The theory behind the minimum wage is simple; to make sure that everyone with a job makes at least enough to get by. It is the right thing to do, right? Everyone needs a livable wage, right? Sure, but only if they earn it, right?
Basic Economics: A product’s price is determined by the market, not the cost to make it. The profit a company makes on the product is determined by the difference between the price the market allows and the cost to make it. A company must make a certain profit on every product or it makes no sense to make it.
Competition increases the supply of products. This lowers the market price. Lower prices squeeze profits. Lowering costs is a requirement to maintain profitability. This applies equally to services.
Labor is a cost: Each product has a finite allowable labor cost to remain profitable. The minimum wage, by definition, is a wage paid to the workers at the very bottom who would be paid less if the market were allowed to operate. The employer is forced by law to overpay these workers.
Artificial Overpayment Hurts the BEST Workers Most: If you artificially force overpayment of the lowest value employees, this money must come from somewhere else. Where?
It must come from the wages and salaries of those who are pulling their weight. It comes from the hard working middle class people.
Your company makes a product. Buyers will pay you $120 per unit for it. At $121 you cannot sell any because they can get a competitor’s model for less. Your overhead accounts for $15. You need to make $5 profit or it is not worth making at all. $120 - $15 - $5 = $100.
So, you have $100 to build your product. $20 goes to component parts, energy usage, etc. $80 is left to pay workers.
Worker A is on time every day, works all day and churns out top notch product. Worker B is on time every day, works pretty hard, and churns out good work, but not as good as Worker A. Who is more valuable to YOUR company? Who would you pay more? Worker A, of course.
You also employ Worker C. He is late rather often, does menial labor and does not aspire to do anything more to help drive the company’s business. He is clearly worth the least, but you need someone to do this work. Unemployment is low for those willing to do this work and he is better than the drug addict you had doing this work last year, so you keep him around.
Worker A’s hard work should be worth $40 and at that wage she drives $43 in value. Worker B’s good work should be worth $30 and at that wage he drives $32 in value. Worker C’s shoddy menial work should be worth $10 and drives $10 in value. $40 + $30 + $10 = $80 and this maximizes everyone’s pay versus the budget dictated by the market and provides the required $5 minimum profit required to continue to make the product in this plant.
Ahh, but there is a minimum wage, so you have to pay Worker C $15; $5 more than he is worth. That means that you can only pay Worker A $37.50 and worker B $27.50, or reduce benefits or outsource the entire process to a foreign country and fire all three workers. You cannot afford to overpay your workforce or the required profit will be lost.
Who paid worker C the extra $5 required by the minimum wage? The government? The company?
NO, Worker A and Worker B pay him or they lose their jobs entirely!
So, to artificially help out the lazy disinterested Worker C, we take money from hard working Workers A and B so that they have a more difficult time feeding their families and paying their mortgages.
Does this make any sense?
How should wages be determined? By each person’s value to the company. That way Worker C is incented by the fine example set by Worker A to improve his lot in life.
But, you argue, the minimum wage is so little. How can it matter that much? Well if you are OK with giving part of your wages to that guy in your place of business who makes minimum wage, and you know who that is, then please share away, but it should be your decision. It should not be forced on the guy next to you.
But isn’t it true that few actually make minimum wage anyway? Certainly, most workers are worth what they are paid plus their contribution to the overpayment of the few that make minimum wage. Is that OK with them? Ask their spouses and children?
But people can barely live on minimum wage. How can you pay them less? People can barely get by working really hard and showing up on time and earning their living. How can you take money from them involuntarily and give it to others who do not care so much?
But, let’s have management make less and use that to pay the minimum wages. Sure, or they can be paid what they are worth and move the whole operation to India and everyone loses his or her job.
Reconsidering the minimum wage is just one step in making the US more competitive in the world markets.
Tuesday, December 30, 2008
Wednesday, December 17, 2008
One Quarter Percent – Has the Fed Learned Nothing?!!
Earlier this year I showed how this entire credit crisis is the fault of the Federal Reserve due to their completely inept handling of interest rates as we came out of the last recession. See http://themoderatevoice.com/22860/guest-voice-the-federal-%e2%80%9canything-but%e2%80%9d-reserved-911-terrorists-strike-again/ . Now they are doing it again. How can we let them?
Major Screw-Up Number One: In summary, in response to the last recession, the Fed lowered the Fed Funds Rate, which drives or influences all interest rates world wide, including LIBOR. This rate had not been below 3% for 40 years, yet the Fed lowered the rate from 6% in January 2001 to 1.75% in December and 1% in June, 2003. It was below 3% for 3 years and 8 months and at 1% for a year, both absolutely unprecedented.
Free money spurred out-of-control mortgage lending, which dramaticly increased home demand, which increased home prices, which further increased mortgage lending and of course home building. It also revved up the bundling and selling of mortgage backed securities and spurred the creation of synthetic CDOs and the like. Subprime, Alt A, Auction Rate Securities, CDOs and all that existed prior to 2001. This action by the Fed just put all of this on steroids and unleashed the inherent creative survival-of-the-fittest greed alive and predictable in all people.
Major Screw-Up Number Two: Then, they REAALLLYY screwed this up. The Fed raised the Fed Funds Rate by 4.25% in 2 years. The last time rates were this low the Fed took 8 years to raise rates by this much. The rapid increase in rates ruined fragile home mortgages throwing them into foreclosure, ruining home demand, causing home prices to fall, lending to dry up, mortgage companies to fail and fire people, lenders to fail and fire people, insurers to fail and fire people and home builders to fail and fire people. Higher unemployment leads to less spending and that kills the whole economy.
So what is the NEW answer to the current recession they caused, do the same thing as last time.
Lower interest rates to a new record low.
What to do Now?
It is too late. This has already happened. Since it has, what is the next right thing to do?
