While I was posting Deficit Unplugged, our President was compromising with Republican Leadership to create Deficit Ignored.  Should we have a payroll tax holiday?…yes we should.  Those tax cuts?  They should have gone the way of the DoDo.

Here is, honestly, why I am concerned about the deficit.  As a Nation we have promises to keep.  We have the promise to our citizenry that if you work hard and use your mind, you can have a better life than your parents, in other words, we have a promise of upward mobility, yet our middle class is shrinking.  For the last 75 years we have promised everyone who works that they, and in some cases their dependents, will have a safety net in old age and for the last 35 years we have promised elders some semblance of health care.

There is a risk now that all the promises will be as ashes.  In truth the giveaways that I talked about in Adult Conversation are part of the problem.  In order to make Social Security more appealing benefits increased and the retirement age was lowered even as the population began to see increases in  longevity.  In order to avoid fiscal responsibility, Social Security receipts were spent as part of the general budget.  When borrowing from ourselves wasn’t enough, we borrowed from other nations.

Engineering short term budget deficits will never allow us to attack the long term budgetary issues that affect our fiscal health.  We had a chance to let the tax cuts expire but now that ultimate decision has been kicked two years down the road.  Our tax code is a mess, to be sure: it is over 67,000 pages of nonsense and exceptions to nonsense. TAX prep is a 65 Billion dollar industry and roughly 61% of filers use a tax prep service.  Refund Anticipation Loans are a huge business in low income areas.  I have lost count of the number of articles I’ve read by economists over the past few weeks who advocate reforming the tax code, collapsing to two brackets, the top of which would be lower than the top bracket under the beloved Bush cuts, and adding a value added tax.  Taxing both production and consumption rather than production as we solely do now.  Some of the logic for not doing these things boggles the mind:  A value added tax would cause the poor to save rather than spend so we shouldn’t do it…huh???  We should preferentially tax the rich because the rich would save rather than spend….huh???  We should extend unemployment benefits because the unemployed will spend them….huh???

Since the 1970s the roots of our economy changed from a manufacturing base to a consumer base, an economy driven by spending.  What did George W. Bush urge us to do after 911? He urged us to remember our patriotic duty and shop.  But there is a problem with jobs based on retail and consumer spending and that problem was summed up by Lee Scott, CEO of Wal Mart:  “Some well-meaning critics believe that Wal-Mart stores today, because of our size, should, in fact, play the role that it is believed  General Motors played after  World War II.  And this is to establish this post-world war middle class that the country is so proud of.  The facts are that retail does not perform that role in this economy.”

Our economy has become dependent on people spending and when they run out of their own money to spend, borrowing to spend more.  No wonder we are in the mess we are in.  We have become a nation of “business as usual” trying to hang on to what it has rather than pave the way forward  with programs and incentives that will restore our middle class.  I actually believed that there would be a push for updated infrastructure and a new power grid.  It kills me that a chunk of my money every month is recycled back to the very extremist groups responsible for 911.

What do I think the President should have done?  How about lock everyone in a room with the camera’s rolling rather than hammer out an agreement after hours behind closed doors?  Make people responsible for their positions in public, not when surrounded by the safety of the herd as most politicians are when they make statements about the economy.  He should be in my face all day every day articulating his views.  That 70 minute internet only version of Mr. Obama’s 60 Minute interview was a revelation.  He has sound positions but is not doing a great job of communicating them.

I am not someone that my mother would call liberal; my mother occasionally calls me Neal (for Neal Bortz and she has even called me a selfish capitalist on my own blog)…I don’t believe in using the tax code to redistribute wealth, and I believe that everyone must pay.  I believe in term limits to certain safety nets like unemployment insurance coupled with sound public policy like a jobs bank and retraining.  By jobs bank, I don’t mean a jobs bank that the automakers had in which laid off workers were paid substantial incomes while at home waiting to be called back to automotive jobs.  No, what I mean is a database of jobs and industry trends so that people don’t have to guess what industries are fading and which ones are emerging, they don’t have to guess what the qualifications for any given job are, opening and closing dates for applications are posted and adhered to, resources for retraining are promulgated and there is funding for retraining. I believe in a national infrastructure bank with national priorities that are updated and funded and I don’t believe that public works projects should be awarded to  certain companies without the benefit of competitive bidding.

What we have now is a mess.  And political will only to posture rather than fix our problems.

I am afraid that the scenario that I outlined in Adult Conversation will take place.  I believe that Americans will ultimately have to forgive the intra-governmental debt Social Security now holds and Americans will have to accept less.  You avoid the iceberg when the tip is just a speck on the horizon, not when the berg is looming  off the bow.

By kicking the can down the road as our leaders just did this week we are surely headed for tougher choices down the road.

Please comment.

I started this blog because of my interest in personal finance and financial freedom.  Gosh, that phrase financial freedom is sooooo trite.  I started blogging just before it became clear there was going to be a financial meltdown.  I’ve been wondering exactly what my role in the overall economy is.  I make money, I save money, I invest money and I spend it.  But lately, it seems as though we are in a free-for all economy.  Everyone is worried and out to get theirs.

It seems to be okay that some thrive while others suffer.  Some intimate that the thriving of one group causes the suffering of another.  (Certainly the financial meltdown has shown that a few thrivers have caused many to suffer) but are we really going to fall into a society so polarized that we argue that the thrivers must pay their fair share to ameliorate the suffering of others?

