A Lesson In Incentives

I found an interesting story from Bloomberg. I think there are several lessons that can be learned from this story beyond the obvious. It goes to show you that with any government program, the devil is in the details! It's not enough just to say you're going to create a program to help feed the poor. HOW to do that is very very important.

Poor in India Starve as Politicians Steal $14.5 Billion of Food Ram Kishen, 52, half-blind and half- starved, holds in his gnarled hands the reason for his hunger: a tattered card entitling him to subsidized rations that now serves as a symbol of India’s biggest food heist. Kishen has had nothing from the village shop for 15 months. Yet 20 minutes’ drive from Satnapur, past bone-dry fields and tiny hamlets where children with distended bellies play, a government storage facility five football fields long bulges with wheat and rice. By law, those 57,000 tons of food are meant for Kishen and the 105 other households in Satnapur with ration books. They’re meant for some of the 350 million families living below India’s poverty line of 50 cents a day. Instead, as much as $14.5 billion in food was looted by corrupt politicians and their criminal syndicates over the past decade in Kishen’s home state of Uttar Pradesh alone, according to data compiled by Bloomberg. The theft blunted the country’s only weapon against widespread starvation -- a five-decade-old public distribution system that has failed to deliver record harvests to the plates of India’s hungriest. “This is the most mean-spirited, ruthlessly executed corruption because it hits the poorest and most vulnerable in society,” said Naresh Saxena, who, as a commissioner to the nation’s Supreme Court, monitors hunger-based programs across the country. “What I find even more shocking is the lack of willingness in trying to stop it.”

Let's go into the details to see how this program works.

From the government warehouses, millions of tons are dispatched monthly to states including Uttar Pradesh, which are supposed to distribute them at subsidized prices to the poor. About 10 percent of India’s food rots or is lost before it can be distributed, while some 3 million tons of wheat in buffer stocks is more than two years old, according to the government. The CBI’s indictment of Gupta provides a glimpse of how the operation was run. Food purchased by the central government is trucked to districts like Sitapur, where Kishen’s home of Satnapur is located, and stored until marketing managers in the food distribution system sign off on its dispatch to the Fair Price Shops. The owners of those shops, called kothedars in Hindi, bring cashier’s checks for the subsidized price of the supplies. A kilogram of rice, for instance, costs as little as 2 rupees, or about 3.6 cents, in most states. The market price for similar quality rice is about 10 times higher. The shop owners are supposed to sell the food to villagers without making a profit.

People respond to incentives, they will try to better themselves, the way incentives are set up make the difference. If there is incentive to better themselves through profits then they will do that, but if the incentive is towards stealing or some scam, they will consider if they can get caught and steal if the rewards outweigh the risks. Programs should be made in a way to minimize "bad" incentives while maximizing "good" incentives. Look at how the Indian system works vs. the US food stamp program. The Indian program gives subsidies to the sellers of food and expects them to pass along the savings to poor people. If shop owners are supposed to sell the food without making a profit, where is the incentive for them to get the food, make sure it arrives on time and unspoiled, and service the poor? Now look at the US program which gives subsidies directly to the poor through food stamps. The poor then go and buy food at full price from their choice of merchants. The merchants make profits so they have every incentive to make sure they have food in stock to sell and to make sure food arrives at markets without spoilage since people won't buy spoiled food. Yes the poor can sell their food stamps for money, just goes to show you that not all "bad" incentives can be eliminated, the goal is to eliminate as many as possible. The US system uses the market system more than the Indian system. The poor are forced to buy food at market prices and supermarkets get to make profit off of this government program. At first glance, this sounds worse than the Indian system in which there are no profits to markets so that every penny of the money the government spends goes towards helping the poor. Yet in practice, the Indian system is much much more corrupt and much much more wasteful.

From the government warehouses, millions of tons are dispatched monthly to states including Uttar Pradesh, which are supposed to distribute them at subsidized prices to the poor. About 10 percent of India’s food rots or is lost before it can be distributed, while some 3 million tons of wheat in buffer stocks is more than two years old, according to the government. Even after accounting for the wastage, only 41 percent of the food set aside for feeding the poor reached households nationwide in 2005, according to a World Bank study commissioned by the government and released last year.

So 10% is lost to rot and only 41% of the 90% left over ever reaches the poor! What that really means is that nearly 70% of the food purchased by the government for the poor never reaches the recipient! There is absolutely no incentive for efficient distribution or to make sure the poor get the food. Under the US system, the poor are responsible for figuring out how to get their food and where to go for the best prices (not hard, go to the supermarket and look at the weekly ads they send out). The lesson is that people respond to incentives and if there isn't any, they will be lax over their responsibilities. Profits give people an incentive to act. In a different world, we wouldn't need incentives and profits to supermarkets could be eliminated so that the poor get 100% of the subsidies, but in the world we live in, the real world, that's just not possible. Conservatives understand the limitations and work within the boundaries of the real world. Liberals do not understand the limitations and so craft programs that have the best intentions, but fail spectacularly in the real world.

The Evils of Austerity?

