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My concept is borrowed from the game of basketball.. When one is down in points, one gambles on applying a full court press.
For my plan to work, as a nation, we go “full court press”.
What does “full court press” mean? That is a legitimate question for non basketball players to ask. It means that you pressure the other team up and down the entire length of the court to force a turnover; you try everything you can; you expend every amount of effort; the opposite of what one usually does, which is to conserve energy by pressuring the team only underneath one’s own basket and underneath theirs.
On a broad scale here is what we need to do. Short term.
1) Jump start the economy. Put money in the hands of purchasers.
2) Pay some type of compensation to those out of work.
3) Rebuild our infrastructure, (green energy included).
4) Re-establish some type of manufacturing base back inside this country.
5) Open access to short term credit; it needs to be readily available, even if just for the daily business transactions that often go unnoticed, but are essential for the running of our economy.
Long term:
1) We need to spend within our means, both personally and as a nation.
2) We need to pay down the deficit, reducing our national interest payment.
3) We need to control our spending on entitlements: Social Security and Medicare.
Despite the gloom there are some exciting bright spots in our current mess.
One, we have proved beyond a reasonable doubt that privatization of Social Security is a very, very, very, very bad idea. That argument, by today’s events, has been proved to be extremely dangerous.
Two, we are now given unlimited opportunities to fix long term problems that before seemed insurmountable under the old system, because back then….. we had to play by “old rules”.
Three, we have historical accounts of what did and didn’t work in a previous Great Depression and we have at our finger tips a vast information system, allowing anyone to bring forward the next “great idea” which just may turn the tide.
Four, we have at the top of our government, an extremely gifted group of individuals who are each charged with bringing major changes to bear in their respective areas.
Five, we finally have a Congress working in sync with the Executive Branch in order to pass the necessary changes required by today’s events.
So let’s jump start the economy. There are several ways to do so.
One is a tax check to spend at will. Most of which will go to pay bills to stave off bankruptcy and do nothing to generate new manufactured products or services.
The second is have the mortgage companies contribute their part. Figure out how, and run a three month moratorium on paying off the mortgage.
The third is to have banks again guarantee loans to businesses at very low rates, so businesses can spend freely without fear of going under.
The final, is to have the government get directly involved in large massive projects giving some good employment opportunities to work on projects that if left to free enterprise, would never get done because of the low rate of return on their investment.
This is organized as outlined above.. Click the links above to go to the chapter for further detail on that topic.
Hopefully our search of big, bold ideas will need to go no further than the words on these pages. (all 59104 of them.)
Who purchases things? Who ever it is that does so, they need to get snapping….. kavips
Here is an interesting question. What happens in a Great Depression?
Let’s trace the fallout from one single event: General Motors going out of business. As soon as that happens, its now unemployed workers must cut back on their spending. Sales drop precipitously in neighboring restaurants, and a percentage of those food service employees are quickly laid off.. None of those ex restaurant employees can now buy anything at the supermarket, so it too lays off a percentage of its stock clerks. With everyone in survival mode, the local gas stations no longer can move the amount of gas they are used to selling, and they too, must add their layoffs to the pot… Even insurance salespersons begin to lose a flood of accounts as they expire and fail to get renewed; now they too shop less, contributing to an additional scarcity of business, stopping by the supermarket now for only emergencies. Because of plummeting sales, the supermarket has no choice; again it must make drastic cuts. One week later the gas station does likewise and cuts everyone but its owner, who himself becomes the sole employee, manning it from Monday through Friday, 8 am to 5 pm. Fewer and less people working creates even less economic action, which in turn, causes fewer people to work, which causes even less economic action. The downward spiral grows wider. Left alone,… it is unstoppable. Eventually one very wealthy person, the last man standing with any money, buys up the entire town for pennies on the dollar.
But wait,….aren’t there a lot of other towns supplying parts to GM, simultaneously undergoing the same scenario? Yes. Across this nation, in every village, town, or city, because of GM’s folding, the same downward spiral occurs…. As people lose their jobs it causes more people lose their jobs; the reason they lose them is because their neighbors lost their jobs first… The unemployment curve which once climbed steadily, suddenly shifts, and rises exponentially.
Obviously the critical point where we should attack this economic problem is at it’s very beginning… Keeping GM afloat. As one can see from this projected downward spiral, which widens as time progresses, the longer one waits to apply a fix, the higher becomes one’s cost to correct it. Eventually the price of fixing becomes just too high; money runs out, and there is nothing more which can be done. To succeed, one has to nip it in the bud.
The four best methods for doing so are discussed below.
A) re-running the stimulus tax check scheme.
B) putting a moratorium on household mortgages for three months.
C) have banks flood lending markets with very low rates.
D) creating a WPA to build public works, funded by the Federal government.
Method one is the idea we found to be the most politically expedient; it was the first idea that occurred, after all it was just this past year we tried it. Although its impact or effect on our economy is still debatable, most public opinion polls taken beforehand did show that once it was received, paying down one’s bills was almost every recipient’s first plan of action. Even though the second quarter of 2008 showed some growth, that positivity was short lived. Today as we look backwards from 6 months past, we see there was little residual effect from that stimulus package, except for the admonition that things would have been much worse had we not followed through on it. What is almost forgotten however, it that this stimulus money is not paid for in advance by taxpayers, but is borrowed (as is a large portion of our budget) from various lenders charging us various rates of interest. Not only do we have to pay back the stimulus funds, but when that time comes and we do have to pay them back…..we will be paying back far more than we received,… due to the interest that is now accruing daily.
Fortunately we can learn from past mistakes. We can choose to put our “shot-in-the-arm” purchase on our national credit card, and continue to say “we are living well”. But on the day of reckoning when we do pay it back, our economy could be doing far more poorly than it is now… (which means (1) it won’t get paid back; or (2) that we will really suffer horrible economic hardships when we do pay it back, much worse than we suffer now).
Our investigation discovered that a stimulus package succeeds only when a nation is not buried under debt. Normally, if extra money gets placed in our hand, we spend it. A stimulus tax check should work in theory. If everyone spends their check simultaneously, their extra purchases deplete retailer’s inventories, which if restocked, would create new activity and growth in the manufacturing sector; therefore in theory….the economy should grow. But as it stands right now, when everyone is mired so deeply in debt , the bailout money gets used to write off existing red ink. What winds up happening is that as I write a check to my debt company, who then uses my money to write off a check to their debt company, which in turn, flips those funds over to their debt company… Everyone passes the money around and around, and instead of manufacturing jobs being started, it is only red ink that gets written off. No new investment gets placed into projects that create new wealth. Bottom line: all that is happening within each and every one of today’s economic stimulus packages,… is that we are borrowing from our nation’s public debt, to pay-off our nation’s private debt. The public debt is still owed by the public; so nothing really changes, except the terms of the loan, and name of the entity to whom we owe!
The next option holds much more promise: that of granting a stay for three straight months on paying off one’s mortgage. Stop for a second,……… now imagine how quickly you could get your personal finances in line, seriously, if you were allowed to go without paying three months worth of mortgages?
Month one would be dedicated towards catching up on bills. Month two, would be dedicated to getting completely caught up, and possibly ahead on bills. Month three would be spent on buying cool stuff. Bouncing this idea around to a lot of people, the same exuberant reaction comes from almost every household: this works for them.
So how would this affect those financial institutions actually in charge of handling the notes? Before I go forward with that task, we need to take a moment to familiarize everyone with the difference between real wealth, and “virtual” wealth.
Real wealth is what we are familiar with; it is something we can touch. Our car for instance. “Virtual” wealth is something seen primarily on a computer screen. We all know what real wealth is: as little kids we saw Scrooge McDuck’s money room in our Disney Books … Virtual wealth is the same thing, except it has “pretend” value. This homily should help explain how “virtual” wealth accumulates it’s value.
Let’s assume that somehow you were able to convince me to purchase some gravel which you picked up alongside the highway while you were walking forward to meet me.. I look it over, decide to buy it, thinking hopefully that I can sell it at a profit sometime later, and pocket the difference. And why not?.. I certainly don’t need rocks, … but I could use some extra cash. However my wallet is short of funds and our transaction which we are discussing,… is in jeopardy. To keep it afloat, you decide to take one dollar for every ten of which you are asking, and when I sell the rocks off later, I will give you nine more dollars at that time…
So here is how “virtual value” works. The real value is $1 dollar for the pile of rocks I received, because that was all of the out of pocket expense that I paid you.. However, instead of $1 dollar, I write down its value at $10, because eventually that is value of what it will cost me. But in truth, it will not actually cost me $10, until … that moment after it is sold.. Sound complicated? It really isn’t….
Here is why. You made $1 dollar selling me the rocks. They cost you nothing to acquire. Now that I have the rocks, if they go worthless it will only cost me a dollar anyway. So I lose a dollar.
However… in some computer, it shows on file that you are carrying the value of $9 dollars owed to you by me as an asset (money coming to you), and I am also carrying my value at $10 as an asset so that I can sell it if needed, so between the two of us, we stand to lose $19 dollars if the gravel market goes to zero. And it’s all really just make believe money, since only $1 dollar actually changed hands. *
Our current crises is predominately over “make believe” money; it is over stuff which we thought was owed to us, based on its arbitrary value at the time we made an agreement. We still have the objects of which we paid for in our possession.
Background explanation over.
So back to the mortgage write off. I lend you $100,000 for your house, and give you a payment book. Now that I’ve given you the money, I have a lien on your house, and I collect the money plus interest over time… If you do not pay me back, say skip a month, I do not lose anything except “anticipated earnings”. I am not in the hole any more or less because you did not pay. I do not have to pay anyone for the house. Everything stays the same, except the additional income I thought I would receive… It simply does not come in when I expected it… which is exactly the same thing that would occur during a restructuring bankruptcy. For a while you pay nothing, until eventually you catch up and resume payments and pay off the loan..
Under our agreement, if you couldn’t pay in a timely fashion, I had the right to sell your home and pay your debt for you. In a thriving economy that is possible. But, as a lender, if no one out there has any interest in buying the house, and I unload it at the going rate market value which costs me money instead of making it, I stand to lose all my money I gave you. Obviously it would be better for me to allow you a small grace period, which will cost me nothing in real money (only the virtual money I thought would be coming in), but will guarantee that over the life’s value of the loan, I will lose nothing… Between losing everything and losing nothing, being a rational person, as your lender, I would prefer to take the latter course of action.
To nip another argument before it gets started, allow me to reiterate with one other example. Let’s switch roles, you and I …. Let’s pretend that you are a mortgage company worth one hundred million dollars, and you have lien on a 1000 mortgages worth $100,000 dollars each. During the good times your monthly income averages $900 per mortgage for a combined total of $900,000 per month. Out of that monthly amount, you pay off your employees, utilities, maintenance service contracts, and costs charged to you by other banks. You keep the difference as profit. Speculation suggests that even without the moratorium, this March you will be faced with a 75% failure rate as people accept the fact that they just can’t pay. Your monthly income suddenly drops to $225,000. (down from $900,000).
In the following month, April, 50% of those who were late, will pay their late March payment, but will still not have enough cash available to make their payments for both months. The other 50% will be down by two months on their payments, with no real hope of ever making it up. In virtual terms, by the end of April, your business will be down $1,012,500 dollars. This is sort of the black hole to where all our bailout money is currently being applied… However, disregarding the “virtual” losses, your actual losses would be only the money spent on paying your employees, utilities, maintenance service contracts, and those costs charged to you by other banks. For you still have lien on those 1000 properties. At today’s zero value, those liens are worthless. But if the economy ever takes off again, by tomorrow they could be worth $100,000,000 if one could find a sufficient number of buyers willing to purchase them at the price you paid…..
So all that mortgage companies simply need to do in order to sustain themselves for three months of no income, is to pay their expenses. And they could again pick up where they left off starting on the fourth month. After all, it does not help our overall economic problem if we lay off numbers of financial service workers, because we were helping the economy by canceling three months worth of mortgages.
The above example is based on estimates which show that twenty five percent of mortgages will continued to be paid through April.. However the boost of this economic impact would be minimized, if only those people in dire financial straits were only the ones given a grace period. Those others fully capable of continuing to pay, would find themselves penalized for having been good creditors and paying their full amounts on time…. Not fair.
If it is to work, the three month grace period must be applied across the economic strata …. covering everybody. Everyone, no matter how poor or how wealthy, needs this same privilege. Remember, our primary goal here is not to stop foreclosures; it is to jump start the economy. To tip the balance of our economy, we need every bit of money pumped back into our system. We especially need those still untouched by our failing economy, who can still afford to keep their mortgages current, to throw their cash into the economy and sweeten the pot…..
As we all heard during the 1930’s, back then banks went on “holidays” for up to weeks at a time. None of those “holiday” banks ever threw in the towel during the time they were closed; however, had they remained opened, bank runs being made on them would have put them under. The same principal holds forth with our mortgage industry and financial institutions today. They will lose no money over their three month closings, but will instead gain the benefit of still being solvent three months from now; something which is doubtful if the dangerous current trends run unabated….
This plan has several major advantages, and a couple minor disadvantages. The major advantage can be dreamed of by every mortgage payer today. “Gee, if only we didn’t have to pay the mortgage this month”. This plan does not require Federally borrowed money like a stimulus package that someday will need to be paid back. This plan does not cause a single dollar to be lost to those businesses who lend money. This plan places a tremendous amount of spending money into the hands of purchasers within three months. The minor disadvantage will be determining who will pay for those employees who usually receive their income from these lending institutions….
The Federal Reserves estimates that this action will put 3.5 Trillion into our economy each month. There is no way federally funded mandates could match that level of impact. There is even perhaps some poetic justice in that since mortgage companies were the ones who first put the global economy into this mess, they should be the ones responsible for pulling us out……
Technically this action could be done very cheaply through the issuance of an Executive Order: stating that no part of the Justice Department will hear or prosecute any cases regarding any unpaid mortgages falling inside the three moratorium months of 2009. If there is no recourse in the Federal courts for not paying one’s mortgage, then by de facto the moratorium is in place. For if you, the mortgage payee, are being pardoned by the Federal Government for not paying your mortgage…then why pay it?
In other alternative situations the same plan could also be passed by Congress, State Legislatures, etc, etc, by anyone who wanted to bask in the warm accolades of regular people….
The next item (much less interesting) is that of dropping interest rates to the floor. After the recession following 9/11, that same thing happened and the housing market took off… quite possibly to our detriment today…. In late December 08 the Federal Reserve dropped the interest rate on inter bank lending to half a point, and speculation was that that it may go to zero, or even negative during the next few months… Zero interest rate? As happened during the last time we had low rates, the purchase of homes became remarkably cheaper… In late December, the Fed released information confirming that a record number of applicants inquired that week about re-financing just after the news was announced….
This has possibilities, but it must have the support from other factors of our economy to be effective. Just cutting down the cost of building a business, the cost of buying large purchases on credit, the cost of taking on a bridge loans to cover a brief, rocky, financial moment that one finds himself, ….. can, if available, provide an incentive to switch money now lying dormant in a safe account, over to flipping a new business that may hopefully one day generate new fresh money towards the GNP.