We live in a civil society…everyone must pay.  To extend the tax cuts for everyone will cost roughly 4 trillion dollars.  Extending them for the wealthiest 2% of Americans will make up $700 billion of that total.  That means that the lion’s share of the tax cuts belong to the middle class.  The grand total being roughly 3.7 trillion dollars.  It seems silly therefore that we talk about budget deficits without considering the totality of tax cuts.  We cannot target one group against the other and appear to be an intelligent nation.

I’ve been looking at the US budget since 2004.  The US income statement is so easy to find.  I discussed the budget in 3 previous posts : IOU America, IOU America Part 2 and Robin Hood.

In my previous posts I used a hypothetical college student as a micro example of the US Budget.  Now I am going to use something more personal, me.

It is not a state secret I had major debt troubles; 30 years ago I got my first credit card, my debt increased gradually through the years until I had 16K a month revolving credit card debt.  I had a house, a car, expenses and deferred student loan debt.  My expense situation could be divided into immediate needs + short term debt.  Lurking down the pike was the Ghost of Christmas future:  long term debt + immediate needs + short term debt.

My short-term debt payments + immediate expenses were about 90% of income. I made up any short falls by borrowing, i.e., using credit cards.  I knew that I had long term debt obligations that I would have to begin paying, but I was so busy being a rat on a wheel, I didn’t know how I was going to make that happen.  Something snapped…I saw the light.

I adopted an austerity program.  But I adopted a program that made sense.  First I eliminated every expenditure that I didn’t absolutely need, that meant canceling credit cards, pre-paid calling cards, meals out.  I only spent a dollar if it put food in my belly, kept clothes on my back, or put a roof over my head.  I prioritized purchases, everything that didn’t fit the above categories went on a list.  I needed some major help in the financial literacy department so I allowed myself to buy books on that topic…4 per month.  One thing that I did do was develop a spending plan.  I had to get to and from work and take call so I maintained my car.  I also continued routine maintenance on my home to make sure the roof was okay and the cooling and heating systems worked.  The spending plan helped me save and take care of the priorities around my home while I paid off my debts.  It is important to mention that my total debt was 123% of my annual take home pay. Ouch!

It is important to understand that even while I was digging myself out of my hole, I had to continue to spend. I had to spend on housing, I had to spend on food, I had to spend on clothing, I had to spend on maintenance.   When our lawmakers talk about all spending as a bad thing they are  really blowing smoke. What they really should be saying is that we know we are going to continue to spend during this recession, but we only want to spend on the things we want to spend on.  And there is the ideological rub.

There are the billions spent on unemployment insurance on the one hand or the trillions spent  to make tax cuts permanent.  The expenditure for unemployment insurance will stop at some point as the economy improves and the unemployment rate falls.  The 4 trillion dollars in lost revenue through a permanent tax cut extension is, well, permanent.  This debate is not about the budget it is about ideology.  We have two 800 pound gorillas in the wings, the dual apes of Social Security and Medicare.  The economy has forced us to talk about them at least a decade sooner than we’d like. We can’t kick the can down the road and everyone must be prepared to give something up.

I am tired of hearing that earmarks amount to a rounding error in the budget.  At one end of an earmark is a Congressman or Senator who lobbied for their district, at the other end is a consituency who benefited.  Everyone must pay, earmarks must stop.

It was wrong for Krugman to rail against the freeze in Federal pay.  Federal employees have the most generous benefits packages around and have been receiving COLAs when others have been receiving pay cuts.  Federal employee pay may be a rounding error in the budget but everyone must pay.  By the way, VA and Federal employee retirement benefits were a 4 trillion unmet obligation in the Federal budget.  A two-year COLA freeze will save money because it will affect retirement pay.  The freeze should be extended to the military not on active duty.

I realized long before Mr. Obama was elected that my taxes were going to go up.  Honestly, I’m really surprised they haven’t yet.  My taxes should go up, but living in a civil society isn’t free. They should go up for everybody.  We shouldn’t be discussing saving 700 billion, we should be discussing saving 4 trillion.  Everyone should pay.  To take the sting out of the tax increase, there should be a payroll tax holiday and reform of the tax code as Bowles and Simpson have proposed.  Everyone will benefit from that.

We are in a recession, but there are still necessary expenditures.   Just as I had to maintain my car and home when I was in my personal recession, we have to maintain our infrastructure and doing that requires spending money, a jobs bank requires spending money.  Just as my mechanic and my plumber benefited from my maintenance plan, our citizenry will benefit from a jobs bank and infrastructure projects.

Please comment.

I finally got one! An iPad. As I write this, I am sitting in a Starbucks in San Francisco. This town should be called iTown. The woman sitting next to me on my right is typing into her Macbook Pro while listening to music on her iPad. The woman on my immediate left is using a Windows-based PC. On her lap is an iPhone.

What inspired this blog post? A Washington Post article of a few weeks ago called The Republicans Prepare Their Agenda of Less. In the article, a member of the Tea Party spoke of the need to address the looming issues of Social Security and Medicare and have an “adult conversation” with the American People.

Several months ago, I wrote a series of articles about why Medicare sucks. I am still getting comments about those articles. I wrote about the budget in those articles and that Medicare, in all its many parts, and Social Security represent represent tens of trillions of unmet obligations in the Federal budget. I also said that any attempts to address long term deficits would have to take into account those two programs and restructure them significantly if they are to remain solvent and if the American people are to continue to be able to afford them.