Wait a minute, the facts are that federal government spending has increased dramatically since the beginning of the crisis in 2008. According to the White House, total federal outlays were the following (in millions). http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/hist.pdf 2008 2,982,544 2009 3,517,677 2010 3,456,213 2011 3,603,061 2012est 3,795,547 Now lets include outlays at the beginning of the decade for further comparison. 2001 1,862,846 2002 2,010,894 Where is the austerity? I think you have perception confused with actuality. There are those in Congress who have made speeches about austerity and the need to spend less, but none of the talk has translated directly into reduced spending yet. So far Congress has done exactly what Krugman and those in his camp recommended. Now if you want even more spending, then that's a separate argument, but I think it is mistaken to say that austerity has been imposed in any form. The increase in spending from 2007 to 2012 is approximately 27%! Federal outlays have doubled since 2001! Where is the austerity?

Compassion And Health Care As A Right

Compassion can't be given by requiring someone else to pay for the act. There is no compassion in mandating that other people pay for health care. Otherwise, just give me your wallet and I'd be the most compassionate being ever alive. I'd ask everyone what they want and give them double...no triple what they answer. Of course you'd probably have to get another job, but what do I care about how much you work when I'm so compassionate? In fact, my compassion demands you work 20 hours a day, no less. There is just so much good I want to do, so many people to help. I hope you get my point. True compassion comes from you giving your own money or volunteering your own time and labor to help people in need. It can't come from forcing others to. Compassion has nothing to do with national health care or any other social program. Unfortunately, what people want, need, or deserve is constrained by reality. There can be no right that depends on someone else's labor, money, or work to provide it. Therefore food, clothing, shelter, water and health care can't be rights. Why? What if everyone demands these "rights", who is going to work to provide them? If someone can go up to a farmer and demand his crops because he is hungry and has a right to food, what happens when the farmer decides to stop working the farm, since all of his produce is being taken away, and demand HIS right to food? Who will provide that food? Reality has veto power over any proposed right. If you want to reduce health care costs, health care must be limited and rationed. Right now, the value equation is missing from health care decisions. What do I mean by value? Is it worth $100,000 to give a treatment that, on average, extends life by 6 months? If you are that person, AND someone else is going to pay for it, then the answer is going to be yes. So we have to ask this difficult question in a more neutral way. Today, this question isn't asked. Doctors do not deny care based on "value". Doctors are trained only to diagnose and treat, regardless of cost. To limit costs, someone has to decide if the costs of the treatment are worth the benefits and deny care if they aren't. I won't pretend I know the answer to the "value" question, but this is the root of our problems with the health care system.

UC Tuition Increases: The True Cost of Providing Education

An important question that must be asked is what is the COST of providing an UC education? And why is the cost rising so much faster than inflation? I've found a blog post that deals with costs and is very detailed using the UCOP budget office's own report on the cost of providing education. I will only repost a summary, the blog post is worth reading in detail. http://changinguniversities.blogspot.com/2011/05/how-uc-calculates-instructional-cost.html

I have not edited any of these figures, and so we learn that the UC’s estimation of the direct instructional cost is actually lower than my calculation of $9,000. The question then is why is their total cost estimate so much higher, and the answer is that they assume that the indirect instructional costs make up over 60% of the total cost; in fact, they argue that the university pays almost the same amount for faculty salaries as it does for departmental support.

From my perspective, this report shows that students and the state are paying for the enormous increase in administrative costs on the campuses, and thus the economic solution is not to reduce enrollments or raise tuition; rather, the solution has to be to decrease the cost of non-instructional services. Faculty, citizens, students, and workers concerned about instruction and research should question these budgetary policies.

A UC Berkeley professor tried to come up with his own estimate of what the costs are to educated per student at Berkeley in 2005. He found that actual costs should be only $7000. Again, readers should check out his post for the details. http://socrates.berkeley.edu/~schwrtz/Cost_II.html

The top budget officer of my school, the University of California, says that the current annual Cost of Instruction is about $16,000 per student. I have done a detailed calculation, using official accounting reports and an official faculty time-use study, to conclude that, averaging over all UC programs, undergraduate education costs this institution just under $7,000 per student per year. (See the details of this calculation at http://socrates.berkeley.edu/~schwrtz/UndergradCost.html ) Thus, current levels of undergraduate student fees now cover the full actual cost of their education at UC! That is shocking. Various experts have said that my result must be wrong; and a few have manufactured rather hilarious reasons to discredit it. (See http://socrates.berkeley.edu/~schwrtz/ExpertsRespond.html ) None have given any objective basis for faulting my analysis, although I continue to seek that sort of academic dialogue. I have a list of many small details in the calculation where better data, discussion or analysis could lead to a more precise answer.

My tentative conclusion is that a huge amount of money is being spent on programs and stuff that does not have anything to do with educating students. Administrative costs are a prime example, though not the only one. I have a good friend who is a Cal-State university professor. He says that the reason administrative costs are not cut is because administrators are the ones who make the decision where to cut. They aren't going to cut their own jobs! Nor do will they want to layoff their staff or reduce their own budgets. Yes this is only a small segment of the larger picture, but one that deserves attention.