However for it to work,… banks have to lend…
That openness towards lending did not happen during the previous Great Depression, and from what little evidence is available to be seen thus far, it appears that banks are loath to let money again slip beyond control of their fingers…
That fear revolves around the habit that banks have of “calling in a loan”. When a bank lends money, it has the right to receive full payment if requested on demand. All banks lend to other banks. If one bank is in trouble needing cash, it calls in its loan. Unfortunately that poor bank holding the loan just called in, now has to ante up a considerable amount of cash rather quickly. Most likely, it will also call in its loans in order to pay off its loan that got called in earlier. The pyramid scheme fans out as each bank triggers two or three additional banks to call in their own loans as well.
A banks only defense in this scenario, is to have huge stocks of money available in cash, for those times when their neighbors call in their loans… Therefore banks are loath to lend out their reserves. If a bank puts most of its money back into the economy, jump starting it as quick as possible by investing in neighboring factories, production units, and houses, and automobiles,….. and then gets “THE CALL”….. it can’t unload all those properties in time to prevent its going under.. But if it has cash, it simply says “here it is….” So one can rant, rave, and rail at banks for not lending out their reserves….. but it would be foolish for anyone to place a monetary bet upon any bank that would make the choice of being altruistic, over it’s own survival…… Until the problem of calling in loans has been eliminated, credit will remain frozen.
(The problem can be quickly fixed by changing those rules regarding the “calling in of a loan”… most particular in its regard their “timing” or lead time, leading up to that act.) As an extreme example, changing the rules to allow a bank a full year to comply, would relieve much stress on any financial institution getting the call. Any bank given a year could figure out how to get liquidity to pay off that “call”. In an area where every bank lends to every other bank, the threat of going under would be abated. Keeping money tied up in reserves, at 0 percent, is costly if one could otherwise get 10 or 11 percent upon it…. Remove this threat…and the credit markets rapidly open up.
Again this action can be done cheaply by an executive order aimed at the Federal Reserve, stating that over a certain period of time, a bank has up until one year from the date its loan is called, to ante up… The bank originally calling for the loan has no worries… it has a year.. The chain reaction of calling in loans is never begun. Banks no longer need more than the required reserves on hand and lending becomes easier because banks are in the business to make money too…… Or again a law regarding such could be passed by Congress, state legislature, etc, etc, or anybody else desirous of basking in the adulation of the public’s citizenry.
(Although the “effectiveness of various tactics” will be written about in another chapter, the best option available today to initiate open credit, would be to issue a national Executive Order stating the obvious, and within it: installing an expiration or Sunset Date, by which it had to be passed and endorsed by another governing branch or legislative body if it were to continue further.)
So dropping the interest rate to zero, CAN put money into the hands of those purchasers who refinance existing loans, and CAN create new business opportunities since the cost of opening a factory will become much cheaper, if and only if, banks are given some way out of having to instantly pack up all their reserves and ship them out at a moment’s notice …….
Finally the most popular idea leaked out by the initial transition team’s encampment, was: creating a WPA to build massive public works funded by the Federal government. For those too young to remember, the former WPA was a Federal Program run like a business, but was funded with the taxpayer’s money…. and not by the purchase of private stock…. The principal is simple.. If banks won’t lend to start capital improvements, the the Federal Government will lend the money to itself (or a division thereof), and something at last will get started. During the last Great Depression, some examples of massive public works built include the planting of a wind break across the entire Great Plains, of building dams along the Tennessee River (TVA), as well as up and down the Colorado and Columbia Rivers… It also included building the Golden Gate, as well as the building of the then ultra modern Pennsylvania Turnpike across the Appalachians…
These local investments spur the economy in their respective areas. Concrete is needed, heavy machinery is needed, as well as are paid personnel. Those people then need to spend their paychecks and money enters the economy.
If one looks back to the last Great Depression, one sees that within the local areas, Public Works did jump start economies on a scale relevant perhaps to the size of a county or a township. But after the job was finished, the work moved away, a little further down the line perhaps, and the brief high level of economic activity was not sustained. As the extra workers move out, that area fell back into a recession. Only in a case like the Tennessee Valley Authority, where continuous activity lasted for decades, was any long term economic viability enhanced.
The added benefit was that we did get some great dams, which are then able to provide electricity over wide swaths of rural areas… or a turnpike… or a nuclear plant…. or a massive bridge….something of lasting value…
But proposing public works as a method to rebuild the economy, doesn’t seem to pan out, based on historical evidence… Essentially the amount of public work that can be done at one time, is just too small to make a dent on the national economy. Building Hoover Dam does not relieve those living in the Hoovervilles of Indiana. Building the Golden Gate Bridge, does not assist those starving in St. Louis, the Gateway to the West. Another Bridge to Nowhere, helps very few people somewhere else….
And that is that is fallacy behind using public works to grow our economy. It’s handsome bucket of water being thrown upon a blazing house. The silver lining of that program is that since we are we paying for unemployment anyway, this option provides a better return to our investment (again we will be using borrowed dollars to pay its way). Paying someone to reforest a clear-cut forest instead of watching Ellen DeGeneres on television, is arguably the better use of our tax dollars. Paying someone to demolish condemned city properties does more far more public good than seeing that money going to seed criminal activity…..
So the money spent towards unemployment, supplementing the welfare of those citizens out of work, could be better spent on Public Works with those same wages being applied to those same people who were underemployed. Again, an Executive Order directed towards the Department of Labor, could require that only those working in the service of their country (assuming other factors were not in play), would be eligible to receive future unemployment benefits. We would then scramble to figure how to accommodate that directive.
Review:
The four possibilities were:
A) Tax stimulus checks
B) 3 month moratorium on mortgages
C) Dropping the Fed’s interest rate very low
D) Building Public Works
Although all have the propensity to help jump start our economy, the one having the greatest impact upon our economy in the shortest amount of time, ie putting the most money into the hands of purchasers, is Plan B: a 3 month moratorium on mortgages.
Those without money,… can’t buy much… kavips
During the thirties, it was acceptable that those thrown out of work were simply out of luck… Some lived, some died and if you were one of the unlucky ones, you had our sympathy, but not our resources… Those resources we saved for ourselves, because more sooner than later, if circumstances folded differently, we might find ourselves destitute along side of you…
Today our mentality is different, in part because during the past Great Depression, we figured out that leaving humanity alone, was more costly than giving them something to do.. Because of our earlier insolence, we all recognize that paying some compensation to those put out of work, is a national requirement.
What is the cost of unemployment?
I recently revisited that cost on a personal level when I forgot to eat for a day and then realized too late, that I was completely out of food; it was far too cold and windy that night to go shopping .. I decided to tough it out till daylight. As the night hours crawled by one by one, I reflected that it had been a long time since I was ever hungry. (I am not talking about the little two-hour-starve thing; it’s the 36-hour-fast thing I’m talking about..) I asked myself to what extremes would I go after spending 4 weeks in the condition I was feeling by the end of that time?… Let’s just say it changed my perspective a little…..
A) We need unemployment insurance; it is not a luxury.
B) Education and retraining for yesterday’s economy is not the answer.
C) Tie the receipt of Unemployment Compensation to some type of “Service to America” platform.
Society can NOT afford the higher cost of having NO unemployment insurance. It can do without the crime, the black markets, and general malaise associated with very hungry people who have nothing to eat. We do not need to remake America in the image of the old Time’s Square of the seventies….. We need to prevent that natural trend from occurring.
Currently only 37% of our unemployed are in receipt of benefits. Only 37%. The increase in working women, the prevalence of two-earner couples, and the reality of single working parents, is not reflected in most states’ Unemployment Insurance eligibility criteria, which fails to take the impact that family considerations — such as the need to care for a sick child or the collapse of child-care arrangements — can have on woman’s employment histories. In most states, workers who lose employment for such a reason and are trying to find a new job are denied unemployment benefits.
Unemployment only supplies 60% up to a certain level, of one’s former compensation. Currently, unemployment is tagged to finding additional work. Today’s unemployment checks are given out, but only after proof of looking-for-work is forthcoming. But how fair is that…. when and if there is no work to be found?
Back during the Great Depression, estimates show unemployment was as high as 25 percent. One out of four heads of households was not working. It became the duty of the other three, to make sure those did not starve and die. Shelters and soup kitchens were just one way of accomplishing that…
Today we hear discussion of our need for re-training. Training can most often be considered a scam proposed by those who make their money on “instruction.” After all, what does training actually give to unemployed workers? A new title? Are they now considered to be among the “trained unemployed”? ….. Could the amount being spent on training, be better served to hire workers who actually “do something” lasting… like building a road that is sorely needed. Consider “that” a form of on-the-job training……
One version of unemployment benefits is titled Self Employment Benefits. These are paid to citizens who have lost their jobs and are trying to start a small business. To date, Delaware, Maine, Maryland, New Jersey, New York, Oregon and Pennsylvania have Self-Employment Assistance programs. Under these programs, States can pay a self-employed allowance, instead of regular unemployment insurance benefits, to help unemployed workers while they are establishing businesses and becoming self-employed. Participants receive weekly allowances while they are getting their businesses off the ground.
The problem is that if the economy is not moving, those businesses will fail as well. And then what? Will we have a glut of out-of-work business owners who have used up all their unemployment benefits? Now were the economy vibrant, this plan could provide much needed growth. It is a much better use of public money over that of paying someone to watch TV… But when there is a glut of under utilized nail parlors, how does adding one more help anyone?
Recently the Federal government extended the time to apply for unemployment benefits. If there is no work found during the first 26 weeks, what makes one think that 13 more will do the trick? Sooner or later one must come to the conclusion, that there is too little work to be found. We are paying ex workers to go on a journey to futility….
Review: here is what we have found so far.
We cannot afford “not” to pay our unemployed. The current system pays them a lot of money, and gets no return on our investment.
Answer?
Tie unemployment compensation to “serving America”, similar to terms used in the reimbursement of college tuition to guarantee that every child had a right to higher education. Volunteers are in desperate supply, especially now that businesses cannot afford extra labor. Volunteering in a soup kitchen, would be worthy of unemployment compensation. Assisting a parental teacher’s aide in a rowdy high school, would be worthy of unemployment compensation. Picking up litter along a highway, or city street, would be worthy of unemployment compensation. In the inner cities, keeping youth off the streets by organizing a basketball league, would be worthy of unemployment compensation.
In all, we are giving citizens the opportunity to give back some of what they’ve gotten,… back to “WE, the people”.
In doing so, we have formed a more perfect union…. More often than not, we will receive more back… than we gave… After all, everyone needs to be needed. There is no better cause than putting one’s talents to good use for our nation, especially in its dire time of need.
Stories of the last Great Depression are fraught with glimpses of how time stood still. There was no one to pay for picking up litter, so it never was.. There was no one to pay for cutting grass along the highways, so it was left alone. Other civilizations have used their populations to achieve great works. Recently, all eyes should turn to China, who as late as 20 years ago, was just a few years past Mao…. But people built dams for food. People planted hillsides for a daily bowl of rice. Whatever it took to survive, people accepted as a necessity. But, if unemployment progresses to 25%, with only 1 out of every 4 people still working, we will need someway of keeping that one alive, while at the same time providing an opportunity for them to live with dignity. I can think of a no better way to live than doing service for one’s country.
With this economic crises we have an opportunity to realign America. We sort of steered ourselves down the wrong path by worshiping our markets a little too much.. While chasing the dollars across our oceans, we sort of forgot that volunteering our time over here was important also. We can relearn that lesson.
In essence, to really make America a better place, we need to tie unemployment benefits with service being done in the name of America… Bringing proof of one’s volunteerism, instead of one’s job searches, would benefit America as a whole. As we shrink our state and national budgets over these next ten years, we will need to find a way to continue those services upon which we have grown so dependent. The best way to do both, (shrink the cost, grow the service) is to use volunteers. Since we can’t have volunteers starve or freeze, we will need to pay them a little so they can sustain themselves for their food and shelter… When work returns, we know where to find new workers….
Whereas extending unemployment benefits over longer gaps of time, retraining the American work force, and tying unemployment to the service of one’s country, all act to mitigate the pain our upcoming Great Depression will bring, the latter,…. linking unemployment compensation to service volunteering for our country, will provide the greatest return to America for all the money it invests into its out-of-work labor force……
A bridge to the future, if collapsed, takes you no where… –kavips
This chapter looks at rebuilding our infrastructure. We have highway problems, energy problems, educational problems, as well as health problems, environmental problems, and social problems. Can rebuilding our infrastructure be a tool to begin the mending process?
Up to now very little has been spent on maintaining our highways. Most highway money was earmarked for new growth.. It was as if no one gave consideration of the fact that maintenance of what we already had up and running was a cost that needed budgeted in.. After all, what political points are ever given for repairing a road before it goes bad? (Damn it, why are they tearing up good highway, costing me twenty five minutes in each direction?) But with the August 1, 2007 collapse of the Interstate 35 Bridge in Minneapolis, we see what happens when highway infrastructure is ignored.
For example in the United States alone, 25% of our bridges are deficient. In Delaware, 15.4 % of our bridges are either functionally or structurally deficient, which is actually good when compared to our fellow small state Rhode Island with 52.9% of its bridges deficient. As one travels back and forth, one crosses an unknown number of tiny bridges; of these, one out of four is deficient. How would you like to be on the I 95 bridge across the Susquehanna… when its time came to fall?….. or perhaps driving across the Chesapeake Bay Bridge between Kent Island and Annapolis? Thinking “one out of four” may raise your apprehension rate the next time you find yourself traveling unknowingly across a potential deathtrap…
The need to improve our infrastructure is obviously there. So if we have the labor available, how will we pay for the construction and repairs with our treasury bottomed out?
That depends on whether bonds still had any worth, meaning whether or not anyone still had any interest in buying them… Normally bonds are sold at a low interest rate, and the money taken in is used for construction. The notes are paid back in regular payments. But if there is no demand for, or more money out there with which to buy the notes, who will fund the infrastructure investment?
Today the bottom line is that the money will have to come from the Treasury. Being broke, that also means the Treasury will no choice but to print more money in order to accommodate the economy’s need. As more money starts chasing fewer goods, inflation looks at us dead center down it’s barrel. Unfortunately we are in such dire straits, that we have no choice but risk the chance of inflation just to keep the next Great Depression at bay….
The same scenario applies to our efforts to revamp our educational system. Now estimated to require between 45 to 50 billion (how much was AIG’s bailout?) the infrastructure of our schools systems faces the same challenge of acquiring minimum funding, as does that of rebuilding our highway system.. Up until August of this year it could still have been done. Now due to insufficient funds, this accomplishment is unlikely. But if we choose to go forward, we will have to do so again funded by printed money with inflation drawing another bead upon the target on our own purchasing power..