There are three things to remember about what I wrote:
1) Social Security and Medicare are paid for through payroll taxes. Every working individual, from the very old to the very young both rich and poor, pays into these programs. This is something that appeals to my sense of social justice, that is that everyone should pay for programs that everyone benefits from.
2) for the past 30 years the government has used receipts in excess of pay outs to fund general government operations. The excess receipts have been traded for government bonds. the interest payments alone are crippling. When people, ie, officials, talk about a trust fund, they are talking about money held in trust, except there isn’t money held in trust. There is money held in bonds, bonds that we don’t have the ability to repay, not at current income levels.
3) all discussions about Social Security are discussions about current income or current receipts, as example by the year 2037 to 2041 we will only take in enough income to pay out 75% of obligations. On the bright side this means that the government will stop misappropriating the people’s retirement funds to fund general government operations on the down side we will all wake up to the reality that that is what has been going on and there will likely be a significant public outcry.

The history of Social Security is outline well at http://www.ssa.gov/history It is worth a read fascinating, really. These documents hold the key to why we are in such trouble. Truthfully, everyone is to blame for the Social Security and Medicare mess. When the money was flowing and it wasn’t being borrowed against, it was too big a pile of cash not to spend. By 1950 cost of living adjustments and disability payments and survivor benefits were added. Health care was originally envisioned to be part of Social Security. It was not part of the original law, but along came Medicare in 1965. Politicians voted for the expansion of Social Security and Medicare at the urging of their constituents and no one thought about the long term consequences. Well, those consequences are here.

It is important to understand what Social Security was meant to do. It was originally called Social Insurance and it was intended to provide economic security against abject poverty. It was intended to keep people out of Alms or Poor Houses. The Great Depression was the third great economic dislocation this country experienced in about a century. It brought with it 25% unemployment and extreme poverty for many, savings were decimated and pensions were rare. Alms houses were funded by state governments to care for people in poverty, but state implementation of these programs was spotty, there was a significant stigma associated with accepting assistance from Alms houses, there was means testing and people were reluctant to receive help from what amounted to state-run welfare programs. When Social Security was enacted, it was not a popular program. The benefits, set at roughly 30 dollars, the amount intended to keep someone from becoming destitute, did not change for the first decade or so of the program. People felt that they could and would get more benefits from the state-run welfare programs. Social Security provided direct payments to states to bolster those programs. In the beginning, Social Security was simply another tax people paid that they perceived little benefit from. In order to increase the popularity of the program, payments began to increase and the retirement age was lowered from 65 in 1935 to 62 in 1950. Thirty dollars in 1935 has the same purchasing power of 470 dollars today, yet a recipient retiring at age 62 who has enough credits to qualify for full benefits will receive 1750 dollars, an amount more than 3 times greater than what Social Security was ever intended to pay our per individual. The machinations that took place in the 1950’s were successful; for a program that was intended to keep its eldest citizens from becoming destitute has become one of our largest entitlements. It is a program that has not kept pace with the realities of demography. In 1935 the life expectancy was 59 years today it is roughly 78. In 1935 people were only expected to spend a handful of years collecting Social Security. Today a recipient, retiring at age 62, may collect Social Security for 20 years or more.  The truth about the payroll tax is that it  has become a stealth income tax because income in excess of payments has been rolled into the general budget. Given that almost half of our citizenry pays no income taxes, yet everyone pays payroll tax, this is a form of tax justice I can live with.

What is the adult conversation our government needs to have with us? First we have to understand that it won’t be a conversation. This is what our government will have to say:
1) The party’s over
2) There is no trust fund and the trillions of dollars in IOUs the government has promised to pay Social Security will have to be forgiven.  What is a trust fund?  You can find the definition here.  I am sure you will agree when you read this that what is going on with Social Security does not meet the definition of “trust fund.” When I first wrote this, I went back to the Social Security site and went to the program solvency link FAQ’s.  When I read the FAQ section I was genuinely shocked.  See the solvency issue is really about what to do with stretching the current income being paid into Social Security.  No one wants to have the program redeem its bonds in large quantity to meet obligations because no one knows what would happen if Federal Bonds were redeemed.  Our government is already printing money at historic numbers to prop up the economy, how would it fare if investors showed up to say redeem 1 trillion dollars in bonds to fund Social Security obligations?  Where would the money come from to pay those bonds?  Right now the money that comes in is sufficient to allow the US government to roll over its debt as it relates to Social Security.
3) The retirement age will have to be between 70 and 72
4) Benefits will have to be reduced

I wonder if Americans are ready?

Please comment.

Okay that is such a clumsy title for a post,  but there it is.  I am still reading Ellen Ruppel Shell’s Cheap:  The High Cost of Discount Culture.  Ms.  Ruppel Shell’s premise is simple, our quest for low prices is anything but harmless.  We pay for it in damage to the environment and the ultimate loss of craftsmanship and quality.  Cheap goods allow us to move toward a throw-away society.  Charles Fishman argues in The Walmart Effect that Walmart makes sells cheaply-made lawnmowers so cheaply that you’d never think of repairing one, you’d simply replace it when it breaks which it is likely to do each and every year.

The abundance of cheap goods has masked the very real problems of inflation and wage stagnation.