Announce right now that rates will begin to rise, one quarter percent every 4 months until rates hit 5.25%. This is about the average Fed Funds Rate over time. First raise will be April, then August, then December, like clockwork for 6 years and 8 months.
Lenders and borrowers will have certainty. Borrow now or the rates will go up in April. Everyone can plan. Lenders can make loans that predict future known increases in rates.
Why are interest rates shrouded in mystery? Who does that help? It provides the Fed with some kind of secret power over the economy that they hate to relinquish.
I suggest that if the Fed will not do this itself, then Congress should take this power from them and do it legislatively. The Fed screwed this up once. We cannot afford for them to do it again. Good luck America.
Major Screw-Up Number One: In summary, in response to the last recession, the Fed lowered the Fed Funds Rate, which drives or influences all interest rates world wide, including LIBOR. This rate had not been below 3% for 40 years, yet the Fed lowered the rate from 6% in January 2001 to 1.75% in December and 1% in June, 2003. It was below 3% for 3 years and 8 months and at 1% for a year, both absolutely unprecedented.
Free money spurred out-of-control mortgage lending, which dramaticly increased home demand, which increased home prices, which further increased mortgage lending and of course home building. It also revved up the bundling and selling of mortgage backed securities and spurred the creation of synthetic CDOs and the like. Subprime, Alt A, Auction Rate Securities, CDOs and all that existed prior to 2001. This action by the Fed just put all of this on steroids and unleashed the inherent creative survival-of-the-fittest greed alive and predictable in all people.
Major Screw-Up Number Two: Then, they REAALLLYY screwed this up. The Fed raised the Fed Funds Rate by 4.25% in 2 years. The last time rates were this low the Fed took 8 years to raise rates by this much. The rapid increase in rates ruined fragile home mortgages throwing them into foreclosure, ruining home demand, causing home prices to fall, lending to dry up, mortgage companies to fail and fire people, lenders to fail and fire people, insurers to fail and fire people and home builders to fail and fire people. Higher unemployment leads to less spending and that kills the whole economy.
So what is the NEW answer to the current recession they caused, do the same thing as last time.
Lower interest rates to a new record low.
What to do Now?
It is too late. This has already happened. Since it has, what is the next right thing to do?
Announce right now that rates will begin to rise, one quarter percent every 4 months until rates hit 5.25%. This is about the average Fed Funds Rate over time. First raise will be April, then August, then December, like clockwork for 6 years and 8 months.
Lenders and borrowers will have certainty. Borrow now or the rates will go up in April. Everyone can plan. Lenders can make loans that predict future known increases in rates.
Why are interest rates shrouded in mystery? Who does that help? It provides the Fed with some kind of secret power over the economy that they hate to relinquish.
I suggest that if the Fed will not do this itself, then Congress should take this power from them and do it legislatively. The Fed screwed this up once. We cannot afford for them to do it again. Good luck America.
Tuesday, December 16, 2008
Save the Economy - Save the Immigrants
Throughout time immigrants have driven the growth and prosperity of this country. The concept of illegal immigrants is a relatively recent one. The idea that we should keep out those who don’t look like us, however, is an age-old effort. Whether we like it or not, immigrants are critical to the future of the US economy. There is a simple way to solve this problem. Make them join a union.
Who comes to the US? Immigrants are people with the guts to leave their families, cultures and traditions to venture into a new land in search of a way to improve themselves. They are tough, clever and self-sufficient.
Most people fear the risks and stay home, no matter the desperation of their native situation. Immigrants bear these great burdens and still send most of their often meager wages home. Immigrants are truly special people. This has always been what defines Americans. This applies to Mexican immigrants as completely it has to all other nationalities.
A Bit of History: As always, we should learn from our past or suffer the same errors. Immigration laws are a recent concept. The Immigration and Nationality Act of 1952 was the first broad immigration law. Still immigrants were generally welcomed and helped by Americans to adjust to and become part of society.
Laws of Exclusion: Prior to 1952, “immigration laws” were designed solely to exclude certain ethnic groups. The Naturalization Act of 1790 excluded blacks except as slaves. After that there were acts specifically excluding Chinese, Japanese, Asian Indians, Filipinos, and others. Isn’t our current policy strikingly similar? http://www.umass.edu/complit/aclanet/USMigrat.html We became a melting pot despite our white ancestors’ best efforts.
The Baby Boom: In 1965 we first began to prefer immigrants with skills. The Baby-boomers were coming of age. A graph of births per year is at right. Births rose dramatically from 1945 to 1957. After that rates fell. The Baby-boom generation officially extends to 1964. http://upload.wikimedia.org/wikipedia/en/6/6d/Birthratechart_stretch.PNG
There was a glut of new 20-something workers entering the marketplace to fill the less-skilled positions at the bottom of the growing corporate pyramid. Unskilled immigrant workers, therefore, would further overfill an overflowing population.
1990 was the tipping point.
The youngest Baby boomers turned 26 and wanted to move out of the lowest-level jobs. The problem, there were simply not enough young workers to replace them. Corporations found they could not fill the unskilled workers with Americans. They had two choices:
1. Hire immigrants, or
2. Outsource to other countries.
They did both.
As time passed, the situation worsened. There was pressure to outsource as China found a great new way to drive its economy. There was pressure for Mexicans to come to the United States to fill the jobs left vacant. For years we ignored them as we always had.
Immigrants are Critical to Our Economy.
When a corporation outsources jobs overseas, it no longer needs the supervisors or managers above that group of workers and those jobs are lost as well.
When a corporation hires immigrants, all of the supervisory and management jobs are retained in the US to oversee those workers.
9/11
Then the Bush Administration slammed the door using 9/11 as the excuse. By some accounts there are around 10 million “illegal” aliens in the United States. They have been here for years helping to fill the critical jobs at the bottom of the corporate pyramid.
Mexican immigrants could not go back home, as they had for years, for fear they would not be able to return to the US. The vast majority, like all Americans, had good steady jobs and paid their taxes and even contributed to Social Security and Medicare without hope of benefitting from them.