Even today, there is enough work to employ every man, woman and child in America if we can find the resources to pay for them doing so… Work such as environmentally cleaning up Superfund Sites, energetically laying new transmission lines, socially integrating our square pegs into round holes, educationally teaching problem readers to become literate, or simply maintaining hospice care over those citizens who cannot survive long enough to see America turn its corner; yes, work can be found…
But the underlying question still remains as to how we will be able to fund the privilege of keeping America employed… and at whose expense? If we were unable to solve these problems during the past 8 years of plenty, how will we deal with them during a time of shortage?
Fortunately, we are not the first group of people in our lifetimes to rebuild our world around us… Three examples of what can be accomplished, are found in three post war states who after war’s end, found themselves under American influence. That would be Germany, Japan, and South Korea. These are the models we need to turn to. Someway and somehow they bounced back from complete devastation to becoming the the second, third, and fourteenth largest economies behind that of the United States…
At war’s end, there were very poor resources to spread around. Everything possible needed fixed at once. But with a small amount of seed money provided by the Marshall plan, a major currency adjustment, and a release from price controls, the German population pulled themselves up and today have roaring economies better than do any of our allies of that past conflict. (It doesn’t seem fair.)
History shows us that for two years after the war, while post war punitive policies were kept in place, all of the occupied countries’ economies decreased. The Soviet sector opted to maintain those policies and their economy continued to suffer accordingly until German Reunification in 1990. However in the western Allied sector, starting in 1948 with the abolition of price controls and most post war rationing, along with the devaluation of their currency designed to shrink the amount (by 93% contraction) of the money in circulation, their economy took off; lost days decreased by half, and industrial production climbed within six months by 50%. Both nations were blessed with the post war abundance of skilled cheap labor; therefore both nations were able to increase the flow of money into and around their country.
Rising to the challenge imposed upon them by history, all three countries had able leadership which was effective in communicating this to each countries’ populations: … that their time and effort were to be properly considered as an investment. Their rewards would not be reaped immediately, …but would someday be magnificent. Their leadership was also effective in communicating that timing was critical. If they did not begin immediately… their nation’s dreams would never materialize. It was their competent leadership that marshaled the populations of both WWII nations back to work “on the cheap” and that…. the bottom line, is how both counties bounced back. Not dictatorially, but economically. One should note that both of the two occupied economies fared much better than our Allies, who received far more Marshall Plan aid than did the conquered nations, and who did not have to pay for war repatriations as did both of the war-torn countries.
From here I pulled this little piece of history, showing the progressiveness that forced the German economy forward…..
Colonel:“How dare you relax our rationing system, when there is a widespread food shortage?”
Erhard:“But, Herr Oberst. I have not relaxed rationing; I have abolished it! Henceforth, the only rationing ticket the people will need will be the deutschemark. And they will work hard to get these deutschemarks, just wait and see.”
That they did.
Obviously sitting in our armchairs looking forward, we too understand that we will face the specter of inflation. It MUST come with the copious amounts of money we are currently and anticipated soon to be printing. However as does any nation in a war, our country does what is needed. Currently and just like it was after WWII, the US right now is the only global entity strong enough to expand its money supply fast enough to put most of its citizens back to work. As we begin earning extra spendable income, our demand increases; when that demand pushes up prices, more and more entrepreneurs race to fill in the vacuum of goods… bringing them back down. Greed is good.
As for actual rebuilding of infrastructure, postwar Japan offers a slightly different model. In Japan we meshed the government, banking system, and large industrial players to fund, construct, and grow their infrastructure during the sixties. The local banks, backed by the government of Japan, used a system of overloaning. This policy is one which the Bank of Japan guarantees all loans issued by city banks to their industrial conglomerates. Because there was a shortage of capital in Japan at the time, industrial conglomerates borrowed beyond their capacity to repay, often beyond their own net worth, thereby causing city banks in turn to over borrow from the Bank of Japan. This gave the national Bank of Japan complete control over all dependent local banks until the loans were repaid.
The primary difference between the Japan of then and America today, is that today, the money is still not being lent out by those banks receiving Federal assistance. Instead, today’s over loaning is being wasted on the buying up of other banks; today that mass infusion of capital is being used to consolidate the financial industry, instead of financing large projects that actually put citizens to work, and in turn funnel money back through the economy.
The question remains. Does rebuilding our infrastructure get us back on our feet?
Yes and no. The economic impact on the local level at the location where the federally funded project is being built, is huge. But it is a localized effect. For an economic turnaround to be effective, infrastructure building must occur simultaneously in almost every town or village across the United States. If funded solely by the federal government, that significant cost would appear prohibitive. But if instead of being funded solely by the Federal Government, it is done as did the Japanese during their infrastructural rebuild, (where all local banks simultaneously financed local projects close to their locations), much more capital becomes available. If we place our bets on the option that local banks WILL lend out the money, if we guarantee that they lose none of the amount lent out,…. then that outcome could start some infrastructure development in the very near future somewhere near every community’s small bank, no matter where it may be located.
So if as a nation, we choose this plan, and we attempt the Japanese-tried approach, the question next arises over which infrastructural improvements will return the largest investment? The consensus seems to be that Energy, Education, and Technological advancement lead the pack.
As we now all know, even during prosperous times our nation gives up a large percentage of its income to other overseas nations just for oil. By simply keeping that dollar amount in the United States we could provide our economy a substantial boost. Furthermore, manufacturing and exporting new technology which help frees the rest of the world from their dependence on oil, would certainly assist us in turning the trade balance back in our favor. Both of these lines of thought converge to point out this: the increase of our energy independency could become the primary viaduct which could bring America back into prominence.
As for increasing our energy independency, there are several options for doing so. One, is to create new sources. Here is one startling fact: there is enough potential wind power in North Dakota alone to cover 25% of America’s energy needs. The problem is getting it to where it needs to be used. Building transmission lines from America’s heartland out to its extremities, where its largest users are, should be a first priority. For one, it actually uses the free market plan and opens markets to a cheaper supplier of that required product. Two, transmission costs are a significant portion of the energy costs we pay for electrical energy today. Three, poorly outdated transmission grids eat up a lot of energy that could instead be used to power America.
Likewise building transmission lines from our local shores to major metropolitan areas, provides those city areas with cheaper electricity from off shore wind, thereby increasing the likelihood that more wind power generating companies will set up off-shore. The larger the wind farms are off shore, the better our economy will weather that upcoming Depression that appears to be looming off our horizon… And if hydrogen is one day destined to become our replacement fuel, then locating their manufacturing plants in close proximity to offshore wind farms, in order to capitalize on a wind farm’s free excess energy during non peak hours….. could certainly help build an industrial base to back up the tourist economies of rural shoreline counties.,.
Directly related to the new technology of wind power, would be the need to construct electrical storage facilities in areas that have no jobs. Western Pennsylvania and West Virginia would be ideal localities to build closed circuit water generators that use free excess wind power during non-peak times to pump water up a hill to reservoirs on top, from which water can then be released during peak times, flowing downhill turning a series of giant generators as it falls to the valley floor. These massive projects would put large numbers of Americans to work in those areas desperately needing new development.
But these three investment strategies are all dependent on the knowledge that wind driven energy will be a big player in the years to come. No one will make such an major investment in a climate of doubt. The Federal government over the next few years … has to make that clear.
For other hard hit areas, an investment in solar power out in America’s Southwest can do the same. A conglomerate of local banks issuing out loans, guaranteed by the Federal Banking System, should have sufficient resources necessary to begin the immediate construction of a series of large solar farms in that area. With such an investment to attract large numbers of employees to that area hardest hit by the housing crises, local banks could with the Federal bank’s support., begin paying workers who in turn would help out the local banks by buying back some of those foreclosed mortgages at market prices…
But unquestionably, the largest saving can be made by simply conserving more energy in our homes and businesses. Just re-insulating every home in America, can save the cost of its installation within a year. According to the Department of Energy, re-insulating a home can save between 5% and 22% of its energy costs per year. At their estimated energy cost of $1500 a year (seems low, doesn’t it), the range would be from $75 dollars to $300 dollars a year. So paying someone a bounty of $75 dollars for each house, just to infra-red, then re-caulk it’s leaky windows and insulate it’s doors, would see its return within one year on every dwelling visited. Paying someone to go through a city’s public housing could save that city government tremendous amounts of money which could be better spent putting its citizens back to work.
Educational infrastructure is likewise needed. Our nation’s schools for the most part, have not been updated on a grand scale since they were originally built for the influx of baby boomers … What is more important than structural additions to existing buildings, is a revamping of the educational process itself.
America needs to regain their technological prowess… Our educational system ranks behind most of Europe and civilized Asia. One Duke study concluded that 137,437 engineering graduated in the United States, compared to 112,000 for India and 351,537 for China. Of course the quality of those foreign engineers are open to debate. But still, with lopsided numbers like that, it is obvious that over time…. we lose the technological war. Today… whoever is driving the global need for technology… drives the global economy.
Putting additional parents or motivators inside of class rooms, increasing allocations for science supplies (simply dropping sodium into water turns most students on to science as well as instantly explains the clarity of the periodic table), and increasing the social status of the “geeks” in teenage classrooms, are just some of the ways we can rebuild our educational infrastructural needs, without large investments of cash… Where we most often complain that the educational system is broken and in dire need of fixing, at the core of the problem is broken down people. Whether it is administrators, teachers, school board members, parents, or the students themselves, what we have throughout our education system is a group of talented, but leaderless individuals. All are spinning their wheels independently in their effort of trying to find some type of traction in improving education. Often within the same schools, different partners are spinning in opposite ways.
What American education needs is a grand goal, one that is set nationally and bought into by all of its people. Once again, America needs to be challenged. At its forefront it needs a leader capable and willing to stake his reputation on meeting and achieving that goal.. And most importantly, that challenge needs to me made without any financial strings attached. You know: the usual “we need to invest $$$ in …….”. Instead, what is needed by our incoming leadership is to voice a measurable goal such as this one for example: that says by 2015 we will as a nation, turn out as many engineers as does China….. (Goal reaching against a competitor worked for reaching the moon). Perhaps to achieve it, some additional funding may be necessary. But what is more important, is that is sends a real signal to students that fun and games as they have been portrayed on children’s TV, can no longer be tolerated within our high schools. Every young person now has the survivalist duty to apply themselves to the best of their ability, for the honor of their country in whatever the direction their talents lead them… (With proper leadership, this can be done fairly cheaply: it takes just one big speech.)
The long term return on this cheap investment is that by 2020, our engineers should be in the field working at top notch organizations, benefit them and us from their training and expertise…. The longer we wait… the further behind China and India we find ourselves… We are already talking twelve years from now before we can get any return on both ours, and our student’s investment….
Likewise, tying in with improvement of our educational output, is our need to advance ourselves further along the road of technological innovation, ie. creating new patients. For which ever nation builds the most savvy technical gadgets, that is the country from whom all others will want to buy…
But in today’s economical climate one must realize that a risky investment on some new technological device, untested in the market place, will have difficulty finding financiers. Once again, the Federal government, if it is spending its resources elsewhere, has the option of only printing more money to pay for this investment, assuming that private lenders are too scared to lend. Therefore as mentioned above, as in the post-WWII-Japanese model where the small city banks overloan to businesses and corporations allowing them to invest in research and development, if these loans are themselves guaranteed by the national bank, private lending can fulfill the need.
A very strong incentive to promote new research and development by corporations, would be to allow all such expenses devoted to the creation of new products, to become tax deductible under the newer higher rates that will be forthcoming shortly. Every bit of money spent on research and development, is our nation’s best investment. Innovative new products lead to the quickest economic turnaround as those new developed ideas soon become commercially viable…
Other areas where infrastructure can also be propped up by an infusion of small loans made by city banks which are then guaranteed by the Federal Reserve, are in the areas of environmental protection, health care, social services. Western forest fire fighting companies, environmental detoxification companies, and tree reforestation companies, could begin putting people to work.
It could work like this. A company such as Guardian, on call for disaster, receives a payroll loan from a small bank guaranteed by the Federal Government to keep itself afloat until money comes in from charging an oil tanking firm for the mess they made… Most of that loan money is used to buy necessary additional equipment, which puts someone to work in the manufacturing plant where that piece of equipment came ….. As work eventually comes in, the Federally guaranteed loan is paid back to banks… In this and most cases, no direct Federal investment is required. They just stand behind the guarantee.
In the health care industry, private companies providing hospice care, watching over psychiatric patients, creating new MRI’s, handling billing requests and follow up from insurance claims, can now receive a private loan from a small bank guaranteed by the Federal Government to carry them over until their money returns. Needing new equipment keeps a job at the plant where that piece was manufactured…
Companies specializing in assisting the poor, handicapped, impoverished, hungry, homeless, can also stay afloat by these private loans over lent by their banks, but guaranteed by the Federal Government. When the money returns from their clients, the loans are paid off.
In each of these areas, existing goods and services are maintained. The businesses don’t fold. Here is a different way of looking at it. This Keynesian jolt of economic activity is metaphorically like starting a heart of a human being temporarily stopped in cardiac arrest. At that time, all the systems are in place to work…. the heart just needs pressed to get started….. Our economy is like that. Inattention to the core of our economic problem, which is money not flowing out of banks, will lead to the same result to us as it would to a patient who does not get his heart restarted….
So this chapter can be summed up this way. The Federal Reserve is given responsibility for making sure that all projects having a viable chance of success, receive funding from, and eventually pay back… the small local banks making those loans. The Fed just guarantees the loans won’t fail….
Those out going loans should be focused on projects giving us our biggest bang for our money. Those areas providing the best return on their investment, are in the areas of energy, education, and technological advancement……
Instead of direct investment, the use of Federal guarantees in these three areas, coupled with the Federal Reserve’s monitoring the effects of inflation, are one way our nation can capitalize on its current hardship, and pull itself out through our effort, grit, and tenacity….
He said build something; I said with what?— kavips
Some of you remember the “giant sucking sound”?
Ross Perot, Reform Party candidate for the US President in 1992, coined the term during one debate (4:45) to represent how dropping protective tariffs for NAFTA… would suck our manufacturing jobs to undeveloped nations south of our border…
Today we see evidence that it was true. Although China, India, and Southeast Asia are contenders for stealing our manufacturing base as well.
There is no real industrial manufacturing base left in the United States, which is one of the reasons that bailing out our car manufacturers has become a national emergency. At the exact moment when we need a manufacturing base to prime the pump of our economy, it is missing. Gone. It is not there.
The Free Trade agreements do well for our nation’s consumers; they bode ill for those working at high wages. I remember buying the cheapest shovel I could find for $25 dollars back in ’92. Last summer the same brand was still on the shelf for $25 dollars, but the one I bought cost me $4. I figured I could buy 6 replacements before breaking even…. My choice gave me $21 dollars to spend on other items…. Free Trade works for American consumers…
But for someone costing more than $1 a day, for someone with pension costs, health insurance costs, and vacation costs, free trade is something to fear. For the sucking sound of job loss continues up until the point occurs where the cost of doing business here, drops down to meet the climbing rate of the cost of doing business elsewhere……. At $18 dollars an hour here, and $1 dollar an hour there, when both settle out around $9 the flow of jobs is abated.
