When the Stimulus package included some “Buy America” language the world was outraged. Free Trade, Free Trade was the clear message. The omitted question is, “What do you mean by Free Trade?”
In my opinion, to have truly Free and Fair Trade, the definition must have two parts:
1. Goods and services can be traded across borders without government impediment; and
2. The producers of those goods are subject to the same or similar regulations.
As to item 1, everyone knows that our trading partners do not permit free trade in both directions. If the US produces a product or service that if imported into the country would make it difficult for local producers to compete, then tariffs or regulatory impediments to free trade are established. The US, of course, does this as well.
The big chasm lies in item 2. Regulations are imposed to level the playing field. A company that wants to reduce pollution cannot do so if its competitors will not impose upon themselves the costs associated with reducing pollution. In the not too distant past, the relevant competition was among US and European companies subject to the same or similar regulations. Now, the relevant competition includes China, Mexico, India and many other countries that have no such laws or very weak laws that are not enforced. The playing field is out of whack.
US manufacturers produce whatever goods we still produce in facilities that are as environmentally clean and as safe as any in the world. When a company manufactures products or services in another country, including Mexico, these costly regulatory requirements need not be met.
Should we impose our regulatory philosophy on others?
Should we loosen our regulations and endanger workers and the environment?
The answer is that if a company desires to sell its goods into the US, then that company should be required to respect at least the environment we all share, and the safety of the people making these products, to the same extent as their US competitors must.
No company is REQUIRED to sell its goods into the US. Therefore we are not imposing our regulatory standards on others. Selling goods into the US is a privilege.
Second, the US works diligently to protect human life. This includes plant safety and protection of the environment in which we live. We cannot reduce our standards. In fact, we desire to strengthen them, but cannot if doing so puts more of our companies out of business in the face of unregulated international trade.
How can we accomplish this?
No question that this is a difficult proposition.
First, several countries, such as those in Western Europe, Japan, Australia, etc. already have proven track records for respecting the environment and human life. Aside from battles over specifics products, any imports manufactured in those countries would experience no import impediment. This is free and fair trade.
A near-term date would be set for other foreign countries to bring their companies up to appropriate world standards in air and water pollution and in worker safety. When the country is ready, it will pay sufficient US inspectors to come to the country to review compliance by all companies in that country that desire to export goods to the US. These inspections will be annual until the country passes and proves compliance with internationally compliant worker safety and environmental laws.
Those companies that pass will have free trade access to US markets. Those that fail will be allowed to import but after paying a tax at a rate higher than the costs to come into compliance, or they can choose not to trade in US markets and avoid the tax. Then whenever their plant is cleared, they will be permitted to trade with the US. Set thresholds will be established for the foreseeable future, that all companies in the world will have to meet. A company could improve itself far into the future and be certified through that date. Then use that fact in its marketing.
Ideally all developed countries would band together to create and enforce these rules and they would apply to trade with any country that is part of the group. At least one part of the world trade playing field would be leveled, we would have freer and fairer trade, and we would not have to wait for the next Kyoto Accord to begin to reduce pollution.
Saturday, February 28, 2009
Saturday, January 24, 2009
US to Solve Chinese Economic Crisis
There is an old saying, “Follow the Money.” The current stimulus package is going to provide tax credits to everyone, even those who pay no taxes. What happens when you give people money? They buy stuff, which is good for the economy, right? Well we have a huge trade deficit and most of the consumer goods that will be purchased with this money are made in China and other countries. So, following the money, if we give it away our population will spend it on goods from China, thus saving that economy and doing very little for ours over the long haul.
How can the government use its billions to actually fix this problem? I am quite certain our new President has the brightest minds available working on this. What I have gleaned from the conversation, however, and I find this typical when people are panicked, treat some of the symptoms but are not bold enough to craft an actual cure. One thing is clear, we have got to get back to making things.
For years, at least 40, the US has become increasingly uncompetitive in world business. We like to blame it on low wages, and that certainly plays a part. In addition, we have the cleanest, safest plants in the world. Of course they are all closed or closing. It makes no sense to provide funds to people who will buy foreign-made goods or to businesses if there is no real way for them to compete in the global environment. They will both spend the money overseas and there will be no advantage to the US economy.
What to do? Here are some ideas. (See my prior posts for more details below)
1. Pollution Tax: Create a Pollution Tax that everyone who sells anything in the US has to pay. This will raise the costs of imported goods that are manufactured in countries with little regard to pollution of the water, air and ground in their countries. Balance the international playing field a bit.
2. Increase Loan Guarantees: Dramatically increase SBA and other guaranteed loans. Guarantee loans are made by banks. Banks will loan money again and the government is not out the cash now. Make the borrower use the money in the US to hire people and create facilities.
3. No Minimum Wage: THIS IS GOOD FOR THE HARD WORKING MIDDLE CLASS! The minimum wage forces hard-working middle class Americans to pay, out of their own pockets, extra wages to the worst workers in the company, or of course the company moves the whole plant to China. When a company moves overseas, the US loses the higher-paying supervisory and management jobs as well as the hourly workforce. Make all workers, even the lousy ones, earn their wages and there will be MORE jobs that pay higher wages.
4. Reduce Immigration Restrictions: Let immigrants in, let them work at below minimum wage and allow American industry to grow again, bringing higher paying supervisory and management jobs back to this country.