The Echo Boom
This is the group born between the mid-1980s and the mid-1990s, peaking in 1990. This group is coming of age, but they are technologically savvy. They will fill the high-tech, healthcare and green jobs of the next economy. They want nothing to do with the blue color jobs required to run this country’s manufacturing and service base. It is also a small blip in comparison to the Boom.
The Solution is Simple
You cannot remove ten million people, even if you could find them. We cripple US businesses struggling already to compete by denying them Mexican workers.
Pure amnesty is simply politically impossible. A fence is just silly.
Undocumented Workers Must Join a Union
If we provided that any illegal alien could secure all necessary working papers to become “legal” so long as they join a recognized American union and remain in good standing, we would solve all of the problems associated with Mexican workers.
Then employers have no excuse. If they need more low-skilled workers, they need only turn to the unions. Any illegal alien who chooses not to join a union, will not be able to find work.
Unions will help workers adjust to our culture, language and work ethic. They will help them secure training and better wages, make sure they are not competing with Americans, and help insure they have health and other insurance.
American workers, whether in guilds, trades or unions, have always been there to help immigrants adapt. They will do it again.
Who comes to the US? Immigrants are people with the guts to leave their families, cultures and traditions to venture into a new land in search of a way to improve themselves. They are tough, clever and self-sufficient.
Most people fear the risks and stay home, no matter the desperation of their native situation. Immigrants bear these great burdens and still send most of their often meager wages home. Immigrants are truly special people. This has always been what defines Americans. This applies to Mexican immigrants as completely it has to all other nationalities.
A Bit of History: As always, we should learn from our past or suffer the same errors. Immigration laws are a recent concept. The Immigration and Nationality Act of 1952 was the first broad immigration law. Still immigrants were generally welcomed and helped by Americans to adjust to and become part of society.
Laws of Exclusion: Prior to 1952, “immigration laws” were designed solely to exclude certain ethnic groups. The Naturalization Act of 1790 excluded blacks except as slaves. After that there were acts specifically excluding Chinese, Japanese, Asian Indians, Filipinos, and others. Isn’t our current policy strikingly similar? http://www.umass.edu/complit/aclanet/USMigrat.html We became a melting pot despite our white ancestors’ best efforts.
The Baby Boom: In 1965 we first began to prefer immigrants with skills. The Baby-boomers were coming of age. A graph of births per year is at right. Births rose dramatically from 1945 to 1957. After that rates fell. The Baby-boom generation officially extends to 1964. http://upload.wikimedia.org/wikipedia/en/6/6d/Birthratechart_stretch.PNG
There was a glut of new 20-something workers entering the marketplace to fill the less-skilled positions at the bottom of the growing corporate pyramid. Unskilled immigrant workers, therefore, would further overfill an overflowing population.
1990 was the tipping point.
The youngest Baby boomers turned 26 and wanted to move out of the lowest-level jobs. The problem, there were simply not enough young workers to replace them. Corporations found they could not fill the unskilled workers with Americans. They had two choices:
1. Hire immigrants, or
2. Outsource to other countries.
They did both.
As time passed, the situation worsened. There was pressure to outsource as China found a great new way to drive its economy. There was pressure for Mexicans to come to the United States to fill the jobs left vacant. For years we ignored them as we always had.
Immigrants are Critical to Our Economy.
When a corporation outsources jobs overseas, it no longer needs the supervisors or managers above that group of workers and those jobs are lost as well.
When a corporation hires immigrants, all of the supervisory and management jobs are retained in the US to oversee those workers.
9/11
Then the Bush Administration slammed the door using 9/11 as the excuse. By some accounts there are around 10 million “illegal” aliens in the United States. They have been here for years helping to fill the critical jobs at the bottom of the corporate pyramid.
Mexican immigrants could not go back home, as they had for years, for fear they would not be able to return to the US. The vast majority, like all Americans, had good steady jobs and paid their taxes and even contributed to Social Security and Medicare without hope of benefitting from them.
The Echo Boom
This is the group born between the mid-1980s and the mid-1990s, peaking in 1990. This group is coming of age, but they are technologically savvy. They will fill the high-tech, healthcare and green jobs of the next economy. They want nothing to do with the blue color jobs required to run this country’s manufacturing and service base. It is also a small blip in comparison to the Boom.
The Solution is Simple
You cannot remove ten million people, even if you could find them. We cripple US businesses struggling already to compete by denying them Mexican workers.
Pure amnesty is simply politically impossible. A fence is just silly.
Undocumented Workers Must Join a Union
If we provided that any illegal alien could secure all necessary working papers to become “legal” so long as they join a recognized American union and remain in good standing, we would solve all of the problems associated with Mexican workers.
Then employers have no excuse. If they need more low-skilled workers, they need only turn to the unions. Any illegal alien who chooses not to join a union, will not be able to find work.
Unions will help workers adjust to our culture, language and work ethic. They will help them secure training and better wages, make sure they are not competing with Americans, and help insure they have health and other insurance.
American workers, whether in guilds, trades or unions, have always been there to help immigrants adapt. They will do it again.
Solving the Healthcare Crisis
There are around 300 million people in the US. About 50 million, or one in six, is without health insurance coverage. Health insurance costs are growing at double digit rates, and have for many years.
A Proposal
Eliminate State Governance: Every State regulates health and other insurance providers. This was quite relevant when companies were small and most employees were within one state’s boundaries. Now, of course, even very small companies are multi-state if not international.
A significant cost of providing health and other insurance coverages is compliance with the regulations of the 50 states. Each company must establish a separate corporation in each state with executives and management. Each state has its own special requirements and coverages. Various states require certain coverage for chiropractic, psychological, psychiatric, pregnancy consulting and other care and services. This complexity alone prohibits new creative insurers from competing with the huge established providers. Open competition drives prices down and options up. Establishing a national regulatory framework that preempts State regulation would dramatically reduce the cost of health insurance immediately.