But you can’t force a company to not make money. If it gets so bad that they can’t stay in business, they have every reason to shut their doors…. Even if WE were able to close off the imports of all products made more cheaply elsewhere than domestically…… we would be paying much more than necessary for those products we bought. Most of us would choose to go without that unnecessary expense, before paying what we considered exorbitantly high prices.
Furthermore, closing down imports would turn us into a trade island. Other nation’s $4 shovels would continue to be snapped up on the world market, while we sat on a huge inventory of $25 dollar ones…. As soon as our nation’s market was saturated, its one shovel plant would have to close, (provided no bailout was forthcoming to keep it solvent and afloat….) They could not sell any more of what they had….
I mentioned in a previous chapter that it was lower labor costs which were responsible for propelling Germany, Japan, and South Korea out of their economic paralysis following the ends of wars. Writing on the wall says that for us to survive… we probably will have to do the same.
Just having health care removed from corporate responsibility, could significantly impact how this is done. If the burden of providing huge sums for medical insurance was suddenly lifted off of business’ shoulders, its cost of doing business in the US would drop significantly without touching the amount paid out in wages.
So what would it take to get manufacturing jobs to come back to the United States of America.
Bottom line….the entire process from raw materials to final delivery, needs to be cheaper here ….. than somewhere else…
That cheapness doesn’t mean we are forced to sacrifice wages… After all, wages are the fuel that drives our economy. After all, wages are what buys those goods and services which America makes. After all large scale cutting-back on wages, cuts back on the money supply that buys what we produce…. Cutting wages is the final resort: our very last line of defense. It is in other areas where we need to look if we wish to get our nation to bypass this economic bump in the road…
One different and novel method would be to shorten the accounting rule on how one claims depreciation. One of the reasons that trading in mortgage securities was so profitable and lucrative was because the full cost of buying those securities was immediately deducted from the purchased amount creating an expense that matched the asset. However upon buying a piece of equipment under depreciation, a large amount of capital is required up front… and is not costed out except in little pieces over a very long time.
Building a business is capital intensive. Buying securities … was not. Considering the global shortage of capital right now, changing the rules for even a short time, could be considered to be sort of a tax break. If banks were lending (those loans guaranteed by the Federal Reserve), and…. purchases made this year could be written off totally… meaning no taxes would be paid on that amount…. this would be the goldmine year for a business to expand, buy, update, renovate, modernize, and become more efficient. And if each one of every businesses started ordering materials, …..well, you see what that would do to our economy…….
Since a business will be carrying a lot of expenditures this year, the chances are that their tax payment will be minimal. That does not do well for our nation’s Treasury… we sorely need that money… but, if one waits long enough… upon the following year, all those new pieces of equipment will have been completely depreciated, so that when the rules return to normal, the profit below the depreciation line is higher than it would have been had we left everything alone! And the Fed’s taxable portion of that amount, would be higher in its dollar amount, even though its marginal rate did not change. The same boost in more taxable dollars, would occur each year up until that time when the equipment would have finished its cycle of depreciation. Basically for the Federal treasury, it is the same principle as having a business skip a monthly mortgage payment, by agreeing to pay a token amount more each month after that grace period to achieve balance.
Another concept is to change our definition of what constitutes manufacturing… The old days are gone, thanks to technology. If one looks at our assembly lines today, one does not see a myriad of men running around at breakneck speed to keep up with the assembly line… Instead one sees (in the words of Robert Reich) “a lot of numerically- controlled machine tools and robots, and a few technicians sitting behind computer consoles. The old-style assembly line factory worker is going the way of the bank teller, telephone operator, and service-station attendant.”
“But there’s a different way to think about manufacturing, and here we’re doing much better. Take a close look at any manufactured item — a pen, a cup, a car, a dress — and see who’s actually earning what portion of its purchase price. Much of it goes to Americans, even if the factory that made it is located in Asia. More and more of any item’s value is going to researchers and designers, engineers, entrepreneurs, marketers, advertisers, distributors, bankers, lawyers, wholesalers, retailers. None of them is considered a manufacturing worker, but they are the future of manufacturing. ” a different way to think about manufacturing, and here we’re doing much better.”
“The loss of blue-collar manufacturing jobs is a huge problem for America. That’s because many young people with only high school degrees no longer have access to middle-class wages. But that problem, which has been growing for years, won’t be solved by an Assistant Secretary for Manufacturing or any get- tough trade policy. To solve it we need good schools, ready access to technical skills and community colleges, and companies that continuously retrain and upgrade their workforce.” Robert Reich 2003.
Robots are here to stay. What is needed to maintain them, is an educated workforce that can design them, program them, maintain them, market them, and sell them…. Education puts higher costing jobs back on the family’s table. If America is to compete, then we need to be the ones making the most technologically advanced pieces of machinery that are bought by technicians from other countries… We don’t want our workers competing for $1 an hour jobs, yet we need those products which are cheaply made so we don’t have to spend prodigious amounts of our income on simple necessities. We waste a lot of time in today’s schools. Currently Delaware schools lose 1 month every year talking up Black History month. We need to start asking hard questions on how that helps America compete against someone from India or China? It doesn’t? One example of where our priorities are wrong, and we know it, but we do it anyway.
If one asks Americans whether we need more manufacturing, the choice is overwhelming…. In one unscientific poll, 99.13% said they would be willing to pay more for a product if it was made in America. The unscientific nature of that poll is suggested by the lack of determination of just “how much” those Americans would be willing to pay over the cost of a foreign import…. As in that true story about Lowe’s $25 dollar shovel… are they willing to pay 600% more? If you remember … this one shopper wasn’t… He figured the could get six shovels for the price of one, and bet that his shovel would hold up well against those odds. (He was right too, by the way).
Another traditional way to protect local manufacturing jobs, would be to forcefully devalue our currency. If we artificially keep our currency at a lower rate per exchange with other nations as does China, our products, even if costing the same to produce, will be cheaper to buy… Again this would be a short term solution, since as our economy began to grow due to an increase of factory orders, our currency would gain value and then rise.
The downside is that it would make traveling through Europe expensive, but that would be a small price to pay for not having the Great Depression at our doorstep. A more significant negative would be that the global economy would prefer to peg their prices upon the Euro, and the once almighty America dollar, would fall quickly out of favor…
Speaking of traveling, the high fuel prices paid last summer point to another element as to why manufacturers would want to return to America. Keep in mind that many manufacturing jobs went offshore for cheaper labor. The downside of doing so is that one must pay to transport the product back here to market. With the influx of $4.33 dollars for a gallon of gas, the cost of getting foreign products into stores, climbed rather significantly. At some point it will be cheaper to again build in America and pay the American rate, instead of building cheaply offshore and then giving back the savings to those responsible for transporting ones product back to our shores to sell…. If a fuel tax is levied as has been discussed, it could turn America into a land of new manufacturing opportunities. The less miles traveled… the lower the cost that would be incurred.
In the same vein, the imposition of Carbon taxes would bring manufacturing back to America. If America imposes Carbon taxes and China does not, then all those Chinese products being imported are subject to carbon tax tariffs making them too expensive and unmarketable on these shores. Carbon taxes especially when coupled with high energy costs, make manufacturing closer to home, the cheaper alternative.
Cheap energy can really bring American manufacturing back onto these shores. That energy would be wind at 2.3 cents per kilowatt/hour, being made with free fuel turning the rotors of 7MW generators perched on tall towers dotted across America. Pushing forward with subsidies to initiate the building large wind farms, would be advantageous in not only putting workers to work on building the towers as well as installing the rotors, but also in lowering our energy costs so that any company moving here would still do better than it’s competitor languishing oversees.
Some say our brand new baby boom may bring jobs back to America. In 2007 America broke its record for the most births per year. That last record had held from 1957. With a workforce growing by 4,300,000 persons per year, and China’s one baby policy still in effect, our labor pool may appear more attractive 18 years into the future. This may not sound as far fetched as one would initially think. Most business decisions are sketched out over a fifteen year time frame… which means in most better run companies today, some employee has already started the research that will ultimately become the foundation of the plan… The idea is to get companies to reinvest here… not elsewhere. Grand trends that happen in our future can be a valid part of convincing someone to open an American manufacturing plant….
Likewise tougher and better American regulation can return manufacturing back to America. That may not make sense to anyone who has not done business in third world environments, where capriciousness blows with the wind. One of the classic blunders invested in the third world is the huge oil investment made in the Niger delta, now rendered cost prohibitive by the actions of local guerrillas. Another occurred last winter, when toy manufactures suffered significant losses because toys contained lead. And it was last year when animal enthusiasts bought everything American so that their pets would not keel over dead? In an arena where paying off a string of corrupt politicians is considered just a cost of doing business, the uncertainty of knowing just how long those politicians will last, has firms thinking again about the stability of doing business on American shores… RegalWare. Inc has brought back all of its plastic manufacturing back to Kewaskum, Wisconsin. As their CEO Jeffery Reigle states:
About three years ago, the company, with the guidance of consultants TBM, started evaluating its operations to become more efficient. A particular concern was how long it was taking to deliver cookware to customers. The overseas manufacturers emerged as a key bottleneck. Since the company brought production home earlier this year, delivery times to one major customer, Reigle says, have gone from 30 to 60 days to as little as 24 to 48 hours.
Even if Regal Ware’s prices are 8% to 10% higher than buying direct from China, the its cash flow from Regal Ware products has increased 10% because the seller can turn over inventory more quickly.
Other pressures that motivate a manufacturer (or outsourced work) to move their manufacturing back from overseas: 1) bad experience with foreign vendors, partners, suppliers, local government, employees, 2) updated product portfolios and the pursuit of short lead-time or customization, 3) good utilization of automation, 4) overheated competition and lack of patient protection from improving foreign competitors, and 5) finding the made-in-USA label sells really well overseas. Not to mention liability issues where shoddy work, or tainted raw materials can upon being discovered, totally disrupt normal business flow.
The overall rising costs in China, from wages to taxes and to utilities, are definitely in the spotlight. American businesses may have realized through the years, from observing work transfer first to Mexico and then to Asia, that no country will be low-cost forever. Low cost is not everything. Consistency and trust in the quality also considerations a consumer factors in when making a purchasing decision. Tightening our quality standards, our environmental regulations, and stressing our attention to detail, will have the effect of increasing the value of the label “Made in America” That label is already the one preferred by wealthy Chinese who like us, have care and concerns for their children as well… Knowing how their countrymen sometimes operate, they prefer American.
So far missing in this analysis is all mention of imposing tariffs on imports for any reason. Pat Buchanan has been making the argument to stem free trade for years.
To date one of the more interesting aspects, is his distinction between how foreign trade works with VAT taxes and against corporate taxes… VAT (Value Added Tax) are used by almost every civilized state other than us. American’s have held off because of the huge populist sentiment that permeates their politics. (VAT’s being a consumer tax, are regressive). The VAT works on this principal: at each step of a manufacturing process, just the value added … is taxed. In America, when one buys a bag of flour on sale at $2 dollars a pound, and assuming a 6% sales tax, one pays 12 cents additional in sales tax. In Europe, Japan, and other industrialized nations, each step is taxed and the consumer pays the final price posted, Over there the fuel, seed, and fertilizer used in the growing of the wheat is taxed. When harvested, the silo operator taxes the farmer, who in turn has the taxes paid on his raw materials, deducted from the amount he is called to pay. The regional distributor taxes the silo operator, who in turn deducts the amount of tax he paid to receive each farmers wheat. The mill operator tacks on his charge which is paid for by the regional distributor, and when selling the product to a distributor, he credits the amount he paid… and so it goes right up to the last person to sell you the bag of flour.. Each entity buys the product with the tax attached, attaches their tax and gets credit for the tax they paid when they purchased their raw material. That way, each entity is taxed only on the value they added to the product.
Since just my telling of it appears so complicated, one can get an idea of how keeping track of every step in the process, must run tax agencies bonkers. Instead of trimming the IRS, we would be growing it by leaps and bounds. Which is why in frugal America… VAT’s have not yet been moved out of any committee….
The bright side is that this amount replaces corporate income taxes: zero corporate income tax. The downer is that we would be paying $2.12 for our flour …. before a state even had a chance to tack on their 6% sales tax. Together, we would be paying a 12.36% tax on all products. Your $150 grocery bill would cost $168.54. Whereas that seems like a lot to Delaware citizens who are used to no sales tax, to those in other states already immune to a 6% sales tax, the difference would be only an additional $9.54 dollars.. The average American would be paying roughly per month, four times that amount on groceries or $38.16 for the privilege of doing away with corporate income taxes…
But… and here is the argument when applied to free trade….
Foreign cars arriving here, have their portion of the VAT’s deducted by their home corporations. We, without a VAT, must pay the full amount of the VAT expected in foreign countries, when we drop our cars off there. Roughly a 15% charge is added to the purchase price of any American car in a VAT country, while they receive a 15% credit for selling cars in ours… It is hard for American cars to compete as imports.
Perhaps we could recognize this constraint being placed on what is now, … the taxpayer’s car company, and use this opportunity to initiate a VAT solely on the car manufacturing sector of our economy to see whether or not its principal holds up under actual international trade. The worst case scenario is that American cars may cost us 15% more, and the best case is that US manufacturing plants go into full production due to the overseas high demand of affordable “American quality” vehicles….
Finally, we come to the heavy hitter part of the intellectual argument. If we are talking about changing import taxes, what about tariffs?
Tariffs limit free trade. How? Tariffs make imports more expensive, thereby making domestically produced products cheaper by comparison. Tariffs become a means of keeping prices higher for all Americans thereby enabling American companies to remain solvent as well as increase their profit margins. Tariffs once imposed, cause retaliatory tariffs against us which shut out our imports from entering new markets, causing plant shutdowns and layoffs.
Protectionist tariffs are often blamed for the increase in the severity of the Great Depression which occurred after the passage of the Smoot Hawley Act of 1930. Intended to protect America businesses and force up prices by limiting cheaper foreign competition, those companies protected went under, because no one bought any of their higher priced goods. Imports plunged 66% from US$4.4 billion (1929) to US$1.5 billion (1933), and exports fell 61% from US$5.4 billion to US$2.1 billion, both drops far more than the 50% fall in the GDP.
It did little to protect America jobs. Unemployment was at 7.8% in 1930 when the Smoot-Hawley tariff was passed, but it jumped to 16.3% in 1931, 24.9% in 1932, and 25.1% in 1933.
Today, one cannot help but to invoke the image of Ronald Reagan when discussing “Free Trade”. Above anyone, he is the person responsible for bringing that term into modern consciousness. However, even the harbinger of free trade was quick to slap tariff duties on “motorcycles over 7 liters” to protect Harley Davidson from going under.