5. Flat Corporate Tax: Create a flat corporate tax on gross revenues over one million dollars that all businesses pay. Eliminate all of the complex tax rules that allow some profitable companies to avoid paying any income taxes, and all the complex tax requirements and credits that have been laid on the system throughout the years. Then the government can start over if necessary.
6. Eliminate the Payroll Tax: It discourages American workers. Roll the required tax revenues into the flat corporate tax.
7. Fund High-Tech and Clean Fuel R&D and New Businesses: As the President has pointed out, this has a great future to drive new higher paying jobs.
8. National Competition-based Health Insurance: Pass a national, competition based health insurance plan, with catastrophic coverage for all. Take health insurance benefits out of the province of business. They do not know how to do this very well. Put it in the hands of professionals and let people get creative.
9. Balance the International Playing Field: Regulations are important, but use them to balance the international playing field. If US companies have to do something, foreign companies that import into the US should have to do so as well, or pay a commensurate tariff that balances the playing field for US manufacturers.
If we do not correct the problems with US manufacturing this is all a waste of time. Countries that make things will grow. Countries that provide services and buy things from other countries gradually shrink.
If you are an environmentalist, who do you want manufacturing goods - the US or the Chinese?
If you care about the poor, where do you want workers to work, in the US or in China?
If you care about safety to workers and consumers, where to you want things made, in the US or China?
We have no choice but to find ways to compete in the global economy. Level the international playing field.
The only saving grace is that really wealthy people invest their money in foreign lands and since they prefer to live in the US, they bring the profits back here. How long will that last? Only so long as Americans have money to spend to buy foreign goods. That is slowly slipping away. Open your eyes and see the real, hard problem.
Give away money = save China’s economy.
Invest money in business and level the international playing field = save the US economy.
We are all rooting for you, Mr. President. Good luck, but please do not save China.
How can the government use its billions to actually fix this problem? I am quite certain our new President has the brightest minds available working on this. What I have gleaned from the conversation, however, and I find this typical when people are panicked, treat some of the symptoms but are not bold enough to craft an actual cure. One thing is clear, we have got to get back to making things.
For years, at least 40, the US has become increasingly uncompetitive in world business. We like to blame it on low wages, and that certainly plays a part. In addition, we have the cleanest, safest plants in the world. Of course they are all closed or closing. It makes no sense to provide funds to people who will buy foreign-made goods or to businesses if there is no real way for them to compete in the global environment. They will both spend the money overseas and there will be no advantage to the US economy.
What to do? Here are some ideas. (See my prior posts for more details below)
1. Pollution Tax: Create a Pollution Tax that everyone who sells anything in the US has to pay. This will raise the costs of imported goods that are manufactured in countries with little regard to pollution of the water, air and ground in their countries. Balance the international playing field a bit.
2. Increase Loan Guarantees: Dramatically increase SBA and other guaranteed loans. Guarantee loans are made by banks. Banks will loan money again and the government is not out the cash now. Make the borrower use the money in the US to hire people and create facilities.
3. No Minimum Wage: THIS IS GOOD FOR THE HARD WORKING MIDDLE CLASS! The minimum wage forces hard-working middle class Americans to pay, out of their own pockets, extra wages to the worst workers in the company, or of course the company moves the whole plant to China. When a company moves overseas, the US loses the higher-paying supervisory and management jobs as well as the hourly workforce. Make all workers, even the lousy ones, earn their wages and there will be MORE jobs that pay higher wages.
4. Reduce Immigration Restrictions: Let immigrants in, let them work at below minimum wage and allow American industry to grow again, bringing higher paying supervisory and management jobs back to this country.
5. Flat Corporate Tax: Create a flat corporate tax on gross revenues over one million dollars that all businesses pay. Eliminate all of the complex tax rules that allow some profitable companies to avoid paying any income taxes, and all the complex tax requirements and credits that have been laid on the system throughout the years. Then the government can start over if necessary.
6. Eliminate the Payroll Tax: It discourages American workers. Roll the required tax revenues into the flat corporate tax.
7. Fund High-Tech and Clean Fuel R&D and New Businesses: As the President has pointed out, this has a great future to drive new higher paying jobs.
8. National Competition-based Health Insurance: Pass a national, competition based health insurance plan, with catastrophic coverage for all. Take health insurance benefits out of the province of business. They do not know how to do this very well. Put it in the hands of professionals and let people get creative.
9. Balance the International Playing Field: Regulations are important, but use them to balance the international playing field. If US companies have to do something, foreign companies that import into the US should have to do so as well, or pay a commensurate tariff that balances the playing field for US manufacturers.
If we do not correct the problems with US manufacturing this is all a waste of time. Countries that make things will grow. Countries that provide services and buy things from other countries gradually shrink.
If you are an environmentalist, who do you want manufacturing goods - the US or the Chinese?
If you care about the poor, where do you want workers to work, in the US or in China?
If you care about safety to workers and consumers, where to you want things made, in the US or China?
We have no choice but to find ways to compete in the global economy. Level the international playing field.
The only saving grace is that really wealthy people invest their money in foreign lands and since they prefer to live in the US, they bring the profits back here. How long will that last? Only so long as Americans have money to spend to buy foreign goods. That is slowly slipping away. Open your eyes and see the real, hard problem.
Give away money = save China’s economy.
Invest money in business and level the international playing field = save the US economy.
We are all rooting for you, Mr. President. Good luck, but please do not save China.
Thursday, January 22, 2009
The American Mutts – And Proud of It!