Allow Open Cooperation: If any group of individuals, businesses, charities, unions, trade associations, etc could band together to negotiate national and even international group health, life, disability, workers comp and even liability, auto and casualty insurance coverage for their members, including whatever services and care the membership deemed valuable, one would drive substantial reductions in the price of health and all other insurance.
One auto mechanic cannot afford coverage for himself or his employees. If the national trade association of auto mechanics were permitted to band together and negotiate group rates, they could all afford reasonable insurance with the coverages they deem important. Charities would band together to create huge groups of uninsured individuals and provide affordable coverage that delivered only the coverage these individuals want and need. This is not allowed under today’s laws. Negotiating power for purchasers will reduce insurance prices significantly.
Provide Catastrophic Coverage: The government should provide only coverage in the event of major health problems. If an individual’s illness or injury exceeds some set minimum, we will use $150,000 for these purposes, then the government will pay for all future medical and prescription costs for the patient.
The risk to insurance providers would be capped at $150,000 and so basic insurance premiums would be much lower and more people could afford coverage. Doctors working on patients whose medical costs have exceeded $150,000 would be employees of the government as to this work, subject to the negotiated rates, etc. Doctors could opt out and transfer patients to doctors in the system. Most would remain, just as most accept Medicare and insurance company negotiated rates at present.
For this work, they would be immune from medical malpractice liability, eliminating the extreme costs of that coverage for this higher-risk work. Mistakes would be addressed by a government medical panel and the physician would be disciplined accordingly, including criminal penalties for situations were punitive damages might otherwise be granted.
If one elects government coverage, the patient understands that he or she has no right to recover against the doctors if there is malpractice, but he or she also knows that the government will cover medical bills, prescription costs and other medically required items for as long as required. An individual with means could opt out of the government provided system.
All costs now expended by the government on Medicaid, Medicare, Social Security Disability and other programs would be rolled into this program.
Wellness: Different costs, underwriting requirements and the like would be encouraged rather than discouraged as they are now. Those who are smokers or obese would pay more. Groups would strongly encourage members to quit smoking, lose weight, exercise and get healthy or risk being removed from the group entirely. HIPPA would be amended to allow the group to monitor participants with chronic but manageable diseases such as diabetes, to make sure that the members are taking their meds and monitoring important vitals. Because of the government cap, the costs of health insurance associated with these diseases would not be as significant.
Brokers: Insurance brokers would be held to a higher standard. Broker malpractice would be expanded. Kickbacks, a common practice today, must be eliminated. At present, when a broker reaches certain annual premium levels, the insurance company pays that broker a bonus. These are often very substantial. They are obviously designed to convince the broker to sway the decisions of insurance purchasers toward a certain provider even if that provider is not right for them.
Conclusion:
Freeing the system of undue regulation, permitting greater creativity and providing negotiating power to the purchaser will dramatically reduce insurance prices and increase the number of people covered. Adding catastrophic coverage for all cases above a certain limit will also reduce ordinary coverage prices and make sure that everyone is taken care of if they suffer major illness or injury. In the end, it should be affordable for the government and dramatically increase the number of Americans who have coverage, which will ultimately help the medical community and everyone wins (except perhaps malpractice plaintiffs’ attorneys).
A Proposal
Eliminate State Governance: Every State regulates health and other insurance providers. This was quite relevant when companies were small and most employees were within one state’s boundaries. Now, of course, even very small companies are multi-state if not international.
A significant cost of providing health and other insurance coverages is compliance with the regulations of the 50 states. Each company must establish a separate corporation in each state with executives and management. Each state has its own special requirements and coverages. Various states require certain coverage for chiropractic, psychological, psychiatric, pregnancy consulting and other care and services. This complexity alone prohibits new creative insurers from competing with the huge established providers. Open competition drives prices down and options up. Establishing a national regulatory framework that preempts State regulation would dramatically reduce the cost of health insurance immediately.
Allow Open Cooperation: If any group of individuals, businesses, charities, unions, trade associations, etc could band together to negotiate national and even international group health, life, disability, workers comp and even liability, auto and casualty insurance coverage for their members, including whatever services and care the membership deemed valuable, one would drive substantial reductions in the price of health and all other insurance.
One auto mechanic cannot afford coverage for himself or his employees. If the national trade association of auto mechanics were permitted to band together and negotiate group rates, they could all afford reasonable insurance with the coverages they deem important. Charities would band together to create huge groups of uninsured individuals and provide affordable coverage that delivered only the coverage these individuals want and need. This is not allowed under today’s laws. Negotiating power for purchasers will reduce insurance prices significantly.
Provide Catastrophic Coverage: The government should provide only coverage in the event of major health problems. If an individual’s illness or injury exceeds some set minimum, we will use $150,000 for these purposes, then the government will pay for all future medical and prescription costs for the patient.
The risk to insurance providers would be capped at $150,000 and so basic insurance premiums would be much lower and more people could afford coverage. Doctors working on patients whose medical costs have exceeded $150,000 would be employees of the government as to this work, subject to the negotiated rates, etc. Doctors could opt out and transfer patients to doctors in the system. Most would remain, just as most accept Medicare and insurance company negotiated rates at present.
For this work, they would be immune from medical malpractice liability, eliminating the extreme costs of that coverage for this higher-risk work. Mistakes would be addressed by a government medical panel and the physician would be disciplined accordingly, including criminal penalties for situations were punitive damages might otherwise be granted.
If one elects government coverage, the patient understands that he or she has no right to recover against the doctors if there is malpractice, but he or she also knows that the government will cover medical bills, prescription costs and other medically required items for as long as required. An individual with means could opt out of the government provided system.
All costs now expended by the government on Medicaid, Medicare, Social Security Disability and other programs would be rolled into this program.