The Cato Foundation was quick to criticize this action. In a policy piece titled “Taking America For A Ride” they were quick to point out the economic hardship facing America. Concluding that:
They went on to predict that 20,000 less motorcycles would be sold the first two years, with an increase of 8,000 to 10,000 Harley’s being sold over the same period…
But they were wrong. Initially the goal was to jump the current tariff of 4.4 percent to 49.4 percent and keep it there for a year; lower the rate to 39.4 percent in the second year, to 24.4 percent in the third year, to 19.4 percent in the fourth year, and to 14.4 percent in the fifth year. After the fifth year the tariff is to return to 4.4 percent. During the amendment process lines were added that allowed numbers of BMW’s, Italian, and English manufacturers to slip through unaffected. The Japanese were given the same amount as were the other foreign bikes in without tariffs, but… due to the size of their market share, a large percentage of their imports were affected.
Bottom line: Harley Davidson is still around today. They would not have been had this tariff not been imposed. Harley Davidson took this time to retool, refinance, and modernize their brand, becoming a better company for it. Able to make better motorcycles, their market share increased to make them enough profit allowing them to call for the removal of the tariff a year earlier than planned.
Furthermore, solely because of the tariff, two Japanese companies, Honda and Kawasaki increased production at their American plants since they were not affected by the tariffs, in turn providing additional work for American workers.
So why was one tariff a success and the other an abysmal failure? The difference is scale. The Harley Davidson tariff was limited to Japanese manufacturers who used their protected high prices at home to subsidize dumping into the America market, which ultimately drove down motorcycle prices so low that Harley Davidson was unable to keep up. The tariff was limited to five years, and designed with a specific purpose: equalize the playing field. It was not done to protect American workers (they were few in number); it was not done to keep a lazy and insolvent company afloat forever; it was done to allow the free market to work. Now, every time a “hog” pulls alongside of you, you can thank Ronald Reagan.
Protectionism ( the imposition of trade barriers) has its purpose. With today’s economy one should expect to see and hear labor unions clamoring for more and more “protection”. It’s a plea that is hard to resist. After all, we could all be in the same boat some day, and certainly would appreciate someone bailing out our leaky vessel…. How can one “not” protect American workers?
The answer to that question is this: that we, the rank and file Americans, have to realize that protectionism is a form of war. As we recently found out, when a nation goes to war, it had better be sure beforehand that it will end up on the winning side. For once a war is started, the costs are always higher then expected. And if the enemy has a method (not in your calculations) of outmaneuvering you,… you never get the chance to say… “oh…never mind… let’s call this off and pretend like it never happened…” For once you hurt someone… they will do their darnedest to hurt you back.
The Smoot Hawley Act hurt a lot of people indiscriminately. The Harley Davidson tariff did so with precision. It’s the difference between accomplishing the same goal with either an all out war, or with a deniable, dark-ops special operation. One must take into account, and not be surprised, by the retaliatory measures which be taken against us.
As an aside, it is worth noting that an interesting observation came from the removal of the Smoot Hawley Tariff as WWII came into closure. The world emphatically sought assurances that no Smoot Hawley Act would ever be passed again. This bitter hate led to the Bretton Woods Agreement, in 1944, a great lessening of global tariffs starting in December 1945, and the General Agreement on Tariffs and Trade, in the 1950s. However it is interesting to note that special provisions were made for national security. Due to globalization in the 20’s and 30’s, Britain and France had ceded their watch making to Germany and Switzerland. Later they discovered that the lack of a watch industry was a great handicap in building defense equipment during the war. Both nations determined never to be without a watch industry again and placed embargoes on watch imports after WW II. (Lewis E. Lloyd, Tariffs: The Case For Protection, 1955, p. 137-139). The US is in somewhat the same danger today.
When dealing with protectionism, it is important to first sift through all the facts to see who is benefiting from whom. When George Bush protected the American Steel Industry in 2003, business went to China costing our nation 200,000 American manufacturing jobs…. Yet when one goes shopping for jeans, and sees articles from the Philippines, Malaysia, and made in America all at the same price, it puts a hole in the argument that free trade lowers prices for all Americans. Obviously instead, it increases profits for those who move their business to cheap labor areas off shore, then selling it back to us at the rate we are used to paying… Again that is why one must be leery of free trade pronouncements being made by large multinational corporations. They may benefit someone else, and not America.
Protectionism helps the American worker as Ross Perot adequately explained. The downside is that protectionism hurts the American consumer as Al Gore showed Ross Perot in their 1993 debate over NAFTA on the Larry King show. Al presented Ross with a large picture of Smoot and Hawley shaking hands in a congratulatory ceremony. As with anything tainted with protectionism, we need to weigh the benefits against the risks. Sometimes the risk may be acceptable. But it is unconscionable for us to look at protectionism in a vacuum…. as one affecting just American workers. The proper yardstick to measure protectionism’s effectiveness would be to measure its impact upon the total amount of money circulating throughout our system. Will protectionism grow the amount of money… or diminish it. Each case by case analysis needs to take that single measurement into consideration, otherwise we will be making a great mistake, sort of like Smoot and Hawley did during Hoover’s administration.
Bottom line of this entire post:
Raising tariffs, like war, is a very unpredictable method of furthering a nation’s wealth. Therefore other methods to increase our manufacturing base should be tried first.
Recognizing the severe nature of our economic situation, any policy change if enacted should be given expiration dates. A handout is helpful; continuous welfare is not.
To return American manufacturing jobs back to Americans, the entire process of acquiring raw materials to delivering the finished product, needs to be cheaper here in America, than it would be with foreign workers halfway around the globe. The best avenue for providing that benefit while getting the biggest bang for the buck, is to temporarily change our depreciation laws so that capital purchases can be written off entirely over one year. As opposed to the much talked about stimulus package amounting to no more than a national welfare check; this little change would have a lasting economic effect with less long term cost than a corporate tax cut. The second short term policy would be to use a budget reducing gasoline tax, to artificially raise fuel rates, making it expensive for foreign manufactures to ship here. Doing so would reward those businesses that built near their markets.
Both stimulate our economy without directly affecting retaliatory measures by our trading partners. Those two, one politically acceptable and one not, should be our first choice of action.
Longer term solutions involve 1) educating most of our youth to be technically savvy, 2) moving forward with a Carbon Tax benefiting technologically advanced societies over cheap working developing nations, and 3) developing cheap energy sources (2.3 cents per kilowatt/hour) for American manufacturing, would all keep American jobs in America…
What we do not want to do… is believe that we are an island and impose trade restrictions that isolate and collapse us further, instead of growing our way out of our current crises. We do want to lower all other costs so manufactures will want to set up shop here, on these shores, despite our higher wage levels……
My bills are too high to expect me to help out the economy.….– kavips
One Trillion shy of all domestic Household debt (14T) , is the debt imposed upon us by “the borrowing of our governments”… local, state, and Federal (13T). The majority (10.4T) is our Federal debt. It should come as no surprise that tackling this task should be our first priority to insure that any short term economic gains we create, are not wiped out months or years later.
We were on a successful track to achieve this goal just 8 years ago… Budget surpluses were projected far into the future, and before our eyes, the whittling down of our national debt actually happened . Today, Generation X’rs and Y’rs simply accept that as fact, that balancing the budget is possible. Very few recognize how much of a miraculous achievement that thing is: a budget surplus… For until Clinton-Gore arrived, no one ever expected our national debt to decrease. But decrease it did and not only did it actually drop within our lifetimes, but a credible path was tracked showing it decreasing year by year to negligible amounts. And then … with one election… things drastically changed. We stopped our Treasury from taking in enough money to cover its known expenses and instead, borrowed the amount to fund what was necessary.
In eight years we went from a projected $5 trillion dollar surplus to an actual $10.4 trillion dollar deficit; a flip flop of $15 trillion dollars! Political afficiendos will be quick to blame Republican philosophy and their elected president: George W. Bush. Unfortunately they are way off the mark. (I say unfortunately for if one party and one president were truly the problem.. the fix would be much easier to amend…)
The problem is a systemic one. The entire financing system of the Federal government is now broken; almost to a point where returning to the glory days of before 2000, is barely considered a laughable alternative. The problem can be best ascribed to a head on collision between a poorly timed demographic shift, and unreal expectations. Put simply in one word, entitlements; put in four words, Social Security, Medicaid, Medicare.
Here’s how paying off our nation’s trillion dollar debt benefits us.
Courtesy of Federal Budget 2009 (Right click for full image)
Looking at the image and being asked what can be cut under current law, one sees that only two areas of the above pie chart cover discretionary spending. The other four cover mandatory, non-discretionary items. That means that they get paid, … irregardless. We have no choice but to pay them fully. We have to pay interest. We have to pay Social Security. We have to pay Medicare and Medicaid, as well as all other mandatory payments such as Treasury obligations.
The only two areas where we can slice, dice, and cut back on expenses, are between that of national defense, and everything else we think of as being “our government”; both together amount to a paltry 38% our our entire expenditures. 62% of our Budget is locked down, and commitments have already been determined where it will be spent…. long before the fiscal year even begins.
So one sees that if we were to pay down the National debt, we free up the interest payments ( 9% of our current budget) which can then be applied to other things we might need ten years from now.
Obviously our entitlement programs will have to be changed. One can see that ridding ourselves of Medicare and Medicaid as a governmental expense would go a long way to reducing our deficit, and ultimately be a big push bringing our interest payment closer to zero…. But doing so… brings up the ugly social issue of what to do with those Americans lacking health care….
Contrary to popular belief getting rid of these programs is not completely impossible. Except for the time-frame covering the past 40 years, mankind has survived OK without Medicare and Medicaid. Rome lasted a thousand years without it. We all know that if we suddenly became faced with an all-out-war against some type of alien invader (Independence Day),what money was currently designated as a mandatory expense to cover health costs, would instantly be moved to supplement our planet’s defense with nary a whimper. Our sick would make due the best they could… perhaps even do better than they do now… (at least for those 2 million Americans a year who pick up a nosocomial infection!)
The writing is on the wall. One entitlement will have to fall in order to save this country. As America’s retirees get older, the medicare problem is one costly extravagance that must be looked at closely to determine whether it helps or hurts our nations viability.
When compounded with Social Security’s insolvency, the Medicare situation takes on an additional albatross around its neck. For as one thinks about it, we are using federal funds to extend the lives of those who are receiving Social Security. Using all and any expense available to keep someone resuscitated long enough to earn one more Social Security check, does not make practical or financial sense. We must rethink our commitment on how we will provide long term health care, based on today’s prices… not those prices existing back when the Great Society was envisioned….. the 1960s.
Ultimately for governmental medical assistance to survive, we will have to suck the profits out of health care. There will be a few who protest. But if Medicare were suddenly to cease to exist, and health care became a cash only commodity, somehow we would survive. Who knows? When faced with no free blood pressure medicine, we might try other methods to keep alive… such as eating right and exercise.
The amount of people dying will never change. Everyone born will die at some point. All we are doing, is removing the unlimited amount of taxpayer money used to support the unreasonable assertion,that we have the right to use lots of other people’s money to live as long as we selfishly can.
Think about this. Very few of us would purposefully bankrupt our own flesh and blood children by forcing them to pay out of pocket for our over-the-hill medical needs… With Medicare being fully funded by taxpayers….. it is doing just that…
Of course there is another method we can use to fund our budget and keep Medicaid and Medicare: bring in double the revenue…
But, because of the demographics of our aging population and the sparsity of those working young who are paying for the old people’s expenses, keeping this cancerous expense on-board, and paying for it by saddling those still working with double taxes, is not a viable option…. One could argue that it is morally wrong. It would be saying to our children that “yes, we had the American Dream freely given to us by our parents; now you will have to work much harder, and earn even less, just to continue that dream for us.”
The writing is on the wall… Sometime, somewhere in our future, it will have to go… Not disappear, mind you, but in its form now, funded as it is currently… it cannot last… The pie chart tells all. Tweaking 3 or 4 percent in any one category makes no dent upon our unfunded problem.. We must begin preparing ourselves for this uncompromising reality; one entitlement will have to go. Looking above we see the absence of Medicare and Medicaid in the Federal Budget, is more plausible than the loss of any other category.
If we were to wean ourselves away from that entitlement, and apply that amount in bulk towards our national debt as a payment of one half of one trillion per year, within 20 years…. our debt will be gone.
For when it comes down to discretionary spending… we are as low… as we can go… The cut has to come from Medicare/ Medicaid. What replaces it is a whole different discussion…..
So how high do taxes need to rise, (using today’s figures without cutting out one entitlement), if we truly wish to decrease our national debt? Since the economy grew significantly during the Clinton years when all taxes were higher, those rates we can be assured do not stifle economic growth. As a first step, that would be the smartest move; let the Bush tax cuts expire. …To those who argue that increased taxes constrain our economy, try and get a solid answer from them as to why the economy grew like magic when they were previously in place.
Since it has already once been done, it should not be hard to do it again. Right? Need more detail?
Let’s look at the twentieth century as a whole.. This chart simply shows the highest marginal tax rate per year. It ranges from 7% in 1913 up to 94% in 1944-45. Graphically displayed it looks like this….
Graph Courtesy of Truth and Politics.org
Although the graph stops at 2003, this evidence shows the ending level extends at 35% through to 2008.
If one couples one’s knowledge of history with numbers portrayed upon the graph, a correlating factor of 40% seems to be the ideal marginal tax rate.. When rates dip below that amount….they may last for a few years at that level, then they soar sky high for many years thereafter… It appears that languishing below 40% puts too much stress on the private sector. Something goes wrong, it buckles, and great governmental expense is taken to bring it back under control.
But if one uses the same evidence portrayed on the graph, and this time couples it with one’s knowledge of economics, they notice that lower rates produced boom economies, and the higher rates stifled economic growth.
Recent knowledge ( ie. today’s events) coming off of the experimenting and tinkering between 40 and 35 percent, leads one to believe that 35% is too low to sustain the economic viability of this country. As a nation we have socialized ourselves a bit too far to survive upon those lower rates…. 40% seems to be the optimum low that we can go….
Unfortunately because we played around with cutting underneath that magic number, we will be paying steep rates throughout the near future, very much like those which occurred between 1933 through 1963. Those who lived their full lives listening to Republican partisans constantly complaining about today’s high taxes… well, thanks to them (Republican partisans), America’s wealthy is about to find out just what “high taxes” really are…. As one can see from the chart, and can estimate from the amounts of the bailouts being currently given out…. the highest marginal tax rates for the wealthy, will climb higher than most of our wealthy has seen in their lifetime…
And because of that increase… our economy will slow.
The beauty within this chart is that it provides to all a sense of where the line needs to be drawn.. When we talk of raising taxes… we are speaking of returning to 40%, a level only 5% different from where we are now… What that means is … instead of someone making a full billion dollars now, after future taxes are deducted that person would be still sitting on $950,000,000 dollars… Who wants $950,000,000 dollars? I do. I certainly would not fold my business just because I had to give an additional 50 million over to my government, a scare tactic some may make us try to believe. Especially since I already know that our economy functions more consistently with that additional 5% amount financing the support structure on which all businesses depend on.
So how much revenue does that paltry 5% increase raise? Try $390 billion dollars per year, based on current data provided for this year’s third quarter.