We are all proud, and we should be, that Barack Obama is the first African American president. As a tall white anglo male, I represent the group most favored of this great country and I am extremely proud of this national accomplishment. I think it is time for a great celebration. Of course our President, like you and me, has a very diverse lineage. Kenyan and Irish among them.
It would be a wonderful thing for President Obama to step forward and denounce all labels for race, national origin, whatever and declare that we are all mutts. He clearly supports this position. That is what makes us Americans. Just like the President, we are all an amalgam of brave souls, outcasts and misfits from countries around the world.
We are American Mutts!
I would love to see Barack create a national day, some historically irrelevant Saturday in June so it will be nice everywhere, and declare it a day for celebration of our American Muttness.
Focus on the fact that we are all shades of the same general brown color, not black or white or whatever.
Focus on the fact that our ancestors came from all over the globe, but we should celebrate not those countries but the mixtures of histories that make Americans who we are.
Celebrate the fact that we represent every religion on the globe, but encourage participation by non-believers.
Have parades and speeches and lectures and parties.
Sign legislation abolishing laws providing special treatment for any group over another.
Review the purpose of the Constitution, the 16th Amendment, the Declaration of Independence, and the many speeches throughout our countries history, but do not dwell on the past – celebrate the future.
It would be a wonderful thing for President Obama to step forward and denounce all labels for race, national origin, whatever and declare that we are all mutts. He clearly supports this position. That is what makes us Americans. Just like the President, we are all an amalgam of brave souls, outcasts and misfits from countries around the world.
We are American Mutts!
I would love to see Barack create a national day, some historically irrelevant Saturday in June so it will be nice everywhere, and declare it a day for celebration of our American Muttness.
Focus on the fact that we are all shades of the same general brown color, not black or white or whatever.
Focus on the fact that our ancestors came from all over the globe, but we should celebrate not those countries but the mixtures of histories that make Americans who we are.
Celebrate the fact that we represent every religion on the globe, but encourage participation by non-believers.
Have parades and speeches and lectures and parties.
Sign legislation abolishing laws providing special treatment for any group over another.
Review the purpose of the Constitution, the 16th Amendment, the Declaration of Independence, and the many speeches throughout our countries history, but do not dwell on the past – celebrate the future.
Certainly we will always be different. Every mutt is different from all others. That is what is wonderful about mutts.
When we celebrate "diversity" we point out and even label Americans as within certain separate but equal categories. African-American. Italian-American. Chinese-American. Christian. Jew. Atheist. Whatever.
Shouldn't we celebrate that we are all unique American mutts and then celebrate our INDIVIDUAL differences and strengths rather than our labels.
I want to be recognized as an American who is tall and bright. Not a European-American, Christian, White person. These are labels which bear no relation to my individual characteristics whatsoever. They are, however, how we define ourselves today and they are irrelevant.
We are mutts, mutts are each unique, and we should celebrate THAT.
Rejoice in the variety that makes us American and begin to develop a new culture without labels, without stereotypes and without prejudice.
Create a new pride in being an American Mutt!
American Mutt Day!
When we celebrate "diversity" we point out and even label Americans as within certain separate but equal categories. African-American. Italian-American. Chinese-American. Christian. Jew. Atheist. Whatever.
Shouldn't we celebrate that we are all unique American mutts and then celebrate our INDIVIDUAL differences and strengths rather than our labels.
I want to be recognized as an American who is tall and bright. Not a European-American, Christian, White person. These are labels which bear no relation to my individual characteristics whatsoever. They are, however, how we define ourselves today and they are irrelevant.
We are mutts, mutts are each unique, and we should celebrate THAT.
Rejoice in the variety that makes us American and begin to develop a new culture without labels, without stereotypes and without prejudice.
Create a new pride in being an American Mutt!
American Mutt Day!
Be Proud to be an American Mutt
Monday, January 19, 2009
The Pollution Tax
Al Gore proposed that we institute a carbon tax on the carbon emitted by any company. This is a good idea so long as it applies to every company that sells anything in the US. I also believe that while carbon is important to Mr. Gore, the US should be concerned with global pollution and the tax should be based on pollution.
The US imposes expensive regulations on its manufacturers while China and other countries do not. Regulations and taxes should be designed not to impose unequal burdens, but to level the playing field. There is no incentive to improve pollution performance if your competitor will not do the same. We now compete in a global marketplace, but we can only control what occurs within our borders.
The pollution tax should be an amount high enough so that it is cheaper to comply with anti-pollution regulations. It should be applied to all US companies and to all importers of goods into this country. There should be two levels or considerations, one on the plant itself and the second on the products sold in the US. It is not terribly helpful if a clean facility produces polluting products.
The pollution tax would be a set percentage of the value of the goods produced in the facility no matter where they end up. Each company, foreign and domestic, would have the EPA investigate its facilities and product, and then grade them as to how well they meet US standards. Foreign companies that import into the US would be required to pay the EPA to perform this service.
If the company passes, then the tax is waived. If it fails, then a tax is imposed based on the level of non-conformance. Each year the standards should be increased and the tax increased for non-conformance. This should be clearly set forth so that everyone understands what is coming.
If a foreign company refuses to pay to have the EPA inspect the facility, then the tax is imposed and imports are prohibited from that manufacturer. Imports will be allowed once the outstanding tax is paid and the EPA is permitted to inspect and grade the facility. Once graded, the new and adjusted tax, if any, is due going forward. So long as it is paid, imports are permitted. It will be the requirement of importers to make sure that all imports include a seal of approval from the EPA.