I love getting a good deal, but I love getting a good deal for a quality item.  The problem is that much of what we buy is low on quality.  The most enlightening chapter of Ruppel Schell’s book is the chapter entitled, “The Outlet Gambit.”  Premium outlets are designed to  get you to part with your money while connoting value.  The problem is that the reference prices on which the discounts are based are fiction and many brand leaders manufacture lower quality products specifically to sell in “premium outlet” malls.  Ruppel Schell and Dr. Gillian Naylor, marketing professor at the University of Nevada, Las Vegas College of Business, travel Las Vegas malls with Dr. Naylor distinguishing between quality and garbage merchandise and, more importantly, whether or not suggested retail price is truly reflective of a product’s quality.  More often than not the answer was no.  Rupel Schell writes, “Given this assiduous attention to value, Naylor’s opinion of outlets is worth noting:  She uses them, but sparingly. She prefers department stores which she said generally carry better quality merchandise at prices that are frequently lower than outlet levels.”

This book has merely confirmed something that I began to suspect long ago:  That manufacturers use the allure of outlets to unload inferior merchandise that they make specifically for the outlet. The Coach belt that I bought at the Premium Outlets mall outside Santa Fe, pulled apart within months of purchase and the Coach leather coat, that I paid a pretty penny for has loose stitching and the beautiful rich brown color that I found so attractive on the day of purchase is coming off after only one season of use.  I have vowed to never return.  Coach Premium Outlets is selling junk and if they are doing it in Santa Fe, they are doing it in your neck of the woods.  The implication in Cheap is chilling:  by shopping at an outlet store, you could end up paying $300 dollars for a suit that is really only worth $200 dollars at full retail.

Even online super discounter Amazon.com practices the reference price shell game to lead you to believe you are getting a deal.  I began to suspect something was up when product reviewers suggested in very direct language that Amazon was outright lying about the suggested retail prices on some of its products.  A few months ago I was in the market for a new coffee maker.  Amazon lists the suggested retail price on the Cuisinart DCC-1200 as $145 dollars and they offer it on sale for $69.95 a savings of 52%.  But what does Cuisinart sell it for? $79.95 and there is no suggested MSRP.  Macy’s has the same item listed for $79.95 with an MSRP of $99.95.  We have to conclude that the Amazon MSRP is simply a fantasy used to bolster the value of the perceived deal.  Amazon is really selling the item at $10 dollars off, a savings of 8.7%.  A pretty thorough Internet search has lead me to believe that this item’s retail price is $79.95 and that even the Macy’s MSRP is made up.  This item is easy to compare because Cuisinart only makes one model of the DCC-1200, but what if there are different models of the same item? Take the Buck 110 folding hunting knife.  The Amazon price is $41.36 with a suggested retail price of $66 dollars.  The implied discount is 38%.  Would that it were true.  LLBean sells the same knife for $34.95 and there is no suggested retail price.  Bass Pro sells the same knife for $44.95 and does not list a MSRP on their site.  Hunting Blades does list the MSRP as $66 dollars while selling the knife for $47.95.  What does Buck sell this knife for?  $45 dollars.  Buck actually sells two versions of this knife.  The knife with brass fasteners is $66 dollars and the one with nickle fasteners is $45 dollars. The image on each site appears to be of the higher-end knife, but none of the sites uses the Buck model number so it is virtually impossible to make direct price comparisons.

Provided that all 4 sites are actually selling the same knife, this exercise illustrates several things:

1) Whether the MSRP is real or not retailers use that number to provide context for the deal you think you are getting.

2) Without accurate model numbers, it is impossible to truly compare prices from store to store

3) It pays,  literally,  to shop around.  Provided we are talking about the same item, LLBean clearly offers the best deal on this knife.

4) It makes sense to go directly to the manufacturer to verify the MSRP.

5) Price is clearly relative.  Clearly all for sites want to sell this knife yet only one site offers substantial savings over the other three.

Amazon’s pre-order price guarantee is a zero-sum game.  The  guaranty only applies to prices in effect on the day an item ships.  The guaranty does not apply to rock-bottom price fluctuations that may have occurred before the item shipped.  Price fluctuations that some buyers will be able to take advantage of, but not you if you pre-ordered the item and expected Amazon to monitor the price for you.  The best thing to do is not participate in the pre-order program and watch prices yourself.   The other thing to do is place the item in your cart then remove it to buy later.  If you do that Amazon will watch the price for you.

I am reminded of the Donna Summer song, “she works hard for the money”.  The fact is that we all do, yet I do believe that we want quality and value not junk as we plop down our hard-earned cash for the products we desire.

Please comment.

Recently I was sitting with two friends at dinner.  Both women are over age 60 and both found jobs in this economy.  The jobs are high-paying. One of my friends said that she thought the reason she had been able to find a job was her work ethic.  “We may be 60,” she chuckled, “but at least folks know we will show up.

At the time of the Great Depression, the number of self employed individuals was significantly higher than it is today. Since 1948 the percentage of self-employed individuals has declined steadily. Since the 1970’s the self-employment rate has ranged between 6 and 8 percent of total employment.  Has the work ethic in America changed as the rate of self-employment has fallen?

I thought about what she said and filed it.  Back in the roaring 1990’s the labor market was so tight that all kinds of bad employee behavior was tolerated. Monday/Friday absenteeism was high and folks figured they could just get other jobs if they got fired.