True, that five percent does suck a little spending out of the economy, but if applied to the deficit, it reduces the amount borrowed which in turn lowers government’s cost. Eventually when interest payments reach zero, we can again fund our government on a pay as you go plan, thereby balancing taxes with costs in a fine equilibrium….
So if we hold costs the same. How long and how high do we raise taxes to bring our deficit to nothing in 11 years… 2020.
Debt —–Yr Expenses—Yr income—-Yearly incremental amount
10.4T——— 2.7T ————-2.6T ———————– 204 B
(The extra 100 Billion comes from above: it’s the yearly difference between current expenses and income multiplied by 10 for each year.)
So how much does that cost us? 204 Billion is what percentage of 2.6 Trillion? 7.8%
We need a yearly increase of just 7.8 percent to pull us out of debt in ten years, assuming we continue to spend as much as we do now, and that we continue to receive as much national income as we do now……..
That would make the highest marginal rate (35% + 7.8%) equal to 42.8%: just 2.8% higher than it was during the booming Clinton Presidency. Really…. is that not a lot of hardship to undertake?… Especially when one compares it what our predecessors, “the Greatest Generation” had to pay in order to give us the prosperous America which we inherited?……
And if that increase amount is spread across the entire spectrum of our sources of income.
Courtesy Federal Budget 2009 (Right Click for Full Image)
The actual cost to the top ranked taxpayers, could be less…. One would be well advised to realize that the stimulus packages perhaps costing up to 3 Trillion by the time politicians finish robbing our future, will extend these estimates considerably.
But seeing the numbers makes one realize that we are not at the end of financial stability…. The United States has vast resources at its disposal to throw towards the global economic meltdown, slowing and then stopping its progress. We need just a moderate revenue increase to make it happen as well as begin making plans for shedding responsibility for one of our hitherto guaranteed…. Federal entitlements.
The question is what is in it for us… Bottom line… a job.
Although distant and remote, the National Debt plays a huge role in our economy, just as do charges and credit card payments play a similar role in everyone’s household finance. Think of all the spending you personally would be free to do, if you owed no one any money and could pocket what you earned…. That same principal holds for our government as well.
Those of us who still have jobs today are worried. Those of us without… are worried even more. Our jobs and long term security, depend upon our Federal Government getting costs in line and living within their means as well…. As with any investment, paying out an additional 7.8 percent is affordable if one gets a payback of a higher return…
Those living in the 90’s saw it with their own eyes… Dropping the debt creates long term stability and that…. creates jobs.
Sometimes to see truth, you just have to sweep away the clutter ….. — kavips
During our previous discussion over the National Debt, it became obvious that our deficit problems stem from these two entitlements: Social Security and Medicare.
Doing away with both will easily bring our national budget into balance, but that act will wreck inconceivable havoc upon the life of every American citizen. Doing just the opposite, offering free unlimited health-care as well as a full blown retirement package to every aging American citizen, unfortunately is no longer affordable when one factors in both demographic and economic factors.
So what do we do?
If one opens one’s mind to possibilities, we have five choices. Simply put, they are these.
a) Keep both as they are:
b) Keep both with modifications
c) Get rid of one; keep the other as is:
d) Get rid of one; modify the other:
e):Get rid of both:.
These are our alternatives. The purpose of this chapter is to look at each one and decide which appears to be the best solution…..
Our first option is to keep these two entitlements as they are without changes. Let’s review the data. In a famous CBS interview, the former head of the Government Accountability Office (GAO), David Walker laid it out clearly. “The cancer”, Walker says, “(is the) massive entitlement programs which we can no longer afford, exacerbated by a demographic glitch that began more than 60 years ago, a dramatic spike in the fertility rate called the baby boom.”
Let’s go straight to the bottom line: how much will it cost us?
The following predictions are based on GAO simulations (2004). If we do nothing about our two entitlements, and if we wish to balance the budget by 2040, we will need to:
1) cut federal spending by 60% (impossible)
2) raise Federal taxes to 2.5 times of today’s intake (impossible)
3) achieve sustainable economic growth in double digit range, every year till 2079 (impossible)
This gorilla-in-the-room problem belies the fact that there will soon be more people collecting benefits, than there will be those contributing. Old estimates (2004) predicted that this year (2009) would be the year when that subtle switch would occur. During 2009, our surplus stops growing, and we start down the other side; the pool from which we pay benefits, begins to shrink. By 2017 (the first year of the next presidency) the costs of paying out benefits, rise higher than the actual taxes bringing in the revenue. By 2041, the Social Security trust fund will be completely gone.
After that, if we truly wish to continue these entitlements, we must so on a pay-as-you-go plan, year to year; today’s current level of taxes brings in only three fourths (74-78%) of the needed annual revenue…
So we wonder: just how much additional money are we discussing per year? For Social Security … we are speaking in the realm of Billions….
Currently (2007) Social Security Benefits cost 4.3% of GDP and are expected by 2035 to peak at 6.1% percent of GDP… If the GDP at that point is close to $15 Trillion dollars, our annual benefits (at that future level of 6.1%) level out at $915 Billion dollars, and the shortfall amount, (25% of that), is extra we need to step up and pay beyond what we pay now….. That total is $228 Billion Dollars more each year, which is half the amount of last year’s discretionary federal budget! … Per person, assuming an estimated 330 million national population, each citizen will pay $690 more per year into Social Security which will amount to a charge of $1.89 per person per day. After 2041…..one bread winner in a family of four would need to cough up $2760 extra dollars every year.
That is IF….. nothing is done. Which brings us to the second option.
Keeping both with modifications. The Social Security’s own trust report says this:
It’s a small price to pay for solvency. But we must remember that Social Security is the easier of the two entitlements to fix. As David Walker, (former)GAO is quick to point out.., “the Medicare problem is five times greater than the Social Security problem. The problem with Medicare”, Walker says, “is people keep living longer, and medical costs keep rising at twice the rate of inflation!” No! That doesn’t sound good.
Congress made things worse in Dec. 2003 when they expanded the Medicare program to include prescription drug coverage. “The prescription drug bill was probably the most fiscally irresponsible piece of legislation since the 1960s,” Walker argues.
When asked why, Walker says on tape, “Well,…. we promise way more than we can afford to keep. Eight trillion dollars added to what was already a $15 to $20 trillion under-funding. We’re not being realistic. We can’t afford the promises we’ve already made, much less to be able (to afford those) piling on top of ’em.”
With one stroke of the pen, the federal government increased existing Medicare obligations nearly 40 percent over the next 75 years. Walker says, “We’d have to have eight trillion dollars today invested in treasury rates, to deliver on that promise,” Walker explains. When asked how much we actually have, Walker replies, “Zip.”
So where’s that money going to come from?
It’s gonna come from additional taxes, or it’s gonna come from restructuring these promises, or it’s gonna come from cutting other spending,
As a nation, we have promised unlimited health care to each of our senior citizens who will never see the bill, and our government is borrowing that money (at interest) to pay for that privilege. Obviously this is absolutely unsustainable! More so it is abominably immoral to our children. As a nation we simply cannot keep up.
So what modifications are on the table? Some being mentioned are 1) means-testing supplicants for benefits, 2) increasing payroll taxes, 3) increasing the retirement age, 4) cutting back on benefits, and 5) paying cheaply for preventative health-care so fewer citizens require the more costly operations. But none of these options cover the looming demographic shift of baby boomers who are now beginning to reach retirement. Here is a pictorial representation of the problem….
(Right Click on Image for Full View.)
Means-testing supplicants for benefits, is the second surest method to stretch out our resources so those who solely rely on these two Social Services can still have them available despite their catastrophic cost.
But there are two opposing sides to implementing “means testing”. Those with high incomes who paid more of the burden, feel they should at least get something back in return… This group uses social security and medicare at relative high percentage rates. The opposite side argues, that because today’s crises is drying up funding, those with high incomes who can otherwise pay out-of-pocket for their expenses, should have their benefits allotted to those who earned less over their lifetimes… That last argument is a fancy way of bluntly saying that “those with money are funding the health care of those without”…
Whereas we balk at the concept of having the rich pay the costs of the poor, the social cost of returning to the alternative, …. say Victorian England’s version of dealing with the poor, bothers us as well.. It at least opens our perspective that the option we currently have of keeping both social entitlements solvent (even if it is a bad option), may be cheaper and better than the alternative of eliminating either or both Social Security and Medicare altogether. The ultimate answer lies in this one question that needs to be asked? In the future … how much of today’s corporate or small business profit will need to be siphoned off to cover other unforeseen expenses; expenses that the current entitlements prevent from happening?
If you could imagine this futuristic scene: an unsecured retail store just sitting in the middle of a town that is full of people who had not eaten a full meal in months…. How many dollars, how much additional money would be needed to bolster that store’s security, to insure that business was present and ready to do business the following morning? Is the small amount we pay out for entitlements cheaper than the costs we will have to bear for abandoning them?
To find the answer that is required, we need to investigate alternative models to help us determine whether or not, the alternative costs of doing away with our entitlements, would be more, or less costly than keeping Social Security and Medicare as they stand today….
Whereas “means testing” may create a line in the sand and prevent some leakage slipping upward into taking care of the well-to-do, it also may allow a greater problem to become exacerbated. That would be to alienate to our detriment, those few providing the majority of the funding for these two programs in the first place… For they are already paying out far more than they will ever receive… If we push too hard and force them to pay for something they will never use, our American virtue of fairness will one day catch up to this arrangement, and allow them to opt out of the system entirely, because basically, we will all agree it is the fair thing to do. If that event ever happens, our entitlement problem just fell over the canyon wall.
However the surest method of entitlement solvency lies in increasing our payroll taxes. Yes, these are regressive taxes but if we would just be willing to pay 12% to 14% percent more in FICA taxes, which raises their rate from 12.4% to 14.1% percent, it would save social security.. That is an increase of 1.7% per paycheck… At 1.7% percent on an income of $60,000, the average family would receive $1020 less per year in take home pay…. But that extra $1020 would be enough to keep Social Security solvent for years to come…
These are hard facts we deal with. We can write our Congressmen and say “you must protect Social Security”…. But when they follow our orders, and our time comes to ante up $1020 that we do not have…. we begin to wonder how on earth we will ever survive on what little we have left….
The ultimate question is: can you afford an additional $1020 each year of less income? That averages out to $19.61 per week, or .49 cents for every hour you work! That is the unmentioned bottom line that is required to keep Social Security solvent for years to come… Whereas some of you may doubt whether you can afford that increase… those of you still wondering how you can survive on $20 less per week, … must balance that cost against the cost of having no money available to you after you quit working.
Now if that increase is coupled simultaneously with a larger decrease in Health Care costs, then perhaps the 14.1% increase is affordable after all.. This is why all arguments on dealing with entitlements must take place in an open forum. For there are consequences out there that are so remote and yet so overwhelming, that no one person can see all the options while staring at the drawing board… Only with the give and take of offering a plan, and then having it modified under sharp criticism, can we forge from such diverse outtakes as exists across the American spectrum, a solution that is workable over an immense span of time…..
Most likely that increased cost will be split between the business and the employee as is currently done today.. Per person $510 or half of the $1020 will be paid by the employer, with the additional $510 being supplemented by the employee… However we must factor that this too creates a drag upon the economy. Every business must now pay $51,000 over what they currently pay now for every hundred employees on their payroll… A small business with 100 employees and $1 million in sales, loses 5.1% off their margin. If every similar business was losing around 5.1% off their benefit line, it would be hard to convince such a business to re-invest in people in order to get America back to work… Far better instead it would appear for that business to invest in a machine that does the correct job each and every time, and over its work-life costs less than a human being…
However, sobering as this increased cost is, if this moderate increase is dropped into place simultaneously with the exiting of having-to-provide-medical-insurance to each and every one of its employees, this solvency issue could become a big win for business, and the hiring of human beings would be less negative than it was before…
The second option, the one of increasing the retirement age, confronts the Social Security problem in two ways; although it does not completely solve the entitlement problem, it is the best option available to stem some of the ebbing of money away from the trust fund…. Jumping the retirement age upwards by 5 years from 65 to 70, adds 5 additional years of tax money pouring into the system, while also decreasing by 5 years the amount of benefits that are needing to be paid out….. If we garnish 5 years of extra funding and lose up to 5 years of paying out benefits, just moving up the retirement age by 5 years gains 10 years of funding per future retiree.. This is easy to do, and benefits all that do it… Some may protest having to wait longer to retire… It is not so bad if waiting 5 years is framed as helping out one’s country…. Sort of like doing one’s duty as a citizen…. For those fortunate to have private accounts with anything left since November, the additional 5 years of compounding can make a huge difference in how one passes the time during their retirement…..
All evidence points to a net benefit with no negatives, of raising the retirement age.
Cutting back on benefits, the third option, is the normal way unimaginative managers struggle to control costs. Although some monitoring of the government’s money is always required, mandating the spending of every penny and watching every penny being spent, is a costly waste of time. Furthermore, cutting back is the worst option.. for even though it may help balance the budget over the course of one year, in doing so it jeopardizes the balance of all fundamental economic structures that exists today…
Cutting back on our aging population’s social security income places tremendous detrimental effects upon our entire economy. Just as taking one’s foot off a car’s accelerator causes it to slow down, anytime one tinkers with the income flowing into America’s citizens by reducing it, they decelerate the economy… With less income suddenly entering the fuel line, people have no choice but to cut back…
Thereby saying “yes” to Social Security cuts, ie. a reduction of benefits per person, does indeed cut down on the amount of Federal money being paid out; it also depresses the economy by that exact same amount which is being removed… In a booming economy, that cost saving device might have a different consequence than if it were to take effect today. Now, at the historic moment when we desperately need Federal money priming economic transactions all across our country, to diminish the pay-out to those receiving Social Security, hurts the very economy from which we need to acquire the additional income required to pay out those benefits in the first place… Instead of helping solvency, we aggravate its spiraling out of control…
Representing 4.3% of our GDP, we do reap benefits from all that Social Security money moving through the grid of our markets. Cutting back Social Security payments impacts a huge economic detriment. This plan should be used when default has become the last and only option…. When one wants to start a car’s engine, shutting down or decreasing its fuel supply, is the wrong way to get it started.
Our last option, the one of paying cheaply for preventative health-care so that fewer citizens require the more costly operations, is the true, best scenario, long-term approach to our reducing our nation’s future costs… Take just one example: one gastric operation costs as much as 100 colonoscopies. If everyone received a colonoscopy and we had not one gastric operation because of early detection and removal…. consider the savings that would be at our disposal.. If we tackle our top four killers, strokes, heart attacks, breast and prostate cancer with detection and prevention as mandatory practices, then the total payout amount from the Fed to physicians and hospital corporations, could be greatly reduced… Unfortunately there is little data in the United States to verify whether or not this theory has merit upon our human population… But there is large veterinary evidence currently embraced by the United States agribusiness community, that speaks quite well of the cost savings being found through preventative care… Likewise, other countries which decided not to leave something as important as human health care to speculators and money hoarders…. can also provide similar evidence which backs moving health care towards a preventative direction. We can glimpse hope for our own medical future by looking hard at some of their historical statistical evidence….