Pollution Correction Rebate: The entire pollution tax will be used exclusively to help US companies comply with the required standards. US violators pay the tax, but once they prove they have corrected the problem, the costs of making the corrections will be reimbursed by the government from the taxes from all companies, foreign and domestic. Any costs incurred to meet new standards would come from the Pollution Tax fund.
Since this applies equally to foreign and domestic companies, it would go a long way toward balancing one of the inherent inequities between US and foreign manufacturing. Since the proceeds go toward helping US companies comply, it benefits US industry and cleans the world at the same time.
International standards applicable to all companies would likely be developed. The US will likely develop arrangements with certain countries to perform the review on the EPA’s behalf. In the end the US is a leader in environmentally clean industry and US manufacturing gains a modest advantage over competitors from polluting countries, at least until the world is a clean place to live.
The US imposes expensive regulations on its manufacturers while China and other countries do not. Regulations and taxes should be designed not to impose unequal burdens, but to level the playing field. There is no incentive to improve pollution performance if your competitor will not do the same. We now compete in a global marketplace, but we can only control what occurs within our borders.
The pollution tax should be an amount high enough so that it is cheaper to comply with anti-pollution regulations. It should be applied to all US companies and to all importers of goods into this country. There should be two levels or considerations, one on the plant itself and the second on the products sold in the US. It is not terribly helpful if a clean facility produces polluting products.
The pollution tax would be a set percentage of the value of the goods produced in the facility no matter where they end up. Each company, foreign and domestic, would have the EPA investigate its facilities and product, and then grade them as to how well they meet US standards. Foreign companies that import into the US would be required to pay the EPA to perform this service.
If the company passes, then the tax is waived. If it fails, then a tax is imposed based on the level of non-conformance. Each year the standards should be increased and the tax increased for non-conformance. This should be clearly set forth so that everyone understands what is coming.
If a foreign company refuses to pay to have the EPA inspect the facility, then the tax is imposed and imports are prohibited from that manufacturer. Imports will be allowed once the outstanding tax is paid and the EPA is permitted to inspect and grade the facility. Once graded, the new and adjusted tax, if any, is due going forward. So long as it is paid, imports are permitted. It will be the requirement of importers to make sure that all imports include a seal of approval from the EPA.
Pollution Correction Rebate: The entire pollution tax will be used exclusively to help US companies comply with the required standards. US violators pay the tax, but once they prove they have corrected the problem, the costs of making the corrections will be reimbursed by the government from the taxes from all companies, foreign and domestic. Any costs incurred to meet new standards would come from the Pollution Tax fund.
Since this applies equally to foreign and domestic companies, it would go a long way toward balancing one of the inherent inequities between US and foreign manufacturing. Since the proceeds go toward helping US companies comply, it benefits US industry and cleans the world at the same time.
International standards applicable to all companies would likely be developed. The US will likely develop arrangements with certain countries to perform the review on the EPA’s behalf. In the end the US is a leader in environmentally clean industry and US manufacturing gains a modest advantage over competitors from polluting countries, at least until the world is a clean place to live.
Saturday, January 17, 2009
The Bail-Out and Stimulus Package
Every economist will tell you any time you ask that the Federal Government is a closed system. Whenever it gives out money to someone it has to take that money from somewhere else. This includes higher taxes, fewer programs or mortgaging the future through higher deficits. There is no free money.
Politically, the Bush administration and the Obama administration and both Congresses are hell-bent on a bail-out and stimulus package. So as long as this is going to happen anyway, we should look at how it should be structured and what should go along with it.
The basic theory is that if you give people money, they will spend it. They will buy things they would not otherwise buy, which in turn helps the businesses that make those things and they are able to keep more of their employees (even if those employees are in China). When people are hurting for cash, do they buy the higher price items made in the US or the lower price items sold at Walmart and made overseas? In theory it does not matter because the Chinese guy buys something and eventually the money raises everyone. Do Chinese assembly line workers buy American made goods?
But this begs the question, why should the US government and US taxpayers provide money to help employ the Chinese? There is certainly no way to stop it. Once I got my $600 last Spring, I bought stuff. I have no idea where it was made. Did last Spring’s stimulus package help the economy? Are you better off for it? China grew at 13% last year. Where did the $600 go? Where did the $350 billion go?
The goal of spending US cash should be to build the US economy. At its core, what is wrong with the US economy?
We don’t make things anymore. The only way to build an economy is to make things that people want to buy. So, if we are going to spend this money anyway, what should we do to make sure it helps the US economy?
1. Dramatically increase SBA guaranteed lending to entrepreneurs and small business. Virtually all of the current unemployment is being experienced by Baby Boomers over the age of 45 years old. They represent a highly paid glut of humans in our population. In our current situation, they can never be re-employed at high rates. These people have experiences, talents, training and ideas. Help them start new businesses using those capabilities and they will hire others.
Plus a loan is not a net drain. The vast majority of SBA backed loans are re-paid. Even a 5% default rate, which is extraordinarily high, is cheaper than giving away all this money. Plus these are guarantees. Banks lend the money. So there is no actual cash out the door and banks start lending and making money again. The best of all worlds.
That is the politically doable part, but don’t disregard it because you do not like or understand this next part. It is really important though.
2. Eliminate the minimum wage. It is not paid by businesses. It is paid by hard working middle class Americans who get less so the company can allocate some of their hard-earned wages to the dredges at the bottom who, by definition, are not worth even minimum wage. These dredges recently got a raise for being the worst workers in the company. Eliminating that will make US manufacturers more competitive, which simply has to happen.