Krugman's Keynesian Stimulus Theory is Marred By Reality

The financial crisis ended the artificial boom in housing, when that happened, government revenue growth fell or stagnated, but government spending, which had risen in tandem with the bubble, did not. THIS is the cause of the Eurozone crisis, unsustainable government deficits and spending. Government spending, much like property prices, must return to more reasonable levels. Krugman's cyclical stimulus theory is deeply flawed due to real world problems. In theory, governments should fire workers and reduce its contribution to the economy in good times. The fired workers will easily find employment in the private sector and the reduction in spending will be more than countered by general economic prosperity. The opposite then should be done in recessions. Does this ever happen? Does government ever eliminate social programs and start laying off people in good times? No. What happens is that government grows and adds more permanent social programs and employees. When a deep recession occurs, the economy can no longer support such a bloated government. And with deficits and debt so high, there is simply no more room to expand government spending even more. The theory calls for temporary government spending that can be adjusted to counter cyclical economic trends. The reality is that the vast majority of government spending is permanent, in the form of social programs and promised benefits. With each economic cycle, government grows bigger and bigger until a crisis point is reached where it becomes evident that such spending cannot be supported or sustained. Europe has reached such a point and the United States is set to follow very soon. Krugman and his followers should have been rioting in the streets, calling for less government spending during the housing boom if they took his theories seriously. Instead, all I heard were calls for even more government and a greater growth in spending. This is why the theory is garbage. It seems that the only way to stop the growth of government is a reality check, which is exactly what is happening in Europe. This crisis is the equivalent of an intervention for a drug user. The drug user can throw a fit and "riot", but he has hit rock bottom and the drugs will be cut off no matter what.

Paul Krugman's Wrong When it Comes to Austerity

What doesn't Krugman understand? The crisis stems from governments spending much more than they take in. Those governments must reduce their spending to bring it in line with what they can afford. That means resources and employment MUST be shifted from the public sector to the private sector. Since this does not happen overnight, there MUST be unemployment and a reduction in living standards and GDP. THIS IS UNAVOIDABLE! The only cure would be prevention, stopping government from getting so out of control to the point where it is 40-50% of GDP as it was in Greece. That is exactly what certain wise Americans are advocating today. Once deficits are no longer supportable, there is no way to avoid the pain. Krugman's idea of more government spending would just prolong and deepen the crisis. It cannot be a solution because an overly large public sector is the problem! This is very similar to drug addiction. An addict can't be cured by giving him a larger dose of drugs. His withdrawal symptoms can be removed for a while, but he cannot be free of drugs without feeling pain and the larger the doze of stimulant, the worse the recovery will be. Giving an addict more drugs to get high is NOT a cure!

Income Inequality is Not the Same as Racial Discrimination

It's quite a jump to claim that poor people are discriminated against in the same way Blacks were before the Civil Rights Era. It's in fact, an incredible leap off a cliff, but it's exactly what some people claim. They attribute income inequality to some form of unfair discrimination. The poor are assumed to be discriminated against in the same way Blacks and other minorities were in the past. But just how do you identify a poor person? I'm sure many here have their assumptions, but no, you can't identify a poor person by the clothes they wear or the car they drive. As described in the book, The Millionaire Next Door, many of the rich drive older model cars like Camrys and Accords. I know one multi-millionaire that has never bought a new car in his life and he's in his late 60's now. Likewise, you can find a poor person driving a flashy car. The same applies with clothing. It seems to me that instead of attributing unequal outcomes to discrimination and some sort of unfairness, the most logical explanation is that unequal outcomes arise from unequal skills and attributes. If we examine any skill or base of knowledge, we would see a wide range of proficiencies amongst the general populace. If a fair system rewards those with greater skills and knowledge in areas of demand, then we would EXPECT to see income inequality. Only in an UNFAIR system would we see equality in income.

Government Has A Role

Yes government does have a role, but I think the bigger question is how we make government do what it is supposed to? How do we change an inefficient and incompetent government or a government that has been co-opted by corporations, unions, and special interests for their benefit? What is the mechanism to make government better?

Elections only replace the top level of government, it doesn't do anything to change the bureaucrats and lower level employees, what if they are incompetent and fail consistently to do their jobs? The SEC and their counterparts like the Commodities and Futures Commission (CFC) are good examples. We're told they were at MF Global overlooking the company weeks before they went bankrupt and stole over a billion in customer funds. How do we get these regulators to actually do their jobs? Unsurprisingly, no one has been fired from the regulators, how do we make them accountable? What is the incentive for these agencies to do better?

How do we determine if a government service is a good value? The TSA is a good example. How do we figure out if the benefits of their service outweigh the costs, both in dollar terms and time spent?

People are frustrated because we don't seem to be able to change government and make it better. With a private enterprise, we would just stop being customers and they would either have to shape up or go bankrupt solving the problem and another, better company would rise in its place. We have no such mechanism for government. Mark Thoma and others here make too many assumptions, especially about the efficiency of government and that government will operate as it's supposed to. What happens if it doesn't?

Health Care Needs Real Reform

Look, the way health care works now is a fee for service process. That, along with malpractice lawsuits, creates a huge incentive for providers to give you as many services (such as tests, medication, etc.) as possible so that they can list them and charge for them. If there is the slightest reason for a service, it will be provided and charged. Patients do not understand medicine enough to refuse certain services that are probably unnecessary and since the insurance company pays, there's no incentive for patients to refuse all the services that are given to them even if they were educated enough to understand which is ridiculous.

What are the profits to insurance companies as a whole? From http://opinionator.blogs.nytimes.com/2011/11/03/less-than-26-billion-dont-bother/?ref=opinion

According to many on the left, health insurance companies are sleazy and unethical, making obscene profits by charging high prices to sick people, giving physicians and patients the runaround to avoid paying bills, and rescinding policies just when people who paid in good faith get cancer, while their executives often walk away with millions in compensation. Last year, health insurance companies did rack up big profits, but it turns out that the combined profits of the country’s five largest for-profit health insurance companies — United, WellPoint, Aetna, Humana and Cigna — were $11.7 billion, only 0.5 percent of total health care spending. Even confiscating every penny of those profits would add up to less than half of the cost-saving threshold. And even not-for-profit insurance companies need to have an operating margin — a profit by another name. There just isn’t enough money there to make a dent in health care spending.