Wellness: Different costs, underwriting requirements and the like would be encouraged rather than discouraged as they are now. Those who are smokers or obese would pay more. Groups would strongly encourage members to quit smoking, lose weight, exercise and get healthy or risk being removed from the group entirely. HIPPA would be amended to allow the group to monitor participants with chronic but manageable diseases such as diabetes, to make sure that the members are taking their meds and monitoring important vitals. Because of the government cap, the costs of health insurance associated with these diseases would not be as significant.
Brokers: Insurance brokers would be held to a higher standard. Broker malpractice would be expanded. Kickbacks, a common practice today, must be eliminated. At present, when a broker reaches certain annual premium levels, the insurance company pays that broker a bonus. These are often very substantial. They are obviously designed to convince the broker to sway the decisions of insurance purchasers toward a certain provider even if that provider is not right for them.
Conclusion:
Freeing the system of undue regulation, permitting greater creativity and providing negotiating power to the purchaser will dramatically reduce insurance prices and increase the number of people covered. Adding catastrophic coverage for all cases above a certain limit will also reduce ordinary coverage prices and make sure that everyone is taken care of if they suffer major illness or injury. In the end, it should be affordable for the government and dramatically increase the number of Americans who have coverage, which will ultimately help the medical community and everyone wins (except perhaps malpractice plaintiffs’ attorneys).
Wednesday, November 12, 2008
Things We Should Change, But Won’t – Part I: Social Security
Change has been promised, as it always is by almost every new president. So President-elect Obama, who I voted for lest you think I am being harsh, has begun yet another quest for the holy grail of change in Washington. I am going to suggest several things over the coming posts that should be changed, but won’t be. Perhaps I am wrong.
Social Security:
A common misconception about Social Security is that it is a savings plan. Because you paid in you are entitled to get something back out. While certainly sold to the public that way, it is no more than a tax on current workers to pay a stipend to current retirees. It is the worst sort of government entitlement, precisely because we choose to lie to ourselves as to what it is. It is:
A Regressive Tax:
It is a tax where the least wealthy pay a higher percentage of their pay than the wealthy. The tax is only paid on income up to a certain level. If you make less than that amount, you pay the full FICA percentage on 100% of your pay. If you make more than the FICA limit, you pay the full percentage on your pay up to that amount and then NOTHING on your pay over that amount. The more you make, the lower the percentage of your wages you pay in FICA taxes.
Welfare for the Rich:
Then, to add insult to injury, the government gives your hard-earned pay to rich old people. So while you struggle to make ends meet, someone who is worth millions receives welfare payments that you pay for. Talk about screwing the working middle class. I had a wealthy client who could neither refuse to take his social security check nor give it back. YOU pay over $600 every month to this multi-millionaire.
Bad for Jobs and Pay:
Now if that were not enough, employers are taxed on the number of employees they have and on the amount they pay them. That means the more people they hire, the more they pay, and the more they pay their middle class workers, the higher the company’s tax burden. In this manner we make our already “expensive” worker around 7 – 8% more cost-inefficient to American businesses. This, of course, causes employers to hire fewer American workers and move jobs overseas, or makes American firms less competitive in world markets.
Recap. Social Security:
Taxes the poor more than the rich.
Gives your hard-earned money to rich retired people now.
Makes it harder for your American employer to afford to employ you or raise your pay.
Could anyone invent a more ludicrous program?
Solution: Assuming we are not going to get rid of it entirely:
The FICA tax should apply to all income no matter how much or where it comes from.
Recipients should be means tested. If you do not need the money, you do not get it. We know how much everyone has made since they were 15. We know who is or should be rich.
Eliminate payroll taxes to make American workers more competitive.
Result:
For middle class Americans nothing will change.
For those making over the FICA limit, they will pay FICA.
We will stop paying rich people money they do not need.
We will make American workers more competitive without lowering pay or benefits.
Will it happen?
Do not hold your breath. Those rich old people vote . . . a lot.
Social Security:
A common misconception about Social Security is that it is a savings plan. Because you paid in you are entitled to get something back out. While certainly sold to the public that way, it is no more than a tax on current workers to pay a stipend to current retirees. It is the worst sort of government entitlement, precisely because we choose to lie to ourselves as to what it is. It is:
A Regressive Tax:
It is a tax where the least wealthy pay a higher percentage of their pay than the wealthy. The tax is only paid on income up to a certain level. If you make less than that amount, you pay the full FICA percentage on 100% of your pay. If you make more than the FICA limit, you pay the full percentage on your pay up to that amount and then NOTHING on your pay over that amount. The more you make, the lower the percentage of your wages you pay in FICA taxes.
Welfare for the Rich:
Then, to add insult to injury, the government gives your hard-earned pay to rich old people. So while you struggle to make ends meet, someone who is worth millions receives welfare payments that you pay for. Talk about screwing the working middle class. I had a wealthy client who could neither refuse to take his social security check nor give it back. YOU pay over $600 every month to this multi-millionaire.
Bad for Jobs and Pay:
Now if that were not enough, employers are taxed on the number of employees they have and on the amount they pay them. That means the more people they hire, the more they pay, and the more they pay their middle class workers, the higher the company’s tax burden. In this manner we make our already “expensive” worker around 7 – 8% more cost-inefficient to American businesses. This, of course, causes employers to hire fewer American workers and move jobs overseas, or makes American firms less competitive in world markets.
Recap. Social Security:
Taxes the poor more than the rich.
Gives your hard-earned money to rich retired people now.
Makes it harder for your American employer to afford to employ you or raise your pay.
Could anyone invent a more ludicrous program?
Solution: Assuming we are not going to get rid of it entirely:
The FICA tax should apply to all income no matter how much or where it comes from.
Recipients should be means tested. If you do not need the money, you do not get it. We know how much everyone has made since they were 15. We know who is or should be rich.
Eliminate payroll taxes to make American workers more competitive.