3. Allow all immigrants into this country. We need low-paid workers to do the stuff at the bottom of the manufacturing pyramid. We will GAIN jobs, because we will hire Americans to supervise, manage and oversee these low level workers. Those are all the HIGH-PAYING jobs that are lost when we move manufacturing overseas and they are perfect for the unemployed Baby-Boomers.
4. Pass my health insurance plan – see prior post. Get corporations out of the insurance business. Get the States out of the regulation business and make healthcare a national issue which will reduce costs. Allow anyone to band together to negotiate great group rates or create huge self-insurance plans where wellness drives cost reduction. The government should provide catastrophic coverage which will reduce rates to most because the coverage costs are capped.
5. Create a flat corporate tax on revenues over $1,000,000. Eliminate the payroll tax, which is a disincentive to hiring and paying workers. Roll all income and payroll corporate taxes into one simple flat tax. This will dramatically reduce compliance costs for American companies and avoid complex schemes to create a tax loss and avoid paying any taxes. If a company has revenues over $1,000,000, they pay a set percentage of those revenues in taxes, even if they are losing money.
Congress uses taxes for social engineering. I think that is wrong, but it is a fact of life. A flat tax actually makes this easier and more powerful. Every company pays it so they will ALL have the intended incentive if a credit is provided. Not just those showing a taxable net profit.
Small businesses (under $1,000,000 in gross revenues) pay no taxes, so all the complicated corporate, LLC, partnership and Sub S schemes to avoid “double-taxation” that they pay attorneys and accountants for is eliminated. These are families trying to make a living and hire people.
So if we do this, what happens?
Businesses are relieved of a significant amount of unnecessary overhead in trying to do things outside their core competencies – taxes and benefits. The government gets the same amount in taxes and more control over corporations.
There are low-paid workers able to fill the bottom of the manufacturing pyramid and this employs supervisors and management for the Baby-Boom generation that is currently suffering most. These positions are now lost to China. This helps grow the US manufacturing base which grows the economy.
There are plenty of important regulations regarding working conditions, the environment and the like which must remain. When we make things, we do it in a much better, safer and cleaner manner than anyone else in the world. Our unions will make sure that fair wages are paid if that gets out of line. We have a great system. Let it work.
If we help fund small creative entrepreneurial businesses, the true greatness of our economy, we will put the brilliant minds to work on reaching the dreams they never pursued because they had jobs. Small companies built on great ideas build nations. But they too need easier tax burdens, fewer non-core responsibilities and workers who make what they are worth all the way through their organizations.
Finally, workers who are paid only what they are worth, the definition of the minimum wage, will work harder, get to work on time, reduce drug and alcohol use so that it lessens the impact on their performance and will try harder to be better so they can make more. Immigrants will come and go as job availability dictates. Without a minimum wage they may be able to find better employment in their own countries and go back. Problem solved.
Simple but difficult solutions that would work and no giving away money. We shall see.
Politically, the Bush administration and the Obama administration and both Congresses are hell-bent on a bail-out and stimulus package. So as long as this is going to happen anyway, we should look at how it should be structured and what should go along with it.
The basic theory is that if you give people money, they will spend it. They will buy things they would not otherwise buy, which in turn helps the businesses that make those things and they are able to keep more of their employees (even if those employees are in China). When people are hurting for cash, do they buy the higher price items made in the US or the lower price items sold at Walmart and made overseas? In theory it does not matter because the Chinese guy buys something and eventually the money raises everyone. Do Chinese assembly line workers buy American made goods?
But this begs the question, why should the US government and US taxpayers provide money to help employ the Chinese? There is certainly no way to stop it. Once I got my $600 last Spring, I bought stuff. I have no idea where it was made. Did last Spring’s stimulus package help the economy? Are you better off for it? China grew at 13% last year. Where did the $600 go? Where did the $350 billion go?
The goal of spending US cash should be to build the US economy. At its core, what is wrong with the US economy?
We don’t make things anymore. The only way to build an economy is to make things that people want to buy. So, if we are going to spend this money anyway, what should we do to make sure it helps the US economy?
1. Dramatically increase SBA guaranteed lending to entrepreneurs and small business. Virtually all of the current unemployment is being experienced by Baby Boomers over the age of 45 years old. They represent a highly paid glut of humans in our population. In our current situation, they can never be re-employed at high rates. These people have experiences, talents, training and ideas. Help them start new businesses using those capabilities and they will hire others.
Plus a loan is not a net drain. The vast majority of SBA backed loans are re-paid. Even a 5% default rate, which is extraordinarily high, is cheaper than giving away all this money. Plus these are guarantees. Banks lend the money. So there is no actual cash out the door and banks start lending and making money again. The best of all worlds.
That is the politically doable part, but don’t disregard it because you do not like or understand this next part. It is really important though.
2. Eliminate the minimum wage. It is not paid by businesses. It is paid by hard working middle class Americans who get less so the company can allocate some of their hard-earned wages to the dredges at the bottom who, by definition, are not worth even minimum wage. These dredges recently got a raise for being the worst workers in the company. Eliminating that will make US manufacturers more competitive, which simply has to happen.
3. Allow all immigrants into this country. We need low-paid workers to do the stuff at the bottom of the manufacturing pyramid. We will GAIN jobs, because we will hire Americans to supervise, manage and oversee these low level workers. Those are all the HIGH-PAYING jobs that are lost when we move manufacturing overseas and they are perfect for the unemployed Baby-Boomers.