Lifespans. Obviously as a society we dream of achieving as long as life as possible. It would make sense to find out which form of society has the longest lifespan and then do what they do… As I said, it makes sense.. According to the CIA, the top ten countries ranked by lifespans are as follows…
Macau ……….84.33 years
Andorra………82.67 years
Japan…………82.07 years
Singapore…..81.89 yrs.
San Marino…81.88
Hong Kong…81.77
Australia…….81.53
Canada……..81.16
France………80.87
Sweden…….80.74
The United States (78.14 years) is ranked at 46th behind such countries as Bosnia Herzegovina (42), Jordan (39), and Greece (25)… At first glance it appears that living in a small country or municipality can lengthen your lifetime…. Out of the top ten, only five would be considered “real countries”. But if one thinks for a moment, the benefit of having a territory consisting of only urban area, makes sense out of these figures. One has only to remember the access one has to medical care in our metropolitan areas versus what one finds across the vast expanse of rural America, where one might live 30 minutes away from emergency medical care often requiring a full hour round trip. If one looks down the CIA’s list, rural nations as well as those suffering extreme poverty, tend to have shorter lifespans..
But even so, several of the top ten nations have vast expanses of rural areas. Both Canada and Australian do rather well on the chart of life expectancy… France and Sweden also have large areas unsettled by cities and suburbs, as does parts of Japan…. How do they do so well and what take-away can we pull from those five societies who all seem to have discovered the secret of living well….
If one focuses on diet, perhaps there is some magic in eating sushi, or kangaroo, or berries, or drinking wine, or vodka out of bottles with a blue label…
But if one focuses on their medical care one sees some interesting correlations… Here is a smattering of several of them as correlated by Wikipedia…
I chose these links because they open up ALL of the questions which we in the US must become familiar before making our “choice of a century”. These show some of the benefits as well as the costs coming from national medical plans which are run and which are funded primarily by government taxation.. Bottom line which should not be missed by pawing at the details, is that in each of these nations, people live longer than they do here… For there, ALL have unlimited access to medical care.
Granted, it is incontestable that the citizens of those nations live longer. The real question now lies in how much does it cost them? Surprisingly for most, the United States spends more on health care per capita than any nation in the world. True, because of it our system does have some benefits. Therefore the real question at hand is for us to weigh the loss of those benefits against the gains brought on by increased affordability.
As of 2008, here is our track record: The World Health Organization (WHO), in 2000, ranked the U.S. health care system as the highest in cost, first in responsiveness, 37th in overall performance, and 72nd by overall level of health. Obviously if one thinks hard about it, concepts such as overall performance and overall health, are purely subjective… However, it should not negate the fact that our current for-profit system guarantees our position as number one in responsiveness.. Other countries in the top ten included Japan, Canada, and Sweden, in part because the study noted that those governments had also invested in enough infrastructure to insure that their patient’s accessibility to health care was sufficient where needed.. For example, in some countries, health care accessibility includes a vast system of air ambulances….
As for filtering out cost factors, by removing the profit piece of 38% that is tacked onto every medical transaction occurring within the United States, other countries are able to provide services to their constituents for less… One method that is successfully used in other societies to keep their doctors happy and on board, is to link a physician’s income to a single fee per patient. Whether one has a cold, or a gastric bypass, the doctor and nurse staff receive the same income per transaction… The fees in most of the nations listed above were set by regional districts, which helped account for those cost differences varying from region to region… Likewise because of those local boards setting fees, some form of petition was allowable for a physician to argue his case among his peers if he felt that the transaction fee for a certain medical practice was set too low…
There are many options out there to minimize costs.. Japan pays a 70-30 split. The government pays 70% and the citizen covers 30%. Sweden’s split is 85-15. Canada is 70-30. France is 85-15. Australia is 67 to 33… But translated to US Dollars, the cost of health in each of these countries is still far lower than it is in the United States.. Japan spent $2908 per capita. Sweden pays $3149. Canada ($5170), Australia ($3181), and France ($3374) which are cheap when compared to the United States per capita health cost ($7900). So where does the difference go?
Courtesy of ADECRI (Right Click for Larger Image)
In the words of the National Coalition on Health Care: “Experts agree that our health care system is riddled with inefficiencies, excessive administrative expenses, inflated prices, poor management, and inappropriate care, waste and fraud. These problems significantly increase the cost of medical care and health insurance for employers and workers and affect the security of families.” Despite arguments to the contrary, when one looks at the magnitude of cost between our private health systems and those of other government-run health systems, the bang for the buck is simply not there. Anyone who argues otherwise should be suspected of trying to protect his lucrative piece in America’s health care system. For every piece of evidence we now have, shows our system fails at delivering quality health care at reasonable prices, whereas other systems… do just that…
Cancer rates? How does our nation stack up against others when it comes to surviving cancer?
There is good news there: the national cancer rate has declined.. ““The significant decline in cancer death rates demonstrates important progress in the fight against cancer that has been achieved through effective tobacco control, screening, early detection, and appropriate treatment,” said Centers for Disease Control and Prevention (CDC) Director, Julie L. Gerberding, M.D. “As a nation, we must commit to continuing and enhancing these important public health efforts.” Again it was public (not private) health programs, that were responsible for creating this decrease in cancer… However across the board, cancer rates are higher in modern developed countries than in those which are poorly or undeveloped… Not to be shocked, really. Living past the age of 40 opens the door to quite a few strains of cancer that may lie latent but never become diagnosed in an inhabitant from an impoverished country who dies long before reaching that age, thereby improving that nation’s cancer rate statistic in a rather sad fashion. So when measuring the incidences of cancer in many varying societies, those countries with better care and diagnosing abilities, tend to have higher rates of cancers… Meaning that if one goes to one’s physician long enough, eventually some form of cancer will manifest itself….
Currently the US cancer rate as of 2004 (filed 2008 ) averages out at 970.1 cancers per 100,000 of our population…. But what really matters to us is our ranking in the number of deaths being caused by various cancers; the rationale being that a good health care system would have fewer deaths per segment of their population than one that was not so good… So based again on 2004 data, we see that the United States is ranked as the 9th highest at deaths by cancer with 321.9 per 100,000 people, compared to Australia (10th), France (12th), and Sweden (14th). Canada and Japan do not show upon the chart. Again, as for getting the most of our bang for every buck spent, considering that we are paying the most per capita of anyone for health care, we are not doing very well.
Our health system was touted by insurance companies during our last attempt to establish national health care, as being the best in the world… Unfortunately that was a prideful remark appealing to America’s emotions, but had little relevance in fact… It has only been with the soaring of health care costs that corresponded with the time frame of the Bush Administration, coupled with a decrease in hospitalization caused by soaring out-of-pocket costs, that significant data has been made available to America’s citizens making it known to them that this is simply not true..
If one take the statistic of “Percentage Of Life Lived in Ill Health > Female (most recent)” by country , one sees the United States is 6th… following Mexico(1), Poland(2), Turkey(3), Slovokia(4), and Hungary(5). Or that the United States ranks 2nd in child maltreatment deaths, or 165th in Tuberculosis treatment success. But when it comes to obesity, we are number one. Those nations with nationalized health care system treating their citizens to longer lifespans are ranked in obesity: Australia (6th), Canada (11th), Sweden (21st), France (23rd), and Japan (28th).
As expected, when it comes to catering to the wealthy, our health care system stands up fairly well. We rank number one in plastic surgery;
So without going too far off topic, one can see that the argument that states our United States health care is the best system in the world, has some reasonable flaws. It may be good for some endowed with lots of wealth, but when it is stacked against other systems and when one looks at statistics to make their comparison, our system does not rank well… A preponderance of evidence leads one to conclude that money can be saved by switching to a different health care system,… a system that is focused on prevention, and not on gouging the poor sucker who just happens to get sick. It is far cheaper to prevent a costly disease, than it is to treat it… In the United States’ current system, private health insurers shy away from paying out for preventative health care items, knowing full well that the odds are that another provider will be the one who will reap the benefit of their current patient “who will not get sick”… Why should they whittle down their profit margin to enable another company “not” to have to pay out a benefit? Such is the logic in “for profit” health care.
Is there any other proof on this planet that preventative health care on such a massive scale can drop costs considerably? Absolutely. The graphic below (right click to see full image) shows how us humans have capitalized on prevention when it comes to making or costing us money when raising animals….
Courtesy of Journal of Dairy Research
(Right Click for larger image)
That last topic may have gotten us off track. For if you think back we were initially discussing the five options we had to deal with the problem of two entitlements: Social Security and Medicaid/Medicare. So far we have looked at the dismal picture of 1) keeping them as they are… (it doesn’t work).. and 2) keeping both with some modifications…. As we looked, we have seen various modifications as methods of salvaging one or both of the programs… But if you have gotten a good grasp of the numbers, no doubt as we extolled through the changes that could help ease the financial situation in which we find ourselves, you gradually got the sinking feeling down in the pit of your stomach that none of those fixes would be enough…
In an all to familiar setting common to many Americans today, our listing of the options above was sort of like those hopeful scenarios and arguments being made just two weeks before one finds they are about to be laid off.. As soon as that event occurs, when they look back… they see that even two weeks ago that it was inevitable; they simply chose to hope at that time for options that were still open, and they still held out something would turn up to save the day… Then, … came the pink slip. No one getting laid off in today’s world was a being who was not needed. There was just no money left to pay them anymore…. Their output was fine; there were no moral, ethical, efficiency standards that caused the job loss… There was just not enough money to pay them…..
Unfortunately, it is the same with our entitlements. We are paying over $500 Billion dollars a year for each…. Their costs grow as Baby Boomers age, and the number of workers paying into their benefit pool shrinks… Just looking at the costs, and the inability of having the money to pay for it in the future, we need to wise up and figure out a plan…
This is the part of the solution that no one talks about… If you listen to David Walker, he makes allusions but never focuses directly on that question which “must not be named.” Which of the two programs do we scrap… Medicare/Medicaid? or Social Security? Since I have no qualms, we’re going there…
Getting rid of Social Security: Pros and Cons? Most of the literature on Social Security comes from the year 2005, just after Bush’s second term began and he began to privatize Social Security.
Perhaps we should review what Social Security is? And how it’s been abused?
Here is the argument against Social Security…. “The promise of secure retirements is a “hoax.” Taxes paid by workers are “wasted” by the government rather than invested prudently. And “the so-called reserve fund … is no reserve at all” because it contains nothing but government IOUs.” Sound familiar?
If it does you must be at least older than 70. Even then… you would have had to have been just 7 years old when you heard it… It was originally uttered by Alf Landon, who was running as the Republican nominee against Franklin D. Roosevelt’s second presidential term…
Social Security is a tax on employees. They pay part and their employer pays part. But it is still considered by all employers as part of an employee’s compensation and on every financial statement it is included in a category listed under “labor”. The government collects this employee tax and uses it to pay out pensions to those no longer working. Back when Social Security was created there were far more workers working, than retirees who were not… Solvency was not an issue. The government collected what was needed to then pay out….
But in 1982 under Ronald Reagan, Social Security taxes were accelerated to build up future funds in advance to pay for the bubble of baby boomers expected to retire by 2006. The plan authored by Alan Greenspan, sunk accelerated collections of SSA tax into government bonds in the Social Security Trust Fund. Government grew and income taxes went down financed by a long term debt obligation whose repayment horizon lay in the distant future.
Given the apparent surplus created by the SSA tax it became impossible to resist the lowering of other taxes. In 2004 SSA collected $566 billion and paid out $421 billion with the difference of $145 billion going into the Trust Fund, that’s 25% of all collected. Of that $145 billion… the Bush administration used all of it for that year’s current operation of government. The gamble was done. Today we are faced with figuring out how we can pay back that money, lent to our government by the future retirees of the Social Security Trust Fund. The Republican gamble was devious: they never had any intention of repaying the Social Security trust fund…
Instead of reimbursement, we got a noisy push to privatize Social Security; in other words, remove Social Security from out and beyond the control of the government. By relieving the government from their responsibility of having to pay back the borrowed money from the Boomer’s retirement, they could pay off a few benefits to those already in the plan, and quietly shut down it’s operation by turning over the trust fund to investment bankers. This would continue to keep income taxes at low levels. We were using an accelerated tax rate on employees to fund a large portion of the government, and by liquidating the trust fund so we never had to pay it back, we could continue keeping wealthy corporate taxes at very low levels…
But as recent events have shown, putting a nation’s pension solely in the hands of stock market investors and financiers, IS extremely risky. It is far better to put our trust back into the American people themselves.. So once again we need to decide whether paying BACK all that money we cut in taxes just to keeping Social Security solvent, … is worthwhile; or whether we should abandon FDR’s program as a dream whose monthly payments just rose too high…..
In the short term, abandoning Social Security would save over $500 billion a year. Up until this past year, that was more than our yearly national budget. It’s abandonment would quickly bring us back to solvency. Basically it requires that America defaults on a loan it made to itself… which surprisingly is not as bad as it may sound. Really! It is not.
We do it all the time. It is similar to those who borrow hardship loans against their IRA or Keogh plans and never catch up on the chance to pay it back; they just get fewer benefits when it’s their time to cross over… Or to those who borrowed low interest loans from their own life insurance policy yet never get a chance to pay it back; they just get fewer benefits when it’s their time to cross over….. Or those who borrow loans from their parents and it gets deducted from their portion of the last will and testament; they just get fewer benefits when their parents cross over…..
So as long as there are other venues for covering the nation’s elderly, especially those dependent on social security, we could default on that promise made and survive. Like those examples above, we just wind up with a less rosy future than planned… that’s all….
So up to this point in time, all the tricks used to balance Social Security were based on moving money from one sector to another. But as the bill comes due, the revelation slowly dawns that the only way to guarantee that Social Security benefits get into the hands of retirees (both now and in the future), is through increased FICA or income taxes. It’s the only solution that seems to make sense.
Is it worth the pain? A great question. Perhaps instead, we should switch now and look at the per-person dollars-and-cents cost of NOT raising the FICA tax and of doing away with Social Security all together… If one has no safety net of Social Security there to catch him upon retirement, he has no choice but to save for himself.. He will be in charge of his own retirement…
So how much does one save? Again based on 2004 figures:
But…. what if everyone else is doing exactly the same as is our little enterpriser?
Or put another way, if we personally saved as much as Social Security takes out and received a 3% return on our investment, at retirement we would receive $355 a month. But, wait. Social Security gives us $937 a month. How?
They do it by absorbing the risk of hundreds of millions of people. Most people won’t live 30 years after retirement, but no one person can behave as if he won’t. This is the unsung beauty of Social Security, it is a giant lottery that you win by living longer than anyone else.
I should mention that other “beauty of Social Security”: one that is certainly to be appreciated in these times of collapsing financial markets. Social Security is not a personal asset… You could be bankrupt; get completely wiped out: have nothing to your name. Social Security will still be there for you.. Unlike any financial annuity or mutual fund, it cannot be taken. It keeps paying long after your personal finances have evaporated over to negative numbers.