Result:
For middle class Americans nothing will change.
For those making over the FICA limit, they will pay FICA.
We will stop paying rich people money they do not need.
We will make American workers more competitive without lowering pay or benefits.
Will it happen?
Do not hold your breath. Those rich old people vote . . . a lot.
Wednesday, August 20, 2008
Sub-Prime was the Federal Reserve's Fault
President Bush recently called for increased powers for the Federal Reserve.[1] Before we make that leap, perhaps we should evaluate who is really responsible for the current sub-prime mess. Companies from banks to rating agencies to underwriters are being sued or suing others as lawyers try to determine who was ultimately responsible for the disastrous sub-prime collapse. In the meantime, Congress is considering giving the Federal Reserve more power to control and protect the economy. Everyone is missing the real culprit in all of this. The sub-prime mess was caused by the actions of the Federal Reserve and the natural business reactions by all of the parties involved (with some notable exceptions).
What caused the sub-prime mess was cheap money. When money is cheap financial institutions loan as much as they can. That is how they make money. Obtain it at a low rate and loan it out at higher rates. When all the good solid deals are done and money is still available, lenders and all good investors see opportunity. Higher risk deals, referred to as Alt A and Sub prime loans, yield higher interest rates and a greater spread between the cost of money and the income from the loan.
First, a bit of history. Increasing home-ownership has long been the “American Dream,” and therefore a political objective of the administration in power. In the 1960s Fannie Mae’s charter was changed to help banks make more loans. They began the process of buying mortgages from banks so that they had new money to loan. Fannie Mae then bundled these mortgages and with investment bankers, registered them as securities and had them rated by Standard and Poor’s and other trusted securities rating houses. The investment bankers then sold them to investors. These were designed to be long-term investments whose value was based on the underlying collateralized mortgage loans. This process was virtually identical to a similar process used for years to sell municipal bonds, corporate debt and commercial paper. These bundled securities were referred to as collateralized debt obligations (CDOs).
Over twenty years ago, investment bankers began to facilitate auctions where these CDOs could be purchased and sold. Auctions were held more or less monthly. As a result, investors began to purchase Auction-Rated CDO Securities (ARS) as short term high yield and fairly liquid investments for cash that they would need in the near term.
ARS were rated from investment grade, AAA, to “junk” quality. The latter of course came with the highest return on investment possibility and the highest level of risk. Bundled sub-prime loans often found themselves rated as junk or nearly junk in this manner throughout time, even into this decade. Junk bonds, also popular in this era, were rated in the same manner, and also continue to be traded today. ARS were purchased and sold based upon those ratings and have been reliably traded up until the recent crisis.
So, many smart people were investing in securities rated by smart people that were created by smart people and traded by smart people for years. What drove this recent and unprecedented situation?
The answer is simple, the actions of an unbelievably irresponsible Federal Reserve. The Federal Funds Rate is set by the Federal Reservs’s Board of Governors and is the rate at which bank’s borrow money from the Fed. It is the leading driver of interest rates.
On September 17, 2001 the Fed lowered this rate to 3.0%. Historically this was seen as a drastically low rate, one reached only once since 1962. Nonetheless, in an over-reaction to 9/11, the Federal Reserve lowered the Fed Funds rate even further, below 3.0% for the first time in 40 years.
Ø From July 1990 to January 2001, the Fed Funds rate hit a high of 8% (July 13, 1990) and low of 3% (September 4, 1992), but averaged about 5.25% (from the Fed’s website).
Ø On January 3, 2001 the Fed Fund rate was 6.0%.
Ø September 17, 2001 it hit 3.0%.
Ø October 2, 2001 the Fed dropped this rate to 2.5%, below 3.0% for the first time since the early 1960s, nearly 40 years. Then dropped it further.
Ø November 6, 2001: 2.0%
Ø December 11, 2001: 1.75%
Ø November 6, 2002: 1.25%
Ø June 25, 2003: 1.0%.
While all previous forays below 3.0% lasted only briefly, this time the Fed Funds Rate sat at 1.0% for a full year and did not move above 2.0% for over three years. It did not eclipse 3.0% again until May 3, 2005, a period of three years and eight months. This time of incredibly low interest rates is simply unprecedented in U.S. history and led to dire but predictable reactions in the markets.
What lender had any experience in such an environment? Spurred by post-9/11 rhetoric, they did what banks do, they made loans. This had vast consequences that compounded upon one another to create the disaster we are currently experiencing.
Banks felt pressure to make loans. When all of the good loans were made, the only way to invest the cheap cash available was to make more sub-prime loans than usual.
For loans to be made, people who could not afford a home had to decide to buy one using a sub-prime mortgage.
Demand for homes went up.
In 2004, when rates were 1.0% and not coincidentally in the midst of the presidential campaign, home ownership hit all-time highs. Millions achieved a dream they never believed they could reach.
The Bush Administration pushed through a reducing oversight of the mortgage business. Home demand increased.
Whenever demand increases, however, prices rise and that is precisely what occurred in the housing markets.
Home builders saw this and began building more homes.
Since interest rates were low, builders could borrow money cheaply to build even more homes. Bright experienced builders simply did what they do best.
Lenders also saw that home prices were rising, so well-educated conservative bankers rationalized higher loan to value ratios to put more money to work and get more people into new homes.
Home supply increased to meet the new demand.
The only way to do a sub-prime loan is on an adjustable rate basis, but then rates had been so low for so long, who could have predicted what would come next?
The other shoe dropped. The market certainly predicted that rates could not stay so low, hence the use of ARMs, but everyone assumed that after 3 years and 8 months of unprecedented rates, the extremely bright albeit ivory tower economists at the Fed would raise rates gradually over many years to soften the landing. The system was designed for this. It took over 7 years the last time rates were this low to get to 5%.