4. Pass my health insurance plan – see prior post. Get corporations out of the insurance business. Get the States out of the regulation business and make healthcare a national issue which will reduce costs. Allow anyone to band together to negotiate great group rates or create huge self-insurance plans where wellness drives cost reduction. The government should provide catastrophic coverage which will reduce rates to most because the coverage costs are capped.
5. Create a flat corporate tax on revenues over $1,000,000. Eliminate the payroll tax, which is a disincentive to hiring and paying workers. Roll all income and payroll corporate taxes into one simple flat tax. This will dramatically reduce compliance costs for American companies and avoid complex schemes to create a tax loss and avoid paying any taxes. If a company has revenues over $1,000,000, they pay a set percentage of those revenues in taxes, even if they are losing money.
Congress uses taxes for social engineering. I think that is wrong, but it is a fact of life. A flat tax actually makes this easier and more powerful. Every company pays it so they will ALL have the intended incentive if a credit is provided. Not just those showing a taxable net profit.
Small businesses (under $1,000,000 in gross revenues) pay no taxes, so all the complicated corporate, LLC, partnership and Sub S schemes to avoid “double-taxation” that they pay attorneys and accountants for is eliminated. These are families trying to make a living and hire people.
So if we do this, what happens?
Businesses are relieved of a significant amount of unnecessary overhead in trying to do things outside their core competencies – taxes and benefits. The government gets the same amount in taxes and more control over corporations.
There are low-paid workers able to fill the bottom of the manufacturing pyramid and this employs supervisors and management for the Baby-Boom generation that is currently suffering most. These positions are now lost to China. This helps grow the US manufacturing base which grows the economy.
There are plenty of important regulations regarding working conditions, the environment and the like which must remain. When we make things, we do it in a much better, safer and cleaner manner than anyone else in the world. Our unions will make sure that fair wages are paid if that gets out of line. We have a great system. Let it work.
If we help fund small creative entrepreneurial businesses, the true greatness of our economy, we will put the brilliant minds to work on reaching the dreams they never pursued because they had jobs. Small companies built on great ideas build nations. But they too need easier tax burdens, fewer non-core responsibilities and workers who make what they are worth all the way through their organizations.
Finally, workers who are paid only what they are worth, the definition of the minimum wage, will work harder, get to work on time, reduce drug and alcohol use so that it lessens the impact on their performance and will try harder to be better so they can make more. Immigrants will come and go as job availability dictates. Without a minimum wage they may be able to find better employment in their own countries and go back. Problem solved.
Simple but difficult solutions that would work and no giving away money. We shall see.
Friday, January 9, 2009
Stimulate the Future
I confess I have not read the stimulus package that almost President Obama has crafted, but I have read the many reports as to what it contains and I thought I would throw in my two cents worth as well.
My hope is that Obama makes huge changes to the way our government works. I have proposed many, and there are others. For this package, however, I would suggest a growth initiative rather than a hand out. No one wants a hand-out. They want a future.
Dramatically Expand Small Business Loans for Start-up and Early Stage Companies for all sorts of business ideas, but especially for start-up high-tech, bio-tech and other businesses of the future. Provide money so that those laid-off workers with great ideas can start their own huge new business and hire their laid-off co-workers. Since each small business needs around $400,000 on average to get started, a mere $40 billion starts 100,000 new small businesses. If each business hires 5 people on average, that is 500,000 new jobs. The vast majority of this money will be repaid, with interest, so this is not a sunk cost.
Invest in New World Infrastructure Improvements like a nationwide government owned wireless network that everyone can tap into. Build a system that is compatible with every communications provider and with international systems and rent space to them to eventually recoup the costs. We would train a whole new high tech workforce and allow business people to conduct international business from anywhere. Build it with American made high tech equipment to drive the development of that industry in the US and train even more workers.
There are other things that should be done, but they are too controversial.
The minimum wage is, by definition, an overpayment of our worst workers and this overpayment comes from the pockets of our better workers. It is a nice idea, but in the end it robs from the middle class and gives to the least worthy. Not sure that makes sense.
If we allow freer immigration at low wage rates we would bring back US manufacturing and add higher paying supervisory and management jobs decreasing overall unemployment and help to make the US a producing nation again, which is what builds national wealth.
Reallocate Social Security so that only retired middle class and poor receive it and provide that the tax is on all earned income rather than the current cap which requires the middle class pay a higher percentage. More money in and more money allocated to those who really need it.
President Obama’s plan contains many of the other critical issues, but should focus a great deal more of the total to these.
Alternative Energy Investment.
Bridges, Sewers and other Infrastructure Improvement.
Worker Retraining.
Don't just give us money. Drive forward to build our futures.
I am sure that our wise and dedicated representatives will do what it right. Perhaps my thoughts, if only in principle, will help.
Tuesday, December 30, 2008
The Minimum Wage – Bad for the Middle Class
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.
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.
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.
Wednesday, October 24, 2007
The Iraq War
Solving the Iraq War Crisis
US Political Discord: My niece, Ali is writing a paper on the Civil War and asked for my help. The issue to discuss related to whether the Westward expansion of slavery caused the war.