I recently Tweeted an article that appeared on CNN Money about the success of Amish businesses.  Their long term survival rate  is over 90%.  By comparison, the 5-year business success rate is 65% for the general population.  They attribute their success to humility and extremely hard work.

The other day we got a call from a colleague.  Her car had broken down and she was calling to cancel her clinic scheduled for the next day.  She was told to rent a car if she had to but she needed to be present as scheduled.  She showed up.  A couple of years ago, I got a call from another colleague.  She was about to leave on vacation in a few days and noticed a spasm in her back.  She wanted to see a massage therapist to work the spasm out.   Trouble was, the only appointment she could get prior to the start of her vacation was right in the middle of one of her clinics.  She called and, explaining to me that she did not want to head off to her vacation with a spasm in her back, asked if I would excuse her from her scheduled clinic.  My answer was, as Madea would say, “hell to the no.”

Many years ago, I wasn’t much better.  I was chronically 10-15 minutes late for work.  My dogs were sick, my car was sick, I had a hot date the night before.  Silly, silly stuff.  My mama told me that as long as I needed the income, I had better prioritize the job.  My mother raised 2 kids alone and rarely missed a day of work. The truth is that as long as someone needs their income, they had better prioritize their job or business.

Is this behavior a function of age?  Meaning the younger you are the more likely you are to see the need to earn an income in conflict with other activities like getting the car fixed.  I don’t know. I do believe, however, that something has happened.  In the name of family values people shirk work.  Even in households where a parent is home full time, I have watched adult health care professionals walk off the job to take care of something at home.  “Family first” being the last words they utter as they walk out the door. How about “without an income, there is no family, so I’ll just stay on the job.”  It is a foregone conclusion that work comes second.

We might just find ourselves in a position in which we lose our competitive edge to nations in which their citizens are happy for work and for whom the job or the business comes first.

Please comment.  What are you seeing at work?

Okay.  So I am going to get a little technical here, but I’ll still keep it simple.  The definition of Gross Domestic Product (GDP) is:(Wikipedia)

“The gross domestic product (GDP) or gross domestic income (GDI) is a measure of a country’s overall economic output. It is the market value of all final goods and services made within the borders of a country in a year.”

Now remember the our college/grad student in the last post?  His student loans were not factored into his debt obligation because they were deferred.  Much the same way our government’s future obligations for entitlement programs are not factored into our current budget expenses because those expenses are in essence deferred.  But remember there are certain rules about debt.  Personal debt should not be more than 36% of gross income.

What is the government’s gross income?  Its GDP. Below is a graph of our GDP:

You can see that our GDP has risen pretty steadily, but unfortunately so has our debt.  Ever experience the phenomenon of getting a raise or a bonus at work only to spend every last dime of it and wonder where it went?

I’ll bet the answer is yes.  And alas Uncle Sam is no different.  Here is our public debt as a percentage of GDP.

Is our debt picture too high?  Well, we can see from the diagram that our debt as a percentage of GDP was highest after World War II.  How high is it today as a percentage of GDP?  Alas, I’ll let the Citizen’s Guide to the Unified Budget tell you:

“Historically, the Government has incurred debt when it borrows from the public to finance
budget deficits. The economic recovery efforts of the past year precipitated a need to
dramatically increase the amount of funds borrowed from the public. However, part of this
increase has financed investments that the Government expects to ultimately recover in whole or
in part. The Government’s debt held by the public totaled approximately $7.6 trillion at the end
of FY 2009, and was held by the public in the form of Treasury securities, such as bills, notes,
and bonds, and accrued interest payable. The “public” consists of individuals, corporations, state
and local governments, Federal Reserve Banks, and foreign governments. In addition to debt held by the public, the Government has outstanding nearly $4.4 trillion of intragovernmental debt, which arises when one part of the Government borrows from another. It represents debt held by Government funds, including the Social Security ($2.5 trillion) and Medicare ($372 billion) trust funds. (emphasis added)”

That would be $7.6 Trillion dollars plus $4.4 trillion dollars or $12 Trillion dollars against a GDP of $14.6 trillion dollars or 82%. OUCH! Actually this number is a bit worse because that GDP figure was from 2008.  Our GDP has declined due to the recession.  What happens to the people that we know who are in debt up to their eyeballs unless they make some dramatic changes?  A word of caution.  I am looking at total debt as a percent of GDP, most figures that you see will look at public debt only as a percent of GDP.  Public debt is debt held by the public: private citizens, other governments, corporations etc.  Public debt as a percentage of GDP is 50%.  I look at total debt because 1.  I don’t play games with balance sheets and 2. I consider intra-governmental debt because it is created by borrowing from Medicare and Social Security as important as any debt we owe to anyone else.

Now how did this budgetary mess happen?  Had we not had the recent housing bubble and Great Recession, we would still be in this mess, it is just that the recession has increased revenue shortfalls (think declining tax revenue) and made the conversation more urgent.

Again from the Citizen’s Guide to the Unified Budget:

“Strong economic growth and fundamental fiscal decisions taken in the early 1990s, including measures to reduce the Federal deficit and implementation of strong “Pay as You Go” (“Paygo”) rules, generated a significant reduction in the debt-to-GDP ratio over the course of the 1990s. From a peak of 49 percent of GDP in 1993, the debt-to-GDP ratio fell to 32 percent in 2001. During the last decade, much of this progress was undone as Paygo rules were allowed to lapse, significant permanent tax cuts were implemented, and entitlements were expanded. By September 2008, the debt-to-GDP ratio was 40% of GDP. The extraordinary demands of the  current economic and fiscal crisis have pushed up debt held by the public significantly.”