Had the rise in rates occurred gradually back to 5.0% over a 4 - 6 year time-span, the sub-prime mess would have been wholly averted. But of course, that is not what happened. The Fed over-reacted yet again.
Greenspan left and Bernanke entered. He and his group began to raise rates, but not gradually. They yanked them up over a short period of time. Beginning on June 30, 2006, it went up and fast.
Ø November 10, 2004: 2.0%
Ø May 3, 2005: 3.0%
Ø June 29, 2006: 5.25%
Rates rose too much, too quickly. In just two years the Fed raised the Fed Fund rate 17 times for a total increase of 4.25 percent. That was one of the steepest and longest climbs in terms of net rate increase in the last twenty years.
No one could react. Houses were being built. Loans were made. Adjustable rate mortgages of all kinds were suddenly untenable. A three-year ARM done in 2004 at 4.0% adjusted to 8.0% or higher. The house of cards fell and banks, investment bankers, investors and borrowers, found themselves on the wrong end of a bad situation. So whose fault was it?
Every player acted economically rationally. Banks loaned money at good rates and helped good people buy a home. Borrowers borrowed what they could afford, and made logical assumptions about future rate adjustment and home values. Builders built homes. The process of creating mortgage-backed securities operated just as it had for all of the years that this vehicle had existed. Rating agencies rated them. Investment bankers, relying on these ratings, sold them. Investors bought them and sold them at monthly auctions.
All players operated rationally, except one. The one everyone else relied upon to know what it was doing: The Federal Reserve.
The Federal Reserve’s blunder raising rates so precipitously created the following predictable Economics 101 results:
ARMs adjusted too much too fast causing great and unrecoverable pain for millions of borrowers. This had to be foreseeable by the Fed.
Good solid middle-class hard-working and excited first-time homeowners, suddenly could not pay their loans and defaulted.
These people were now worse off than before they joined in the American Dream of home ownership.
At the same time, higher interest rates killed the demand for new housing.
Combined with the glut of newly constructed houses, the decline in demand caused housing prices to fall.
Home builders could not sell their home inventories, defaulted and declared bankruptcy.
Individuals with decent credit could not even refinance their homes to get out from under the oppressive increase in their ARM payments.
More homeowners defaulted or became house poor.
Higher mortgage payments decreased available cash to spend.
Consumer spending decreased damaging retailers and sending the economy into a tailspin.
Investors panicked and refused to purchase any kind of ARS at the auctions. Investment banks could not purchase everything and the auctions failed. The only way for investors to sell and get their cash was gone.
Accountants got conservative and relied upon post-auction sale prices to value many remaining and strong non-sub-prime CDOs and corporations were forced to restate financials.
The stock market plummeted.
Lawyers filed lawsuits to figure it all out.
Banks are struggling.
Investment houses are declaring bankruptcy.
The dollar is sliding.
Foreign companies are buying up strong U.S. companies in droves.
U.S. financial markets are falling apart.
And now the Congress is considering giving the Federal Reserve MORE power to screw up the economy? Perhaps they should go back to basic economics and try again.
About the Author:
Ned Lips is a BDM with UHY Advisors FLVS, Inc. and leads its national thought leadership program. He is an attorney, having graduated with High Honors from George Washington University, who practiced in St. Louis for 12 years before becoming an entrepreneur and now business strategist. He also teaches the MBA Capstone Strategy class at St. Louis University as an adjunct professor.
[1] St. Louis Post Dispatch, June 20, 2008, Business Section, Page B2.
What caused the sub-prime mess was cheap money. When money is cheap financial institutions loan as much as they can. That is how they make money. Obtain it at a low rate and loan it out at higher rates. When all the good solid deals are done and money is still available, lenders and all good investors see opportunity. Higher risk deals, referred to as Alt A and Sub prime loans, yield higher interest rates and a greater spread between the cost of money and the income from the loan.
First, a bit of history. Increasing home-ownership has long been the “American Dream,” and therefore a political objective of the administration in power. In the 1960s Fannie Mae’s charter was changed to help banks make more loans. They began the process of buying mortgages from banks so that they had new money to loan. Fannie Mae then bundled these mortgages and with investment bankers, registered them as securities and had them rated by Standard and Poor’s and other trusted securities rating houses. The investment bankers then sold them to investors. These were designed to be long-term investments whose value was based on the underlying collateralized mortgage loans. This process was virtually identical to a similar process used for years to sell municipal bonds, corporate debt and commercial paper. These bundled securities were referred to as collateralized debt obligations (CDOs).
Over twenty years ago, investment bankers began to facilitate auctions where these CDOs could be purchased and sold. Auctions were held more or less monthly. As a result, investors began to purchase Auction-Rated CDO Securities (ARS) as short term high yield and fairly liquid investments for cash that they would need in the near term.
ARS were rated from investment grade, AAA, to “junk” quality. The latter of course came with the highest return on investment possibility and the highest level of risk. Bundled sub-prime loans often found themselves rated as junk or nearly junk in this manner throughout time, even into this decade. Junk bonds, also popular in this era, were rated in the same manner, and also continue to be traded today. ARS were purchased and sold based upon those ratings and have been reliably traded up until the recent crisis.
So, many smart people were investing in securities rated by smart people that were created by smart people and traded by smart people for years. What drove this recent and unprecedented situation?
The answer is simple, the actions of an unbelievably irresponsible Federal Reserve. The Federal Funds Rate is set by the Federal Reservs’s Board of Governors and is the rate at which bank’s borrow money from the Fed. It is the leading driver of interest rates.
On September 17, 2001 the Fed lowered this rate to 3.0%. Historically this was seen as a drastically low rate, one reached only once since 1962. Nonetheless, in an over-reaction to 9/11, the Federal Reserve lowered the Fed Funds rate even further, below 3.0% for the first time in 40 years.
Ø From July 1990 to January 2001, the Fed Funds rate hit a high of 8% (July 13, 1990) and low of 3% (September 4, 1992), but averaged about 5.25% (from the Fed’s website).