I remembered most of this from my days with Mr. Ross Wagner at Kirkwood HS in AP American History. Despite the hype, slavery had nothing to do with the War at all. No one cared abut black people. That is evidenced by the fact that it took over 100 years for them to gain even the most basic rights of citizenship, like voting and land ownership. What caused the Civil War was years of economic and political discord between the North and South on a myriad of issues and the retirements of three great Statesmen from Congress who held this country together, Daniel Webster of Mass., John C. Calhoun of S.C. and the Great Compromisor, Henry Clay or Ky. The lack of Congressional statesmanship and presidential leadership resulted in the near downfall of our country.
I certainly see that lack of Statesmanship, compromise and executive leadership today. Perhaps we are heading down a similar path. Not, of course, civil war, but perhaps to some form of political melt down.
Oil: I sat through a presentation by a renowned economist last week on the reliance of our country on oil. Our economy relies less than half as much on oil than it did 25 years ago, and that reliance is dropping. We get very little of our oil from the Middle East and so long as they continue to sell it to someone, we will be able to purchase oil at market rates, even if Iran does not like us. They have to sell their oil. No matter what anyone tells you, like slavery, we are not fighting for oil.
Easy-to-get oil is gone. Prices are rising and will not stop. Alternatives are growing in leaps and bounds because the economics work. We are the Saudi Arabia of coal and wind. As the oil minister of Saudi Arabia warned OPEC in 1972, "The Stone Age did not end for want of stone and so the oil age will not end for want of oil." He is right. This is and will happen.
Fundamentalist Fanatics: From the moment the religion was created formally, some 300 years after the death of Mohamed, Muslims have used religion to terrorize and take control of nearby countries.
From the moment the religion was created formally, some 300 years after the death of Jesus, Christians have used religion to terrorize and take control of nearby countries.
From the moment the religion was created formally, some 300 years after the death of Abraham or Israel, Jews have used religion to terrorize and take control of nearby countries. Other than Canaan, they just weren't as successful.
Jerks will use religion to control the weak of mind and spirit to their advantage. Get used to it.
Political Control of the Middle East: What western people do not understand is that Baghdad is the jewel of the Middle East. It is the historic center of civilization. It is coveted and has been fought over for millennia. We opened the door for another great fight for its control and that is mostly what the current military event is about. Very little is happening in other parts of the country.
Iran will never dominate the Middle East. There are multiple sects of Muslim in the Middle East, all of whom hate each other. The Sunnis of Saudi Arabia, and the Turks in Turkey will never let the Shiites of Iran control the Middle East. Put that one to rest.
Note, this inter-nation conflict is not about oil either. Like the Balkans and other regions of the world, this battle for control of the Middle East is centuries old. The Huns, the Ottomans, the Persians, the Romans, and others have fought for and ruled this area way before oil was found (that was in the 1920s). This is not about oil even as between them.
Note that this is not about religion. Same argument. The Muslim religion began in the late first millennia. These folks had been fighting way before that. Who is dying now. Not Americans. Middle Easterners are killing other Middle Easterners. Religion is just the latest in a long line of motivators by leaders bent on domination.
These peoples simply do not like one another very much and it did not start in 2002 and will not end with our departure.
Is this a "War?" Technically it is not a war. We won the war and defeated our enemy, Saddam Hussein's regime. We won and we did that with a coalition of forces. We are now defending an ally from incursions from foreign countries and from revolutionaries within. We would certainly do this for our other allies, for example Israel. George Bush has failed miserably in communicating this to the population.
Why did we go in?: That is the dead horse. We may never know the reasons, but it no longer matters. Now we have to figure out how to get out.
What if we don't win? I have suggested to Hilary Clinton's campaign that the answer to that is to change the definition of winning. Why does President Bush get to define it. If Hilary is presidential material, she should define it and drive toward that victory. We have to "win" as a country. Don't ever doubt that.
So the only option is to convince the American population that we have won by defining winning in a way we can be comfortable with.
What if we leave and don't stabilize Baghdad? Lets say we leave. If we leave now, we could create a vacuum that launches World War III. I think people care about the people of Iraq and do not want to leave them in a disastrous civil war loaded up by foreigners.
Sunni countries and leaders hate Shiite countries and leaders. They all want Baghdad. Kurds hate the Turks. India hates Pakistan. Palestinians want independence. Lebanon is a split country. Saudi Arabia is a split country. Oil is everywhere and dwindling in world power value as costs and prices rise. Middle Eastern economies are seeing this. Russia needs Iran economically. The French and Germans are very tied in to the region. Qaddafi would love to be unleashed. Italy and France are very tied in to Northern Africa. Al Qiadah would love to add turmoil and dispair to their recruitment arsenal. Everyone hates Israel. We have to defend Israel. So we would be back in anyway. Is that the side we want to be on???
I would hate to be the President who makes that decision. Talk about rising oil costs.
What was the gravest error in Vietnam? First we went in for the wrong reasons in an area that did not really matter in the grand scheme of things, allied with a corrupt non-democratic regime. OK, so that is pretty much the same.
Why did we lose? We failed to kick the North Vietnamese butts. You certainly cannot tell me that if we had really gotten after it we could not have blown North Vietnam off the map until they said uncle? We never sent in the forces necessary to win. It is in all the history books analyzing that war. We did not send our "A" game. Mostly because we did not care if we won. History has proven that the stakes were very low. Who cared.
So, what are we doing in Iraq? Fewer people are fighting this war for the US than even in Vietnam. It is a bigger area. It is more relevant. The enemy is harder to find. And the stakes are very high!
Why don't we consider learning from history and going in to truly win this war? Remember it matters not why we went in, only that we are there and need to get out. The "Surge" seems to be working, shock of the week.