It's not "greed" by insurance or phara or doctors, the problem is that there is no mechanism to restrict health care services on a cost/benefit level. This applies to doctors as well. A doctor never thinks about the cost of the care he recommends and if it provides enough benefit. That's just not the way they are taught, they are there to cure or fix your problem regardless of cost. That's why end-of-life care cost so much. A doctor will simply not say that it's not worth the hundreds of thousands to try and cure your disease when it's very likely, but not 100% certain, that you will die in 2 years anyway. That simply isn't done and so we have all these expensive treatments and surgeries and the patient dies in a year anyway.

People have to be made to accept that we need to do a cost/benefit analysis and start denying care if the costs aren't worth the projected benefits. Right now people are outraged when care is denied and it's understandable. People will want a treatment that extends life for an average of 6 months even if it costs $100,000 if the costs are paid by someone else. We need to move to a system where those treatments are denied unless the patient pays for the entire cost themselves. For those who want government control of the health care sector, that's exactly what will happen and what Britain already does. And you cannot sue the government in those countries if they deny you a service, such as a test, even if that test would have discovered the disease you eventually die of. That's what keeps costs down in those countries. We may have to move toward such a system if people cannot accept the cost/benefit method naturally.

Put it this way, NOTHING can prevent you from death. There is no cure, YOU WILL DIE EVENTUALLY. The goal is to get people to accept that it is not worth hundreds of thousands to try and extend your life by a couple of months on average when you are going to die anyway. This is a very harsh view and statement, but a practical one and one that needs to be adopted.

Michael Lewis and California's Budget Crisis

The reason states are having so many budget problems stems from their pension obligations which are coming due as more and more workers retire. The so called "cuts" we all hear about don't apply to pensions and generally apply only to newer, younger government workers even as a growing portion of state and local budgets are being allocated to pension obligations. Michael Lewis wrote a piece on this regarding California in Vanity Fair which is below. I suggest everyone read the article as it shows clearly how government workers have used the system to enrich themselves.

http://www.vanityfair.com/business/features/2011/11/michael-lewis-201111

From 2002 to 2008, the states had piled up debts right alongside their citizens’: their level of indebtedness, as a group, had almost doubled, and state spending had grown by two-thirds. In that time they had also systematically underfunded their pension plans and other future liabilities by a total of nearly $1.5 trillion.

In 2010, for instance, the state spent $6 billion on fewer than 30,000 guards and other prison-system employees. A prison guard who started his career at the age of 45 could retire after five years with a pension that very nearly equaled his former salary. The head parole psychiatrist for the California prison system was the state’s highest-paid public employee; in 2010 he’d made $838,706. The same fiscal year that the state spent $6 billion on prisons, it had invested just $4.7 billion in its higher education—that is, 33 campuses with 670,000 students. Over the past 30 years the state’s share of the budget for the University of California has fallen from 30 percent to 11 percent, and it is about to fall a lot more. In 1980 a Cal student paid $776 a year in tuition; in 2011 he pays $13,218. Everywhere you turn, the long-term future of the state is being sacrificed.

Below, Lewis continues with an interview with the mayor of San Jose whose problems are a microcosm of what local governments are facing.

He hands me a chart. It shows that the city’s pension costs when he first became interested in the subject were projected to run $73 million a year. This year they would be $245 million: pension and health-care costs of retired workers now are more than half the budget. In three years’ time pension costs alone would come to $400 million, though “if you were to adjust for real life expectancy it is more like $650 million.” Legally obliged to meet these costs, the city can respond only by cutting elsewhere. As a result, San Jose, once run by 7,450 city workers, was now being run by 5,400 city workers. The city was back to staffing levels of 1988, when it had a quarter of a million fewer residents. The remaining workers had taken a 10 percent pay cut; yet even that was not enough to offset the increase in the city’s pension liability. The city had closed its libraries three days a week. It had cut back servicing its parks. It had refrained from opening a brand-new community center, built before the housing bust, because it couldn’t pay to staff the place. For the first time in history it had laid off police officers and firefighters.

By 2014, Reed had calculated, a city of a million people, the 10th-largest city in the United States, would be serviced by 1,600 public workers. “There is no way to run a city with that level of staffing,” he said. “You start to ask: What is a city? Why do we bother to live together? But that’s just the start.” The problem was going to grow worse until, as he put it, “you get to one.” A single employee to service the entire city, presumably with a focus on paying pensions. “I don’t know how far out you have to go until you get to one,” said Reed, “but it isn’t all that far.” At that point, if not before, the city would be nothing more than a vehicle to pay the retirement costs of its former workers. The only clear solution was if former city workers up and died, soon. But former city workers were, blessedly, living longer than ever.

A lot of people are confused over why they are seemingly having to pay more than ever in combined taxes, yet are getting less and less in terms of services. It's time to wake up, there are special interests that are clearly using government to enrich themselves and they are not limited to corporations or banks. We are on a course for disaster.

