Quote of the Day
The greatest test of courage on earth is to bear defeat without losing heart.
R.G. Ingersoll
American Jobs Acts? Thumbs DOWN!
I was not impressed by the hyped up Presidential speech, but to be frank I didn't expect to be. Nearly $450B in spending--who could have figured? It'll be paid for? Yeah, this comes from a guy who has now been running a hat trick of $1.3T deficits. And how many times have we heard Senate Majority Leader Harry Reid pay lip service to pay-as-you-go? Keep in mind we have a $15T economy; a lot of spending (e.g., unemployment compensation) or payroll tax cuts (individual), is little more than continuing EXISTING unpaid for spending. The President has thrown in a few conservative sweeteners: e.g., he's promoting a national version of a Georgia plan that makes unemployment compensation more palatable by allowing certain employers a "try-them-before-you-hire-them" wrinkle, he's paying some lip service to small business policy reform, he's allowing business-side payroll tax cuts (THIS time), and he's raising the possibility of free trade agreements. There are all sorts of nuances, such as Obama's giveaway to his crony union interests for relief to those adversely affected by liberalizing trade against South Korea, Colombia, and Panama; give me a break! Any jobs lost by these would reflect companies being effectively subsidized by the federal government.
Let's be clear: most of this is political posturing: what Obama is trying to set up a reelection pretext by arguing that the GOP House is stopping him, that this is a "bipartisan" bill (which of course was never negotiated with the GOP) and this bill would have lifted the economy out of its malaise. As usual, the Obama Administration threw in class warfare tax hikes (dead on arrival), an infrastructure play, etc.
Let me say federal bailout deals offering to put up funding for the first year, but the state has to subsequently pick up funding is sort of like credit card teaser rates, or free phones with a cellphone service plan, or whatever. What you need is consistent policy, not funding gimmicks.
There were several instances in the speech where he repeatedly attacks a straw man--"all or nothing". Obama paints a false choice, say, between over 4000 pages of ObamaCare and financial reform regulation and laissez faire free markets. Whereas my preferred policy would run to minimize regulation on a strict cost-benefit basis, conservatives in general are not characterized like Obama disingenuously suggesting. The issue for businesses is not so much regulation, but CHANGES and/or INCREASES in regulation. What they are looking for in terms of policy is not whether a 2% payroll tax cut will be extended one or 2 more years, but that it is sustained indefinitely. Stop picking winners and losers, stop tweaking this and adjusting that. Obama thinks that unless progressives are tweaking public policy, the free enterprise system isn't robust enough to handle it. On the contrary: the free enterprise system survives despite Obama, not because of Obama. It fundamentally reflects Obama's fundamental lack of faith in our economy. As if an entity which collects only 60% of what it spends has the moral authority to tell private-sector companies how to run their affairs! What hubris!
Social Security a Ponzi Scheme? Yes and No
I often use the term "Ponzi scheme" particularly in discussing unsustainable government programs, including the unfunded entitlement liabilities, pension liabilities, etc. I prefer to be more precise and rigorous, but I am not a lawyer (thank God! what a terrible waste of a great mind would that be...) I understand what Rick Perry is getting at in his recent book, and I don't think arcane distinctions of the type how many angels can dance on the point of a needle are particularly useful or helpful.
You have Ponzi schemes, that typically attract investments by promising a higher rate of return, holding risk constant. (We expect a correlation between return and risk. For example, if a low-income person wants a loan, we know he has a limited amount of discretionary income to pay off the loan and hence there is greater risk of default given other expenditures.) Say, if stocks on average clear a real rate of return of 8%: you promote you've figured out a secret way to get better returns, say 11%, without taking on any more risk than anyone else in the market. Say, you really earn the regular 8%; how do you get the 11%? By skimming off the investments of the second group, etc. As long as the music continues playing in this game of musical chairs, you keep on attracting new investors, you can keep this scheme going. However, if the market tanks, some investors may well want to cash in their holdings; you don't have any new investors to skim off, and the scheme is exposed.
Social security is a Ponzi-like scheme, but not a Ponzi scheme per se. I have mentioned especially for lower-income people, they may more than triple what they and their employers paid into social security. You know that the social security trust fund is not deployed in stocks but in very low-paying Treasury interest rates. There are a few ways you could pay off that tripling--say, for instance, the labor force grows by a relevant percentage or you earn investment returns that make up for any shortfalls in labor force participation.
The problem here is over the years the expected lifetimes of social security recipients has increased--say, you expect $1500/month in income or $18,000 a year. If you were expected to live for 4 years, $72K. Now, because of improvements to health care and/or other reasons, you now are expected to live for 6 years, $108K. But if you and your employer only paid off $72K but you collect $108K, where does the $36K come from? Clearly other people's contributions, unless you and your employer contributions are increased to reflect the actuarial factors.
If you look at the thrust of my posts over the past several months there are several things I've discussed: raising retirement age, modest increases in payroll taxes, moderating benefit adjustments to a more reasonable cost of living, expanding immigration/number of workers, diversifying trust fund investments, etc.
The Democrats pointing out the trust fund won't exhaust itself (assuming economic growth, labor force, actuarial and other factors are adequately modeled--which is a big IF) for another 25 or so years are not only loading the true cost of current worker retirements onto future generations, but the fact that future taxpayers in the 2030's may find their taxes involuntarily raised to an unsustainable level just to pay off retirees--while possibly still attempting to draw down the nation debt with fewer international investors, skyrocketing, economic growth-crippling high interest rates, etc.
People, there's no such thing as a free lunch, no matter how many times the Democrats and Warren Buffett volunteer other rich people into picking up other people's lunches. There has been no austerity in the US--at the federal level--versus what has been going on in Greece, England, and other countries. Sooner or later, we are going to have to draw down the national debt, and it's going to be ugly and highly unpopular politically. The sooner we engage in austerity, the less severe the amount of austerity required.
One final note here: both Romney and Perry are suggesting some sort of means testing of benefits. This violates the concepts of FDR's bargain ensuring the higher income people are vested in social security. If you exclude higher income from payments, they should not be required to contribute to it.
I do see a situation where one might only guarantee a certain amount each year to a recipient or cumulative payments.
Ponzi scheme? No. Ponzi-like? Yes. It needs to be made sustainable in either case with action sooner than later.
Musical Interlude: My Favorite Groups
Air Supply, "Young Love"