That last paragraph should put an end to partisan sniping, but it won’t.  Who was in the White House during 8 of the last 9 years?  George W. Bush.  The next to the last sentence describes pretty accurately what was done economically during his Presidency.  FDR, a Democrat, was in the White House when the deficit exceeded the entire GDP.  He had new technologies, a burgeoning work force and a new and rising tax base on his side.  The deficits grew during the Reagan and Bush I administrations, came down during the Clinton Era and went up again under Bush II.  The deficits would have gone down during the Reagan and Bush I eras had they actually cut spending while they were cutting taxes (in the end Bush I had to raise taxes), but, alas, they did not.  In short each party is responsible for our current debt burden.  They need to stop finger pointing.

Where are we headed?  It ain’t good.

This chart is scary because it doesn’t really take into account the debt I’ve been talking about.  This graph looks at income or cashflow.  Let me explain.  Remember, I said that our total income is about $2 trillion per year.  The chart looks at the amount by which expenses will outstrip our income going forward.  Again from the Citizen’s Guide:

“Chart J also illustrates the difference between estimated program spending (spending on mandatory and discretionary programs, excluding interest on debt held by the public) and estimated Government receipts.”(emphasis added)

I am going to stop here. Please comment. In my next post, I’ll look at why using the GDP figure makes me nervous.

LetsGetFiscal started following me on Twitter and the follow reminded me that I need to get back on track talking about the budget.  Our country is on a dangerous course on many levels: 1).  We have adopted the policy of taxing high income households to pay for the benefits that every citizen will enjoy 2).  We are really not talking honestly about the future of our major entitlement programs, Social Secrurity, Medicare 3). We are increasing our levels of indebtedness to pay for budgetary shortfalls. 4) Debate about the budget has gone down the Partisan sewer when both parties are equally responsible for creating the mess we are now in and, truth is, they know it.

I actually have the 2009 unified income statement for the United States on my hot little hard drive.  The document is over 200 pages long, but most of that is the citizen’s guide and it is pretty easy to read.

My financial adviser, Kim Butler, at Partners4Prosperity always reminds me that I should think micro-economically to understand macro-economics.  In other words look at how I handle money on a small scale to understand how the government does it on a large scale.

Eventually these posts are going to contain images taken directly from the unified income statement for the United States, but for right now, I am only going to discuss general principles.  First a basic example we can all relate to.

Imagine a college kid.  He finishes college and graduate school with $60,000 in debt.  His loan is at 8% and it will be financed over 10 years.  When the loan goes into re-payment the payment amount will be $727.97.

While he was in graduate school, he got a job paying $30,000 dollars per year and decided he needed a car.

Even though he will have an outstanding debt of $60,000 with a payment due of $727.97, while he is in graduate school or qualified post graduate training, his student loans will be in deferment.  Because he is not actively paying on the loans, present day creditors will not consider the loans which represent future debts when deciding whether or not to loan him money for a car today. His student loans are in essence an unmet obligation.  They aren’t due now, but they will be due at some future date.  He knows he has to plan for them, but he has no sense of urgency.

He gets a car for $15,000 at 8% for a payment of $304.15.  Remember his income is $30,000 per year.  That means that his gross take home pay (before taxes) is $2500.  There is a general rule that total debt obligations should be no more than 36% of gross monthly income and housing debt should be no more than 28% of gross monthly income.  The general rule of thumb is that the lion’s share of that maximum total debt obligation will go to housing.  Whether you are renting or buying a home these total percentages are the total percentages.  You can’t just say I’ll run up the cards until my debt is 36% of my gross pay, no you always have to factor in housing because you need a place to live.

36% of $30,000 is $10,800 dollars or 900 dollars per month.  See the problem?  Because no one was looking at his student loan debt, our student was able to get a car loan for $304.15 per month.  But when his student loans come due, he will suddenly be well over the maximum debt load for his income and he still doesn’t have a place to live!

Our student will only have 5 options:1) increase his income, 2) sell his car  3) default on his loans 4) renegotiate his debt  5) reduce current spending

Okay, now imagine our student is actually the US federal government.  Take student loans out of the picture and substitute the entitlement programs of Social Security and Medicare.  From our earlier post we know that the unmet obligation is $46 trillion dollars.  Remember our government’s income is only about $2 trillion dollars. Our government has the same options as our college student:1) it can increase its income through tax increases. Only an extremely naive person would believe that all necessary revenues can be obtained by taxing the top 2% of income earners. 2) it can sell it’s assets 3) it can re-negotiate its debt.  Actually our government already does this by issuing new bonds and using the revenue generated to cover budgetary shortfalls and to pay off other bond holders. 4) default on its debt.  There are plenty of articles on the web that discuss the possibility of US debt being downgraded. 5) reduce both present and future spending.  What this would look like is tackling fewer new social programs and reducing benefits promised through established programs such as establishing a means test for Social Security.  What this would mean is that Social Security benefits would be tied to a person’s post-retirement income, no matter how much they contributed during their working years.