Lessons From Greece

The lesson to be learned here is that once some point is reached, it becomes very difficult to reduce the debt/GDP ratio especially if the government's contribution to GDP is very high as it is with Greece. An economy dependent upon the government will experience a slowdown in growth or even negative growth until the economy can adjust which takes time. In the short term, things will not change and might become worse. The trick is to take pain and reduce government spending before the crisis point is reached.

In Greece, government spending makes up nearly 50% of GDP. What's interesting is that we hear about "austerity" measures, but no actual cuts in government employment have been made, only some changes to wages and pensions. That's because the Greek Constitution guarantees lifetime employment for public sector workers, they cannot be fired or laid off. Now there is talk about moving government workers into a "jobs banks" where they would be paid 60% of their salaries to do nothing. Link below.

http://news.yahoo.com/state-job-cuts-table-greek-loan-talks-123314850.html

Greece's economy is so screwed up and so dependent upon the government sector that there is simply no way to avoid massive pain and a huge depression.

Why don't they just default? In the long run this might be better, but a default would mean that they would have to make even bigger cuts in the short term. That's right, Greece is still running around a -7% deficit despite all the "austerity" measures and a default would force them to balance the books. The Greek economy needs to restructure itself away from the government sector, but it's too late now to avoid huge pain. With so many people dependent upon the government gravy train, it's no wonder that there is social unrest. Once again, the lesson is for us not to get to the point where we are Greece. Our debt/GDP ratio is at 100% now and fast approaching Greece's.

For the people and economists who decry these Greek "austerity" measures, I can only shake my head and wonder what world they are living in. GREECE HAS NO CHOICE, THERE IS NO MORE MONEY TO SPEND, INVESTORS REFUSE TO LEND GREECE MORE MONEY. Time for a reality check.

Flat Tax Plans and Growing Resentment on Both Sides

The problem is that neither side is willing to move towards the necessary actions required to get to a balanced budget. This is especially true of the Left which will not cut spending in any meaningful way. Of the various flat tax plans, Cain's 9-9-9 plan is revenue neutral, Perry's is set to create stimulus. But the real problem isn't with revenues, like Europe, the problem is with expenditures which are so high that it's estimated income taxes would have to rise to above 65% to bring the budget into balance, that is assuming there will be no drop in economic activity which defies standard economic theory.

It's also interesting to note that every tax plan is rigorously attacked for the "costs" of the plan by the left, but spending on social programs and such are never treated the same.

The demand for lower taxes reflects growing frustration with the current system where a shrinking few are increasingly asked to shoulder the burden. With around 47% of wage earners paying no income taxes whatsoever, the rest are being asked to pay more and more.

Reasonable people would adopt a revenue neutral plan that gets rid of tax breaks for special interests, corporations and the like, but unfortunately, there is an unreasonable side that refuses to bring expenditures in line with revenues.

I will ask this unreasonable side how they propose to bring the budget into balance using tax increases alone. As stated, income taxes would have to rise to above 65% and I've seen higher estimates. Add to that State income taxes, property taxes, and SS/Medicare taxes and the tax burden approaches 100%. This again assumes that there will be no change in economic activity with a nearly 100% tax on income. Once again, I ask how this proposal can be called reasonable by any thinking individual. Instead of rhetoric about the rich, I simply ask for a proposal that includes reality. There are simply some Americans that refuse to deal with the problem at hand and use rhetoric to try and preserve a system that is clearly unsustainable. We need to make changes because we have to. Unfortunately, the first stage is admitting that there is a problem in the first place and too many are not even at that first step.

Loose Monetary Policy Fueled Bubbles

Low interest rates, especially negative real interest rates create excessive risk taking because people are forced to reach for yield in order just to stay even with inflation. Look at the situation today and back in the early 2000's with the FED Funds set at 1%. The typical definition for the risk-free rate is the 90 day Treasury bill which closely follows the FED Funds rate. With inflation above 1%, anyone who wanted a safe return would have to guarantee themselves a loss. The only way to keep up with inflation and keep purchasing power is to make riskier investments.

Banks are not the only ones that benefit from low FED Funds rates. Corporate bonds and other financial instruments (such as mortgage bonds) are also affected and receive lower rates too. The higher the quality of the bond, the lower the spread between Treasuries and the bond. Today, highly rated and highly "safe" companies such as Microsoft are able to sell their five year bonds at below inflation. Once again, the investor has to reach for yield in order not to guarantee himself a loss.

Where to go? Humm, junk bonds offered around 7%, and back in the bubble, people couldn't get enough of those bonds. There was so much demand that artificial junk and subprime mortgage bonds were created. That's right, artificial bonds made from credit default swaps simulated the junk and subprime bonds because not enough real subprime and junk bonds were available. Do we see something here? There was so much demand for subprime "high" yielding debt that mortgage brokers were pulling in jobless people and giving them money to buy a home. That is people could get cash out in addition to owning the home!

There was no conspiracy, these loans were widely known and discussed because they were referred to as NINJA loans, no income, no job loans and that name itself should have been enough for any regulator or investor to understand what they were getting into.

Yes there is definitely a psychological side as well. People stopped pouring money into stocks after the tech crash and people are much more risk-adverse today, even willing to accept 0.01% on T-bills which is a guaranteed loss of more than 3% a year with inflation where it is. But I hope that you see how low interest rates create speculation because people are FORCED to take risks that they wouldn't otherwise to protect their savings and assets from being destroyed by inflation. Many people would have been happy getting 5% in a riskless T-bill, which is why the bubble popped right around the time the FED raised FED Funds to 5.25%. It's a complicated system with many feedback loops, but there is no question that loose monetary policy was at the center of the mess.

