same either). Nonetheless, energy efficiency and renewable energy development is a reasonable thing to shoot for anyway, whether there is global warming or not…
 http://network.nationalpost.com/np/blogs/fpcomment/archive/2010/01/17/lawrence-solomon-bbc-drops-top-ipcc-source-for-climate-change-data.aspx 

So the Hadley center in Britain predicted a winter with mild temperatures, but this may end up being the coldest winter in central-northern Europe in 30 years. We’ve had snow on the ground since mid-December, and the 15 day forecast right now has not a single day with a daytime high above freezing… (nonetheless, every now and then we have a day that is slightly above freezing, which usually leads to some melting of the snow and ice on the ground, and subsequently even more treacherous road conditions). The local governments were woefully unprepared for this winter, which is certainly not surprising when you are being told to expect a milder than normal winter. The road crews didn’t clear the roads properly in mid-December (probably assuming, like everyone else, including me, that this was going to melt rather quickly), and so we’ve had a mess on the ground ever since. I haven’t ridden my bike in 8 weeks now.

I am still traveling to Norway quite a bit, and I thoroughly enjoy these trips. I also travel to the US, but only maybe once or twice a year; I was in Tucson last June. I really enjoy these trips also, I am quite lucky that I get to go on business trips to the US as I really enjoy spending time there. Business trips to places you’d like to visit anyway are not such a bad thing. (Of course, at work I am trying to not let on that I enjoy business trips, but I think they have me figured out anyway…. Luckily my wife puts up with it too). Whenever I travel to the US, I wonder how my life would be had I stayed there six years ago. In any case, now I am a happily married man with a house and a kid, which you can see in the attached pictures.

Second Message on February 15, 2010 from my friend in Germany

Hi Bob,

the longer I am living in Germany again the stranger Germans seem to me. In any case, to understand the German attitude to health insurance I think it is important to bear in mind Bismarck's social legislation ( http://en.wikipedia.org/wiki/Otto_von_Bismarck#Bismarck.27s_social_legislation )
and the German mind in general. Germans are a rather risk-averse bunch that believes that things are likely to get worse rather than better.

I have recently come across a few articles on health insurance in Germany that essentially say that the private insurance is facing problems, or rather private insurance is jacking up the rates for two reasons: Private insurers pay more for the same services than the public insurance option (except for their basic tariffs) does: there is a so-called multiplier which says what you can charge for a given procedure when charged to private insurance. I have seen the factor of 2.3 used, but the way doctors can charge for their services in Germany is rather difficult to grasp for me so this factor of 2.3 may or may not be the multiple of what a public option insured person is charged. The higher pay for the same services is one of the reasons privately insured people have shorter waiting times in doctor's offices.

The second reason for higher rates seems to be that privately insured patients do not care how much a procedure costs, as soon as they are above the co-pay limit (often there is a co-pay limit of a few hundred euros or so a year, above that there is no co-payment anymore for privately insured people). (There is an upper limit on how much a doctor can spend on average for publicly insured people, but I am not sure how much of a deterrent this is for a doctor to prescribe what is necessary).

In any case, recently it has been argued that the medical doctors are now charging private insurance patients more to make up for what they do not get from the publicly insured people.

So the issue of public health insurance in Germany remains an interesting one, and, as everywhere else, rates are likely to rise.....

Regards,
XXXXX

Health Insurance in Germany --- http://www.toytowngermany.com/wiki/Health_insurance
Note that pre-existing conditions drive up the private insurance rates for individuals.
Private insurance often leads to preferential treatment from physicians and hospitals.
My friend also tells me that having private insurance is somewhat of a status symbol in Germany.

Bob Jensen's threads on health care are at
http://www.trinity.edu/rjensen/Health.htm

 

 




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

Bob Jensen's Tidbits Archives ---
http://www.trinity.edu/rjensen/tidbitsdirectory.htm 

Bob Jensen's Pictures and Stories
http://www.trinity.edu/rjensen/Pictures.htm

Shielding Against Validity Challenges in Plato's Cave ---
http://www.trinity.edu/rjensen/TheoryTAR.htm

·     With a Rejoinder from the 2010 Senior Editor of The Accounting Review (TAR), Steven J. Kachelmeier

·     With Replies in Appendix 4 to Professor Kachemeier by Professors Jagdish Gangolly and Paul Williams

·     With Added Conjectures in Appendix 1 as to Why the Profession of Accountancy Ignores TAR

·     With Suggestions in Appendix 2 for Incorporating Accounting Research into Undergraduate Accounting Courses

Shielding Against Validity Challenges in Plato's Cave  --- http://www.trinity.edu/rjensen/TheoryTAR.htm
By Bob Jensen

What went wrong in accounting/accountics research?  ---
http://www.trinity.edu/rjensen/theory01.htm#WhatWentWrong

The Sad State of Accountancy Doctoral Programs That Do Not Appeal to Most Accountants ---
http://www.trinity.edu/rjensen/theory01.htm#DoctoralPrograms

AN ANALYSIS OF THE EVOLUTION OF RESEARCH CONTRIBUTIONS BY THE ACCOUNTING REVIEW: 1926-2005 ---
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm#_msocom_1

Bob Jensen's threads on accounting theory ---
http://www.trinity.edu/rjensen/theory01.htm

Tom Lehrer on Mathematical Models and Statistics ---
http://www.youtube.com/watch?v=gfZWyUXn3So

Systemic problems of accountancy (especially the vegetable nutrition paradox) that probably will never be solved ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#BadNews

Bob Jensen's economic crisis messaging http://www.trinity.edu/rjensen/2008Bailout.htm

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

Bob Jensen's Home Page --- http://www.trinity.edu/rjensen/