I’ll stop here and ask you to please comment.

Okay so the title is a bit sensational. This post begins the series I am doing on our domestic budget. Our income statement. Our ledger of income and expenses. Robert Kiyosaki’s books are all about teaching the average individual to read an income and expense statement. For individuals, sources of income can be royalties from books, photographs, articles, patents, licensing agreements, businesses, traditional employment, self employment, unemployment, etc. Expenses are in the form of credit payments, housing, utilities, etc. For the US government the income piece is a whole new ball of wax as is the expense piece, but an income statement is an income statement and they are all read the same. Fortunately for us, we live in a democracy, information is abundant and in many instances free. The government is not out to hide anything. The information that I am going to present is available for free from the GAO (General Accounting Office) and the Treasury. I will also use documents from the SSA (The Social Security Administration). The original transcripts and testimony from when Social Security was first established are available on that site! Imagine documents 75 years old available for all to see.

There are a couple of very important things to understand about Social Security.
1) At the time of the Great Depression there were no social safety nets
2) People who were self employed or owned businesses were just as likely as people who had been employed all of their lives to be unable to provide for themselves in retirement
3) People attempted to provide for their retirement through insurance vehicles (think something similar to whole life) but the surrender rate was very high and very few policies made it to maturity.
Surrendering a policy means that the policy holder surrendered the policy to the insurance company in advance of their retirement in exchange for the return of premiums. This is like someone taking a loan against their 401K or spending their Roth contributions ahead of retirement.
4) Social Security payments were only intended to be sufficient to keep recipients out of the then popular “alms” houses. The amount of money required to do that in 1935 was $30 dollars US.
5) The designers of Social Security only guaranteed solvency of the system to 1980. They felt that the Social Security Trust Fund would become too large and therefore too much of a temptation for politicians to spend. They weren’t sure that social security would continue to be needed and they wanted future governments to determine a way to keep it solvent.

Now for the scary picture:

What do you see? Oh come on….don’t be shy! What do you see?

Well it is a pie chart. Taxes make up a chunk of revenue and so do Payroll Taxes collected to fund Social Security. So what! you are probably saying. Okay…drum-roll. Social Security revenues that are not immediately spent on Social Security payments to beneficiaries are spent elsewhere in government. It works like this:
5 dollars come in for Social Security. Only 1 dollar is converted to beneficiary payments, leaving 4 dollars in the trust fund. That 4 dollars doesn’t stay in the trust fund. Someone slips into the treasury in the dead of night, takes the 4 dollars and replaces them with an IOU. The 4 dollars are then spent as part of the general budget.

But don’t believe me. The follow excerpt is from page 11 of A Citizen’s Guide to the 2009 Financial Report of the U.S. Government by the Treasury:

“In addition to debt held by the public, the Government has outstanding nearly $4.4 trillion of
intragovernmental debt, which arises when one part of the Government borrows from another. It
represents debt held by Government funds, including the Social Security ($2.5 trillion) and
Medicare ($372 billion) trust funds. These Government funds are typically required to invest
any excess annual receipts in Federal debt securities. Because these amounts are both liabilities
of the Treasury and assets of the Government trust funds, they are eliminated in the consolidation
process for the Governmentwide financial statements. When those securities are redeemed, e.g.,
to pay future Social Security benefits – the Government will need to obtain the resources
necessary to reimburse the trust funds.”

What that gobledygook actually means is that when one part of government borrows from another, the transactions cancel so it doesn’t actually show up on the combined financial statement of the US government. It doesn’t mean the transaction (intragovernemental borrowing) never occurred. It just means they don’t report it on the balance sheet. Yikes! Will the government have the money when it comes time to make good on those IOUs? The short answer is probably not.

Again from A Citizen’s Guide to the 2009 Financial Report of the U.S. Government:

“Social insurance programs and Medicaid continue to represent a large share of Government cash-based expenditures. As reported in the Statement of Social Insurance (SOSI), over the next 75 years, the present value of expenditures for OASDI, Medicare (parts A, B, and D), Railroad Retirement, and Black Lung2, are, absent policy changes, projected to exceed dedicated receipts for these programs by almost $46 trillion (nearly 6% of GDP over the 75-year period). Medicare Parts B and D are financed by general revenues. By accounting convention, the general revenues are eliminated in the consolidation of the financial statements at the governmentwide level and as such are not included in this calculation even though the expenditures on the components are included.”

The important thing about this last paragraph is that Medicare Parts B and D are unfunded.  The government has to find revenues in the general budget to pay those obligations.  There are no funds that come into the government coffers that are earmarked to pay for Medicare Parts B and D.

A quick word about earmarks and I will close.  About half of revenues that come into federal coffers are earmarked funds, funds that are designated to be spent for a specific purpose. The largest earmark is Social Security.  There was a great deal of discussion during the Presidential Campaign about earmarked funds. The implication was that because funds were earmarked, they represented wasteful government spending.  This was basically a misrepresentation of the truth.  Eliminating earmarks would have put all Social Security revenues in the general revenue pool bypassing the need to track the revenues with IOUs making an already bad situation intolerable.  The truth is that earmarked funds tend to be the most efficiently spent. The bad news is that any unspent earmarked funds are shifted to the general fund to address budgetary shortfalls elsewhere.

What do you think? Bad news?  Good News? Please comment.