What You Don't Understand About the Debt Ceiling Debate

What you don't understand is that spending is already at or near record levels. According to the White House, spending has more than doubled since 2000 and is due to increase yet again in 2011 to a record 3.8 trillion. If this isn't stimulus spending, I don't know what is. Yet I and many other common people, have absolutely no faith that this record spending is being spent wisely and will lead to future economic growth.


http://www.whitehouse.gov/omb/budget/Historicals

Year Receipts Total Outlays Deficit

2000 2,025,191 1,788,950 236,241
2001 1,991,082 1,862,846 128,236
2002 1,853,136 2,010,894 -157,758
2003 1,782,314 2,159,899 -377,585
2004 1,880,114 2,292,841 -412,727
2005 2,153,611 2,471,957 -318,346
2006 2,406,869 2,655,050 -248,181
2007 2,567,985 2,728,686 -160,701
2008 2,523,991 2,982,544 -458,553
2009 2,104,989 3,517,677 -1,412,688
2010 2,162,724 3,456,213 -1,293,489
2011 estimate 2,173,700 3,818,819 -1,645,119

The government sector is too large and needs to be restructured. People need to be shifted to jobs in the private sector, government needs to stop trying to be everything to everyone. The fact is that even with Boehner's plan, we would still have record levels of spending along with record projected deficits. That's why his plan is a huge compromise plan that is a win for Democrats already, asking for more is plain insulting. Look at the numbers and take $90 billion off of the outlays and off of the deficit. Does it even matter? Does it change the big picture? Be reasonable.

If these small cuts can't be enacted, what chance is there of real cuts in the future? No, people have been pushed against a wall and can't back up anymore. The fact that Boehner can't even get an agreement to freeze spending at 2011 levels shows how much he's backed down and enough is enough.

Government Today Incapable of Wise Spending

Government today is simply incapable of good spending, that is spending on projects that will produce a positive net benefit in the future. Projects are approved and denied for political reasons, not economic reasons, here's a good example...

http://mjperry.blogspot.com/2011/06/federal-governments-solution-to-non.html

Megabus provides low-cost, non-stop express bus service twice daily between Iowa City and Chicago for fares as low as $10 each way for service on some days, and $18 and $23 on other days. The single and double decker luxury buses offer free wireless Internet, convenient power outlets for laptops and cell phones, and panoramic windows (see photo above), and the one-way trip takes less than four hours. To provide this affordable, convenient, dependable and low-cost daily bus service between Iowa City and Chicago, Megabus receives no taxpayer funding, federal or state subsidies, loan guarantees, support payments, etc.

So what's the federal government's response to the "non-problem" of affordable public transportation between Iowa City and Chicago? At New Geography, Wendell Cox writes:

"The federal government is again offering money it does not have to entice a state (Iowa) to spend money that it does not have on something it does not need. The state of Iowa is being asked to provide funds to match federal funding for a so-called "high speed rail" line from Chicago to Iowa City. The new rail line would simply duplicate service that is already available (Megabus).

Perhaps most surprisingly, the luxury buses make the trip faster than the so-called high speed rail line, at 3:50 hours. The trains would take more than an hour longer (5:00 hours). No one would be able to get to Chicago quicker than now. Only in America does anyone call a train that averages 45 miles per hour "high speed rail."

The state would be required to provide $20 million in subsidies to buy trains and then more to operate the trains, making up the substantial difference between costs and passenger fares. This is despite a fare much higher than the bus fare, likely to be at least $50 (based upon current fares for similar distances). By contrast, the luxury bus service charges a fare of $18.00 (or less, see above), and does not require a penny of taxpayer subsidy.

Here in Los Angeles, we have the worst subway system in the world yet it was the most costly to build per mile. I have used the Shanghai, Paris, Hong Kong, Beijing, New York, and Bay Area subway systems more than I have used the LA one even though I have lived in LA for more than 30 years. The system could be made better if it went to more areas. Right now, the entire West Side and beaches are uncovered. Instead of spending money on projects that would reduce traffic and increase living standards, we have ridiculous projects like the one above along with another "high speed" rail project that proposes to link LA with San Francisco at some point. Yet this project will begin by linking two communities I've never heard of in the Central Valley. This is only the tip of the iceberg though.

http://articles.latimes.com/2011/may/16/opinion/la-ed-bullettrain-20110516

The train's biggest problems can be laid at the feet of the High Speed Rail Authority, which is overseeing its construction. Inexperienced board members appointed by the governor and Legislature on the basis of political patronage rather than expertise have made a host of poor decisions. Not the least boneheaded of these is the board's plan to take a circuitous route from Los Angeles to Bakersfield by veering through Palmdale and Lancaster. Compared with the more direct route along Interstate 5 through the Grapevine, this would add 30 miles to the trip plus $1 billion in construction costs, and make it all but impossible for the train to meet its promised travel time of 2 hours and 40 minutes from L.A. to San Francisco.

Instead of these stupid projects that will produce ongoing legacy costs forever, a better idea might be just to give people money to spend in the form of debit cards. These projects not only do not produce a positive net future benefit, they produce a NEGATIVE benefit as they will be in the red and cost government resources to maintain for as long as they operate. These are only some of the reasons why more government spending is so opposed at this time.