But the prime point in favor of keeping Social Security, is that it plays a big role in our economy. Were it to default suddenly, our economy would be (4.3% of our GDP) poorer… That loss would not hold at 4.3% of GDP. It would erode profits, jobs, and cash flow throughout our nation’s commerce. It would be one more tamping of that brake pedal slowing down the nations’ economy… Compared to that, the modest increase in FICA taxes (1.2%) even though it takes some money out of the economy today, would when cashed out, create a benefit 3 times its cost (4.3%), whenever it gets used at some point in the future…
Therefore, when seen over the entire length of its program, the removal of Social Security is more expensive than the cost required to save it, by a factor of three to one.
Which brings us to dissolving Medicaid/Medicare…. What costs or savings would that bring?
We begin with this ancient historical quote referencing Newt Gingrich, then speaker of the House:
Obviously getting rid of Medicare is nothing new…. but equally obvious (as one can glean from this description of just one little cut to North Dakota’s senior citizens), is that any tweaking of the Medicare Plan that reduces any tiny fraction of a cost saving benefit, expends just far too much political capital to ever get done.
Do you see the problem? All that was over the impact of just $1.3 million, (million as in “m”) dollars of cuts made to just one of fifty states. A paltry $1.3 million dollars… out of that year’s medicare budget of $560 Billion (with a “b”) dollars, amounting only to a national percentage of 0.000002.3%. As someone once said, if the government gave away free cars, then stopped the program in mid tracks, it would be impossible to argue that free cars were not necessary for the country’s survival… Even though we survived for how many years without them?
(Editor’s note: a free $20,000 car per household would cost this nation, assuming the Bureau of Census estimate of 113,568 households for 2009, $2.27 Trillion dollars.)
Thus it becomes readily apparent to any savvy politico, that cutting back on entitlements piece by piece, line by line, is an impossibility… Because of that, I am afraid that therefore, it makes more sense to scrap the entire program entirely… (it takes just as much effort as the cutting out of $1.3 million dollars) or …raise the revenue to continue paying for it … as it currently is..
If we scrap the entire program, we are saving our government $560 billion a year. But in doing so we are taking the health care industry off of it’s $560 Billion dollar life support. Yet while doing that, we are simultaneously saving American taxpayers close to $560 Billion a year in payroll taxes… So if one looks at the entire system and sees it as a giant circle, one can glimpse that there is no net gain or net loss to the system that comes out of eradicating Medicare… All we are doing with the Medicare cut, is to interrupt the shuffling of money away from the economy back to the economy….. bypassing the circuitous route that takes the money away from the employee and hands it over first to the government, and from there through the medical profession, where it is then matriculated down to those making their living from the medical field, who then go out and return it back to the economy…
But this is where details matter. Let’s say we stop Medicare immediately… No more taxes. No more reimbursements. Retirees who organized their work lives counting that Medicare would be there for them, do not see the benefit of no longer having Medicare deducted (1.5%) from their pay checks. Yet upon visiting their physician, they are still required to fork over their entire fee with no deductible. Likewise a young 20 year old with no thought of ever going to a physician, would receive his 1.5% weekly tax cut, and never notice its difference… At a wage of $8 dollars an hour, his 30 hour week gives him a tax cut off his $240 weekly gross amount… of three dollars and sixty cents…most of which goes towards the paying of his Verizon bill. No new spending gets created… But to those few still earning $250,000 a year, they in turn get an additional $3750 to play around with (whoopee)…. Which gives us…the moral equivalent of having someone who does not need an additional $3750 (whatever) pocketing the difference while someone older dies from being financially cut off from their medication… The impact on who is affected, greatly distorts the circular argument that no ill effects occur.
That is the problem with all previous talk of dissolving Medicare/ Medicaid entitlements.. Discussion gets focused on what is fair, and no one ever gets to discuss what is it that we can afford..
The total amount of money, both public and private, spent on Health Care within these United States is….. $2.26 trillion. That includes a 6.1% jump over last year. Medicare grew 7.2% to $431 billion; Medicaid grew 6.4% to $329 billion; Private spending grew 5.8% to $1.2 Trillion;
Our first step would be to determine that exact line where Health Care becomes “not affordable”. Once we determine that line, we chose not go over it.. The year 2000 was a very good economical year… If we choose to use that year as a base, we see we spent 13.7% of our GDP back then on health care… Since that seemed to work ok, and until we have a better target, we will let that be our benchmark percent… That means in 2007, our ideal health-care cap (13.7% of 2007’s GDP), should have been at $1.9 Trillion dollars. If so, since we actually spent $2.24 Trillion, we are up $0.34 Trillion dollars over where it should have been, had we kept that line of our budget at target…. So how does one trim $340 Billion Dollars off of our entire nation’s medical expenditures…?
To find that out, we need to first take a look at the roots underlying this question: Why does the United States spend more than other developed countries on Health Care? I can think of three possibilities.
One, is that we are sicker than citizens of other nations. Two, considering that as a nation we are rather wealthy, is it that we seek medical attention much more frequently than do other developed nations? And three, is that our prices for the care which we do seek, are higher when compared to those of everyone else?
Obviously we are not sicker. As a nation, we score well on health. If you examine our health by looking at 130 diseases and charting the incidence we have of those among our population, ….we do rather well.
Secondly, we actually seek medical attention far less than our developed world counterparts.. As this chart shows among civilized nations, Americans actually visit their doctor less per capita than citizens of all other such countries, except for Greece and Mexico…..
Therefore our high expenditures must come from the fact that our prices are simply too high…
McKinsey analysts estimate that, even accounting for more consumption of health care services due to our higher income, the U.S. would spend half a trillion dollars less than it does currently if its medical care prices were comparable to those in OECD countries. Such a reduction in spending would reduce our overall spending on health care from its current level of 16 percent of GDP to 12 percent of GDP.
There you go. In a nutshell, that seems to be the direction we need to pursue… The 12 percent estimate mentioned above is below our target of 13.7% of our GDP. One might expect that as the cost drops, the quality of American health care would increase due to its being more accessible and more affordable.
So how do we drop costs?
There is only one way. Remove the for-profit component deeply rooted in health care from out of the equation, and treat health-care as we do an obligation similar to how we promote commerce, build new infrastructure, and educate our children. In other words, put it under “the people’s” management, meaning government control.
As mentioned above, what works in other nations is the charging of flat fees for each visit. However, to keep physicians from milking the system by returning patients back to their office again and again (the auto repair shop syndrome), an incentive should be placed that tips the will of the physician more towards getting the problem correct on the first try… One suggested method is to reimburse a physician full price for their patient’s first visit, 50% for the second, and 0% for each visit thereafter for the same condition.
A second factor that helps suppress medical prices elsewhere, is the stability that comes from having these prices set by regional boards of the physicians themselves. Since it now will cost the same to go to either Doctor A or Doctor B, if Doctor B has a better success rate, his wealth should increase at the expense of Doctor A… Over time more patients will choose him because of his success. They want to get well faster.
A third factor that suppress prices, is the simplification caused by already having prices preset, and payments quickly transpired based on a simple transaction. American physicians’ largest cost is in obtaining payment. Large staffs are required to deal with a myriad assortment of insurance coverages, none of which have the same requirements. Often it is the physician’s office worker who must themselves become the expert of each individual patient’s insurance coverage; they must do so in order to advise the patient of that patient’s most cost effective options….
But, … if a physician sees 100 patients, and gets $75 dollars per visit, his take that day is $7500. Simple. That extra amount previously charged to pay those massive office staffs, which were required to achieve an 80% recovery, is no longer required.
The CDC estimates that 1.1 billion doctor visits were made in the United States last year.. At a per visit charge of $75 dollars, the net cost ( 1.1 billion X $75.00) equals a meager $82.5 Billion dollars.
So if the government were to begin tomorrow to supersede all current private and insurance payments now covering medical costs and simply charged $75 dollars per visit,…. for a cost less than the AIG bailout, all American medical visits could be free of charge to the patient, and cost the government $82.5 Billion dollars.
As a rough guide, the outlays for Medicare in 2007 amounted to $374 billion dollars which were spread among 43 million participants. The per person average spent on Medicare in 2007, then was $8697 dollars. If an average person went to a physician 4 times in one year, as research by the CCD subscribes… The average visit’s charge would be $2174 dollars.
Of course we are comparing apples to oranges here, for the total outlays cover everything from prescriptions to dialysis… However one can still compare cheap apples to expensive oranges and make a selective choice.. But the primary reason our health care is a higher percentage of our GDP than any other civilized nation, is because our prices are just simply way too high…..
If on top of everything we pay today,…. we were add an extra payroll deduction for government paid doctors visits, nationally, $82.5 billion dollars divided by the number of American taxpayers (138 million), would cost each American taxpayer $597 dollars on the average each year… Per week, that amounts to $11.48 dollars….
So if we assess every American worker $11.48 a week, every American could then visit a physician, either private or in a hospital room, cost free. This does not aggravate the deficit; it is a pay as you go plan. This illustrates the cost savings available to us if we ditch our current system of for-profit medical care.
I don’t know about you, but this saves my household $6500 per year….. How much does it save yours?
As we can see, both entitlements have benefits. Both are extremely costly… But if cutting one entitlement is absolutely necessary, the least damaging one to disappear is that one funding Medicare and Medicaid.. As we previously saw, eliminating Social Security as a government funded pension, impose an additional economic cost that would hit us with another three dollars for every dollar saved…
However eliminating Medicare, or replacing it with a different system of nationalized health care, such as the one above which bypasses the “for-profit” motive behind today’s health care industry, can be done cost effectively while at the same time it improves the health care availability for everyone...The idea of replacing Medicare with a form of nationalized health care based on a per person fee scale, would drop our nation’s amount spent on Health care to a level below our targeted 13.7% of our GDP.
The facts speak for themselves… Eliminate $374 billion. Replace it with an $82 billion plan under which all basic medical care is covered at no cost to the patient. Preventative health care can and will be available, enabling American citizens to take care of small problems earlier before they become costly boondoggles creating a personal financial crises…. No more will large numbers of American have to forgo getting a filling put in their teeth because of financial hardship, and then have to go deep into debt for that root canal over which they have no other choice but to get done… It could have been prevented for only $11.48 dollars per week….
Let’s review where we are. Our choices were to:
a) Keep both as they are:
b) Keep both with modifications
c) Get rid of one; keep the other as is:
d) Get rid of one; modify the other:
e):Get rid of both:.
We have looked at all but the last. So what happens to us if we rid ourselves of both entitlements, as conservatives have been arguing for almost a century? The answer is simple.
Upon retirement, many Americans would have no income and no health-care.
You can figure out your future estimated expenses here. You can customize them to your own situation. In fact if you haven’t done so, you and every American should take the time, use this tool, and figure out your own budget sometime during these next two weeks. (Or if you are smart, print it out and give it to your spouse, friend, or lover to crunch the numbers…) Irregardless, writing down your finances in front of you is good for you to see.. For in today’s world, information is the wisest source of money……
Upon retirement most American couples will need at least $1500 to survive before medical is even considered. So if we were to pull both of those security blankets away, what happens to that person who retires without savings?
If we perhaps look at what other societies do when their old can no longer work, we find something helpful. Elsewhere, the elderly move in with one of their children. If total collapse were to ever come to us on these shores, this option of moving back in with family, would be our natural reaction. After all, what child would turn their parents out on the street? If one currently looks at the Social Security portion missing out of one’s paycheck, and sees it not as an expense but as an insurance policy against having the in-laws move in, …that missing amount should be a little more bearable to endure….
The arrangement of caring for one’s parent works well until a catastrophic sickness strikes … Their child, or guardian, is then faced with the tough choice of either investing in the medical care of their move-in-guest, or investing in their own future… The rule of thumb common to elderly-worshiping societies, is that one freely spends on one’s parents, fully expecting one’s children will freely spend on him…. But to suddenly flip a society away from caring for its children over to caring for its parents, leaves one entire generation out in the cold…. Or… even worse, forces one generation to pay double for both their children and their parents….
Is the cost worth it? How much investment does one put into their parent’s medical care?
Granted, we all die… So somehow extending one’s life beyond its natural progression feels great when one removes himself from all cost of determining its worth… But when one puts a price tag on something that is as priceless as one’s life, and determines that the tragic consequences will force some loved one into bankruptcy to cover one’s profligacy with unlimited medical opportunities, …. then living longer does not have the rosy connotation it once had…It becomes superseded by guilt. Would we go to such great lengths to transplant expensive organs, if it was our very own children who were putting up their house to foot the bill? Perhaps if our last name was Gates or Buffet and we were doing so at their entreaties. But most people would do what every single one of our ancestors did: depart with dignity when their time was due to refrain from draining their children’s fortune.
So what about those few having no children? They would be at the mercy of charitable organizations, whose role would be to provide compassion and kindness, but do little to alleviate any of the effects that old age renders…
Research that was begun in 2006 when the attempt to privatize Social Security was given its go-ahead, used data from the Federal Survey of Consumer Finances during the boom year of 2004 which pointed to a strong dependency of retirees on Social Security. Indeed, 41 percent of older couples and 33 percent of singles would experience a living standard reduction of 90 percent or more were Social Security benefits eliminated. (A surprising finding is the major dependency of very high-income households on Social Security. Indeed, were this upper income household denied of all its Social Security benefits on the eve of its retirement, it would suffer a 35.6 percent reduction in its living standard throughout retirement.)
A reduction of 90% or more.
That is the cost of removing Social Security for two fifths of our elderly couples, and for one third of our elderly singles. The burden of their care would have to be picked up by society, whether it was undertaken by their children or by charitable organizations.
So the question remains… can we afford that budget cut? Is balancing our budget worth the social cost it imposes on our elderly and society?
Actually the moving of one’s parent into one’s house add’s little expense to one’s normal day to day routine. True there would be one more mouth to feed, but if each family member ate less, the cost increase could still be zero. With the sharing of rooms to allow the grandparent to move in, there would be no additional utility charge, no additional property taxes, no additional insurance assessments, and except for medical expenses and psychological wear and tear, no additional cost to society would be incurred by such acceptance of one’s elderly …
But what would change would be America’s dream of freedom after retirement; that moment would switch from finally achieving independence, to one of dependency. We must question whether that privilege, granted one not seen by most of humanity, is worth over $500 billion to our nation every year?
But one thing is for sure. Having the grandparents stay at home would mean the death of America’s preschool childcare industry as we know it….but then again, having that inter generational exchange might actually instill more character in our youth…
If the economy simply stops, and it can… it is nice to know that we can survive without either Social Security or Medicare/Medicaid… But our analysis points to a better solution. To solve our entitlement’s long term boondoggle, our best bet is to keep Social Security solvent by increasing the FICA tax an additional 1.7% to 14.1% of payroll; create, establish and force feed a fee based national health service that charges one fee for each doctor’s visit; then faze out Medicare as we know it, leaving private insurers to cover the cost of high end operations..
kavips 