I just finished listening to “This American Life’s Return to the Giant Pool of Money”. They originally broadcast this episode one year after the collapse of Lehman Brothers in September 2008. What’s a girl to do after a hard day’s work but come home and listen to grim economic news? Several months ago I posted This American Life Rocks on the Economy and indeed it does.

The world has changed. We are considerably more interconnected than before and behind the scenes is the Global Pool of Money, investment capital looking for a return. It would have been happy with any old return until Alan Greenspan, erstwhile head of the FED, signaled to the Global Pool of Money that interest rates would remain low, essentially eliminating returns from trustworthy treasuries and setting the stage for the relaxing of lending standards, the housing bubble, CDOs, CDSs and what ever economic innovation came down the path.

I just finished watching the Lord of the Rings Trilogy and Alan Greenspan is beginning to look a lot like Saruman and the banking industry is beginning to look a lot like Mordor. Mortgage brokers like orcs and the role of Sauron goes to….okay, I’ll stop.

The point: is any investment “safe” with all of these behind the scenes machinations going on? I am beginning to think not and that, for the sake of safety, I should move into Steve’s or Warren’s basements.

The story laid out by This American Life in conjunction with Planet Money is a tale of suspense, greed, corruption, blindness with more than a generous sprinkle of outright stupidity. And it will happen again. CNNMoney featured an article today: With Caution, Americans Still Want a House.  I read the article and thought OMG!  It took roughly 20 years for us to forget about the Savings and Loan mess and jump into the subprime housing mess.  In another 20 years where will we be?

In part deux This American Life caught up with most of the folks featured in the first installment.  They are all sorry, really they are.  The guy who created and sold CDOs lost a bundle, the guy who created and sold mortgages lost his home and is living with his parents, the guy who took out a home equity line 10 times his income is still living in his home rent free mortgage free, the banks too swamped in paperwork and awash in TARP money to actually foreclose.  I realized while I was listening that the natural desire for retribution and criminal prosecution is really pointless.

I, like Aragorn, could scream, “Let the lord of the Black Land come forth! Let justice be done upon him!”  But honestly what would that do?  This was a bottom up, not a top down crisis.  People bought homes they knew they could not afford, using mortgage contracts they lacked the financial literacy to understand, and used home equity lines to give the appearance of wealth they did not possess.

Without the actions of consumers, the banking industry could not have acted as it did.  A friend of mine bought a house during this most recent boom and she bought it using a 30 year fixed mortgage.  I asked her why she bought using that loan product and she told me to paraphrase, that she bought a home she could afford using a mortgage she could understand.  She did not understand the other loan products being offered and she figured they could not be good for her.  Reading a mortgage product is a lot like reading a label for processed food.  If you cannot understand the label, put the food product down.  Imagine that, buying a house you can afford using a loan product you understand.  All of our consumer education should be focused on increasing financial literacy and fostering that set of values.

What are your thoughts? Please comment.

Because of chronic employment problems your daughter and her husband are struggling for cash you decide to let them live with you until they can recover. The weeks turn into months, turn into years and they never do seem to recover. Your granddaughter needs a cosigner for her student loans. You decide to do it. Your brother is between jobs and needs help with the rent. You do it. Your boyfriend is between jobs and needs help with the mortgage, you do it.  Your brother’s marriage is breaking up, his business is in the tank and he asks you for a “loan” of a few thousand dollars to help with the mortgage.  Do you do it?  Your brother calls needing thousands of dollars in dental work, but he doesn’t have the money.  Do you do it?  All of these situations are examples of Economic Outpatient Care (EOC), a term coined by Stanley and Danko in their book, The Millionaire Next Door. According to Stanley and Danko EOC refers to the substantial economic gifts and acts of kindness some parents give their adult children and grandchildren.  While Stanley and Danko refer to actions of parents when using this term, EOC can occur in any family in which large economic gifts pass from one family member to another.

What is the ultimate impact of EOC? The recipients as a group produce much less than non-recipients and they are much less likely to become economically independent.  EOC does not refer to isolated one-time gifts intended to help a person get through a rough patch, but to recurrent and ongoing gifts to family members in perpetual need.  Because chronic recipients of EOC tend to remain dependent they tend to drain or consume the resources of the giver attaining a disproportionate share of any inheritance.

How can something intended for good, produce harm?  Because simply solving someone’s immediate economic problem does not create the skills that foster independence but what it does do is set the stage for the expectation of ongoing economic assistance. Stanley and Danko found that investing in a child’s education and fostering an environment of independent thought, leadership and personal responsibility actually assists adults in becoming independent.

With this information, how do you decide whether or not to provide assistance to a relative when asked? First ask yourself if the person asking is chronically in need.  If so, your gift may not have the positive effect you intend.  Painful as it is, it may be better to decline to help.  It is not clear that giving the assistance in the form of a loan produces better results therefore, to ensure peace in the family, it may be wise to give assistance as a loan only if you will need the money back at some future date.  Second, can you afford to lose the money? If you are thinking of assisting someone with money you cannot afford to lose, you should decline to help.  Third, if you decide to help, set a limit on your assistance by limiting the dollar amount or the total number of times you intend to help.

It is hard to see the people we love in trouble and it is hard not to want to help.  I have certainly benefited from parental support as a young adult and am grateful for it, but there comes a time when we have to grow up and live independently of our parents, grandparents, sisters and brothers.

Please share your thoughts.