Two Studies Prove Our Tax System Is Highly Progressive

Misconceptions and Realities About Who Pays Taxes, by Chuck Marr and Brian Highsmith, CBPP: Executive Summary A recent finding by Congress’ Joint Committee on Taxation that 51 percent of households owed no federal income tax in 2009 [1] is being used to advance the argument that low- and moderate-income families do not pay sufficient taxes. Apart from the fact that most of those who make this argument also call for maintaining or increasing all of the tax cuts of recent years for people at the top of the income scale, the 51 percent figure, its significance, and its policy implications are widely misunderstood.

* The 51 percent figure is an anomaly that reflects the unique circumstances of 2009, when the recession greatly swelled the number of Americans with low incomes and when temporary tax cuts created by the 2009 Recovery Act — including the “Making Work Pay” tax credit and an exclusion from tax of the first $2,400 in unemployment benefits — were in effect. ... Both of these temporary tax measures have since expired. In a more typical year, 35 percent to 40 percent of households owe no federal income tax. In 2007, the figure was 37.9 percent. [2]
* The 51 percent figure covers only the federal income tax and ignores the substantial amounts of other federal taxes — especially the payroll tax — that many of these households pay. As a result, it greatly overstates the share of households that do not pay any federal taxes. Data from the Urban Institute-Brookings Tax Policy Center show only about 14 percent of households paid neither federal income tax nor payroll tax in 2009, despite the high unemployment and temporary tax cuts that marked that year.[3]
* This percentage would be even lower if federal excise taxes on gasoline and other items were taken into account.
* Most of the people who pay neither federal income tax nor payroll taxes are low-income people who are elderly, unable to work due to a serious disability, or students, most of whom subsequently become taxpayers. (In a year like 2009, this group also includes a significant number of people who have been unemployed the entire year and cannot find work.)
* Moreover, low-income households as a whole do, in fact, pay federal taxes. Congressional Budget Office data show that the poorest fifth of households as a group paid an average of 4 percent of their incomes in federal taxes in 2007 (the latest year for which these data are available), not an insignificant amount given how modest these households’ incomes are — the poorest fifth of households had average income of $18,400 in 2007. [4] The next-to-the bottom fifth — those with incomes between $20,500 and $34,300 in 2007 — paid an average of 10 percent of their incomes in federal taxes.
* Even these figures understate low-income households’ total tax burden, because these households also pay substantial state and local taxes. Data from the Institute on Taxation and Economic Policy show that the poorest fifth of households paid a stunning 12.3 percent of their incomes in state and local taxes in 2010.[5]
* When all federal, state, and local taxes are taken into account, the bottom fifth of households paid 16.3 percent of their incomes in taxes, on average, in 2010. The second-poorest fifth paid 20.7 percent. [6] ...

* The fact that most people who do not pay federal income tax in a given year do pay substantial amounts of other taxes, and also are net federal income taxpayers over time, belies the claim that households that don’t owe income tax will form bad policy judgments because they ostensibly “don’t have any skin in the game.”
* The federal tax system is progressive overall, but state and local tax systems are regressive and undo a significant share of that progressivity. There is nothing wrong with having one part of the overall tax system shield low- and moderate-income households, who pay substantial amounts of other taxes and who generally pay federal income tax as well in other years. ...

I think the above proves that the American tax system is highly progressive, dispelling the myth that the rich aren't paying their fair share. In fact, a recent study by the OCED found that the American tax system was the most progressive of all of the countries studied including those in Europe.

http://www.taxfoundation.org/blog/show/23856.html

But a new study on inequality by researchers at the Organization for Economic Cooperation and Development (OECD) in Paris reveals that when it comes to household taxes (income taxes and employee social security contributions) the U.S. "has the most progressive tax system and collects the largest share of taxes from the richest 10% of the population." As Column 1 in the table below shows, the U.S. tax system is far more progressive—meaning pro-poor—than similar systems in countries most Americans identify with high taxes, such as France and Sweden.

As noted, the discussion has been mainly focused on income taxes, not on other types of taxes. The reason is that proponents of tax increases want to raise INCOME taxes, and claim that the current income tax structure is not progressive enough. It is natural, therefore, for opponents of income tax increases to point out the facts as laid out by the Joint Committee on Taxation along with the OCED.

What is often overlooked when discussing income tax rates are the numerous other types of taxes that must be paid in addition to income taxes. With State and local taxes already taking 12.3% of income from the bottom fifth, rates for the other four fifths are no doubt higher meaning that those who are in the top tax bracket pay more than 50% of their income when all taxes (gasoline, utility, etc.) are accounted for.

The level of taxation for all citizens is shocking in this country and needs to be decreased, not increased. While the Bush tax cuts reduced taxation for ALL income tax payers, I suspect this has been more than offset by increases in state and local government taxes along with property taxes and the like. No wonder there is backlash on the state and local levels. Ultimately, we have to ask, are we getting good value for the taxes we pay? I think the answer is a clear NO.

Our New Economic Future

We are in a global economy today and in a huge adjustment period which is causing weakness in the US economy. The addition of developing countries along with their billions of citizens to the global capitalist marketplace has created shifts in production based on comparative advantage. They are not yet rich enough to buy American goods in bulk, but will be though that will take a decade or more.