Ø On January 3, 2001 the Fed Fund rate was 6.0%.
Ø September 17, 2001 it hit 3.0%.
Ø October 2, 2001 the Fed dropped this rate to 2.5%, below 3.0% for the first time since the early 1960s, nearly 40 years. Then dropped it further.
Ø November 6, 2001: 2.0%
Ø December 11, 2001: 1.75%
Ø November 6, 2002: 1.25%
Ø June 25, 2003: 1.0%.
While all previous forays below 3.0% lasted only briefly, this time the Fed Funds Rate sat at 1.0% for a full year and did not move above 2.0% for over three years. It did not eclipse 3.0% again until May 3, 2005, a period of three years and eight months. This time of incredibly low interest rates is simply unprecedented in U.S. history and led to dire but predictable reactions in the markets.
What lender had any experience in such an environment? Spurred by post-9/11 rhetoric, they did what banks do, they made loans. This had vast consequences that compounded upon one another to create the disaster we are currently experiencing.
Banks felt pressure to make loans. When all of the good loans were made, the only way to invest the cheap cash available was to make more sub-prime loans than usual.
For loans to be made, people who could not afford a home had to decide to buy one using a sub-prime mortgage.
Demand for homes went up.
In 2004, when rates were 1.0% and not coincidentally in the midst of the presidential campaign, home ownership hit all-time highs. Millions achieved a dream they never believed they could reach.
The Bush Administration pushed through a reducing oversight of the mortgage business. Home demand increased.
Whenever demand increases, however, prices rise and that is precisely what occurred in the housing markets.
Home builders saw this and began building more homes.
Since interest rates were low, builders could borrow money cheaply to build even more homes. Bright experienced builders simply did what they do best.
Lenders also saw that home prices were rising, so well-educated conservative bankers rationalized higher loan to value ratios to put more money to work and get more people into new homes.
Home supply increased to meet the new demand.
The only way to do a sub-prime loan is on an adjustable rate basis, but then rates had been so low for so long, who could have predicted what would come next?
The other shoe dropped. The market certainly predicted that rates could not stay so low, hence the use of ARMs, but everyone assumed that after 3 years and 8 months of unprecedented rates, the extremely bright albeit ivory tower economists at the Fed would raise rates gradually over many years to soften the landing. The system was designed for this. It took over 7 years the last time rates were this low to get to 5%.
Had the rise in rates occurred gradually back to 5.0% over a 4 - 6 year time-span, the sub-prime mess would have been wholly averted. But of course, that is not what happened. The Fed over-reacted yet again.
Greenspan left and Bernanke entered. He and his group began to raise rates, but not gradually. They yanked them up over a short period of time. Beginning on June 30, 2006, it went up and fast.
Ø November 10, 2004: 2.0%
Ø May 3, 2005: 3.0%
Ø June 29, 2006: 5.25%
Rates rose too much, too quickly. In just two years the Fed raised the Fed Fund rate 17 times for a total increase of 4.25 percent. That was one of the steepest and longest climbs in terms of net rate increase in the last twenty years.
No one could react. Houses were being built. Loans were made. Adjustable rate mortgages of all kinds were suddenly untenable. A three-year ARM done in 2004 at 4.0% adjusted to 8.0% or higher. The house of cards fell and banks, investment bankers, investors and borrowers, found themselves on the wrong end of a bad situation. So whose fault was it?
Every player acted economically rationally. Banks loaned money at good rates and helped good people buy a home. Borrowers borrowed what they could afford, and made logical assumptions about future rate adjustment and home values. Builders built homes. The process of creating mortgage-backed securities operated just as it had for all of the years that this vehicle had existed. Rating agencies rated them. Investment bankers, relying on these ratings, sold them. Investors bought them and sold them at monthly auctions.
All players operated rationally, except one. The one everyone else relied upon to know what it was doing: The Federal Reserve.
The Federal Reserve’s blunder raising rates so precipitously created the following predictable Economics 101 results:
ARMs adjusted too much too fast causing great and unrecoverable pain for millions of borrowers. This had to be foreseeable by the Fed.
Good solid middle-class hard-working and excited first-time homeowners, suddenly could not pay their loans and defaulted.
These people were now worse off than before they joined in the American Dream of home ownership.
At the same time, higher interest rates killed the demand for new housing.
Combined with the glut of newly constructed houses, the decline in demand caused housing prices to fall.
Home builders could not sell their home inventories, defaulted and declared bankruptcy.
Individuals with decent credit could not even refinance their homes to get out from under the oppressive increase in their ARM payments.
More homeowners defaulted or became house poor.
Higher mortgage payments decreased available cash to spend.
Consumer spending decreased damaging retailers and sending the economy into a tailspin.
Investors panicked and refused to purchase any kind of ARS at the auctions. Investment banks could not purchase everything and the auctions failed. The only way for investors to sell and get their cash was gone.
Accountants got conservative and relied upon post-auction sale prices to value many remaining and strong non-sub-prime CDOs and corporations were forced to restate financials.
The stock market plummeted.
Lawyers filed lawsuits to figure it all out.
Banks are struggling.
Investment houses are declaring bankruptcy.
The dollar is sliding.
Foreign companies are buying up strong U.S. companies in droves.
U.S. financial markets are falling apart.
And now the Congress is considering giving the Federal Reserve MORE power to screw up the economy? Perhaps they should go back to basic economics and try again.
About the Author:
Ned Lips is a BDM with UHY Advisors FLVS, Inc. and leads its national thought leadership program. He is an attorney, having graduated with High Honors from George Washington University, who practiced in St. Louis for 12 years before becoming an entrepreneur and now business strategist. He also teaches the MBA Capstone Strategy class at St. Louis University as an adjunct professor.
[1] St. Louis Post Dispatch, June 20, 2008, Business Section, Page B2.
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