What America "manufactures" has also changed. We now create a lot of intellectual and information goods such as movies, drugs, and processes that have no physical basis. However the international legal protections and recognition of these new goods are still being formed and so we are not receiving the full benefit of our production.

We are moving into a world where tangible products are cheap and plentiful. However, humans will always need entertainment and information. Whether the manufacturers of those products will be compensated is the question, fortunately we seem to be moving in the right direction although enforcement is still very sparsely seen. If other countries would pay for all the software, movies, etc. that they use, the United States will be in good shape and those sectors could grow, but we need to do better at getting others to enforce and pay for what we produce, otherwise the US economy will be sunk as that is our future.

Reason Why Deficit Reduction Must Include Medicare

The discretionary budget is much smaller than the non-discretionary entitlements part which includes Social Security, Medicare, and Medicaid. Of those three, Medicare and Medicaid spending are projected to grow the most. So in order to "fix" the budget and get us to where we can run sustainable deficits of approx. -4%GDP, I see no way out other than to tackle Medicare and Medicaid.

I support ending subsidies for corporations including the green subsidies that are so favored right now along with all farm subsidies, but that's just a drop in the bucket.

I also support reducing the defense budget and eliminating costly weapons projects that deal with an enemy we don't have and won't get into a war with, such as Russia and China. Both have nuclear weapons and a war would end in mutual destruction. Due to the proliferation of nukes amongst high tech nations, conventional weapons such as fighters, bombers, and so forth are unlikely to be ever used so there is no need for them. Cutting defense spending would be a help in reducing the deficit, but again, not enough.

At least Ryan made a proposal. It's time for Democrats and President Obama to likewise, make a serious proposal that would reduce the deficit to manageable means. Constantly bashing Ryan's proposal gets us no further towards a solution, there has to be an alternative for the discussion to move forward and we haven't seen it yet. And to cut off the usual cries of tax the rich, that won't be enough either if Obama sticks to his promise that no one making under $250,000 will see a tax increase.

Some Health Care Logic

The problem is that SOMEONE has to pay for the cost of providing sick people health care. By logic alone, not everyone can pay less than the health care they consume, some people have to pay more in order for insurance to work. It doesn't matter if government runs it or if its single payer, the funds have to come from somewhere be it taxes or premiums.

Recently, Health and Human Services announced that, "The provision of the law that permits young adults under 26, long the largest uninsured demographic in the country, to remain on their parents’ health insurance program resulted in at least 600,000 newly insured Americans during the first quarter of 2011." Now how much more are these healthy young adults paying (or their parents) into the system? If insurance companies only increase premiums by the amount of expected costs to treat these healthy people, then it makes no difference. This is what I suspect has happened.

Right now, it seems that no one wants to pay more for health care, but that's an impossibility. For costs to drop for some people, others HAVE to pay more because the aggregate costs have to be accounted for. Either that or health care services need to be rationed (the death panel model) in order to reduce total costs. There is no way around it folks, it's time to face reality and choose from REALISTIC options, not ridiculous and totally impossible outcomes such as lower costs for everyone without any reduction in quality or quantity of care.

Greece Will Default

The biggest problem with Greece is that they are not competitive within the Eurozone. Iceland did not suffer as much because they were able to devalue their currency, making themselves competitive again. Greece has the Euro, so their only option is to undergo a long and sustained deflation until their wages and productivity become in-line with the rest of the Eurozone.

According to http://www.uncwlibertarians.com/2010/06/greek-public-sector-employment.html

"Approximately one million people, or one out of four working Greeks, is employed by the state. More than 80% of public expenditure goes toward the wages, salaries and pensions of these public-sector workers."

These workers only work 37.5 hours a week and the average retirement age is 61. It's not only that these public sector workers are unproductive, they also received massive wage and benefit increases within the past decade as Greece was able to reduce its debt interest payments costs thanks to joining the Euro.

http://www.telegraph.co.uk/news/worldnews/europe/greece/7646320/Greece-why-did-its-economy-fall-so-hard.html

"Greece went on a spending spree, allowing public sector workers' wages to nearly double over the last decade, while it continued to fund one of the most generous pension systems in the world. Workers when they come to retire usually receive a pension equating to 92 per cent of their pre-retirement salary. As Greece has one of the fastest ageing populations in Europe, the bill to fund these pensions kept on mounting."

http://www.bbc.co.uk/news/10099143

"The government is planning a pay freeze for all public sector workers.

Some pay cuts will also be implemented, and public sector contract workers are set to lose their jobs.

This follows several years of continuous increases in pay, with salaries rising by an average of 30% since 2006.

Annual bonus payments - paid as 13th and 14th month salaries - will also be scrapped for high earners and capped for lower earners."


This crisis didn't just come out of left field, it arose due to years of overspending and pay increases for an already under-productive government workforce. A 100% increase in wages over a decade without a corresponding rise in productivity is a recipe for disaster. Austerity, meaning a cut to reasonable wages and benefits is definitely called for.

However it will take time for Greece to restructure its economy and time is what they don't have. They dug a hole so deep that it's just not possible for them to continue on with the debtload that they have. I believe that they will have to default (restructure in PC speak). Another round of loans from the EU will just delay the inevitable, Greece needs economic growth to reduce their debt/GDP ratio, but it takes time for laid-off public sector workers to transition into the private sector. At this point, austerity measures will only decrease GDP making things worse. Unless Greece can get a large enough EU bailout that will finance all their needs for the next decade, they will have to default.