I suggest sending our "A" game. 12 month plan. A large aggressive surge with 400,000 troops (institute a brief draft if necessary), our full air, naval and tactical support. Establish marshall law. Take and hold what we take. No one goes anywhere except through US troops. No news reporters. No private mercenaries. No civilians. No allies. No Iraqi troops. Not until we are ready.
Stabilize the country, lock down the borders tight, control the oil fields and take over the oil trade for this period (see below), give rewards for turning in bad guys, root out all insurgents and kill them dead. Let the Iraqis handle all prisoners. Three months tops.
Stay there six months, control every street corner, highway and transportation hub day and night. Add Iraqi military. Turn over policing the cities gradually to Iraqi police, but only on teams with US military. Bring in negotiators to work with the factions, union leaders to rally and organize workers, business people to restart the economy and help the Iraqis rebuild everything. We should not need to blow much stuff up at this point.
Most important, find a true leader with charisma to run for President, have new elections. Iraq needs a leader who the people will follow. If we don't find him, someone else will.
On day one, privatize the oil industry. (this is what the big internal fight is about). Create at least five corporations and divide the oil up logically. Create pipeline companies the oil industries have to pay to get their oil to the ports. Create refining companies the oil is first sold to. Create distribution companies to deliver the oil from the refineries to the ships. Etc. Privatize the whole system and let it run. Allow the creation of new companies. The buying and selling of assets, etc. Pass strict reporting and anti-corruption laws, like Sarbanes Oxley, and enforce them, thus creating a growing accounting and legal profession.
Give every Iraqi equal shares of stock in all new oil-related corporations, that way it does not have to be perfectly even. Put them on the NYSE so that they trade and can be bought and sold easily. Let this play out for the first six months while the US runs these corporations for the benefit of the Iraqi people. Build an Iraqi management team in each and train them on corporate governance. Name a president of each corporation and create boards of directors, etc. Get Transparency International or some other international player in the good governance game to oversee this. At six months, turn them over to the management team and get out. One year later, hold corporate elections just like any corporation.
Three months after the political elections begin to withdraw first from the cities turning controlled environments over to the Iraqis and still controlling the borders and Baghdad. One year later, we should be 80% out. Retain a couple of military bases in Iraq for strategic purposes in the Middle East. Be a strong ally. My plan.
US Political Discord: My niece, Ali is writing a paper on the Civil War and asked for my help. The issue to discuss related to whether the Westward expansion of slavery caused the war.
I remembered most of this from my days with Mr. Ross Wagner at Kirkwood HS in AP American History. Despite the hype, slavery had nothing to do with the War at all. No one cared abut black people. That is evidenced by the fact that it took over 100 years for them to gain even the most basic rights of citizenship, like voting and land ownership. What caused the Civil War was years of economic and political discord between the North and South on a myriad of issues and the retirements of three great Statesmen from Congress who held this country together, Daniel Webster of Mass., John C. Calhoun of S.C. and the Great Compromisor, Henry Clay or Ky. The lack of Congressional statesmanship and presidential leadership resulted in the near downfall of our country.
I certainly see that lack of Statesmanship, compromise and executive leadership today. Perhaps we are heading down a similar path. Not, of course, civil war, but perhaps to some form of political melt down.
Oil: I sat through a presentation by a renowned economist last week on the reliance of our country on oil. Our economy relies less than half as much on oil than it did 25 years ago, and that reliance is dropping. We get very little of our oil from the Middle East and so long as they continue to sell it to someone, we will be able to purchase oil at market rates, even if Iran does not like us. They have to sell their oil. No matter what anyone tells you, like slavery, we are not fighting for oil.
Easy-to-get oil is gone. Prices are rising and will not stop. Alternatives are growing in leaps and bounds because the economics work. We are the Saudi Arabia of coal and wind. As the oil minister of Saudi Arabia warned OPEC in 1972, "The Stone Age did not end for want of stone and so the oil age will not end for want of oil." He is right. This is and will happen.
Fundamentalist Fanatics: From the moment the religion was created formally, some 300 years after the death of Mohamed, Muslims have used religion to terrorize and take control of nearby countries.
From the moment the religion was created formally, some 300 years after the death of Jesus, Christians have used religion to terrorize and take control of nearby countries.
From the moment the religion was created formally, some 300 years after the death of Abraham or Israel, Jews have used religion to terrorize and take control of nearby countries. Other than Canaan, they just weren't as successful.
Jerks will use religion to control the weak of mind and spirit to their advantage. Get used to it.
Political Control of the Middle East: What western people do not understand is that Baghdad is the jewel of the Middle East. It is the historic center of civilization. It is coveted and has been fought over for millennia. We opened the door for another great fight for its control and that is mostly what the current military event is about. Very little is happening in other parts of the country.
Iran will never dominate the Middle East. There are multiple sects of Muslim in the Middle East, all of whom hate each other. The Sunnis of Saudi Arabia, and the Turks in Turkey will never let the Shiites of Iran control the Middle East. Put that one to rest.
Note, this inter-nation conflict is not about oil either. Like the Balkans and other regions of the world, this battle for control of the Middle East is centuries old. The Huns, the Ottomans, the Persians, the Romans, and others have fought for and ruled this area way before oil was found (that was in the 1920s). This is not about oil even as between them.
Note that this is not about religion. Same argument. The Muslim religion began in the late first millennia. These folks had been fighting way before that. Who is dying now. Not Americans. Middle Easterners are killing other Middle Easterners. Religion is just the latest in a long line of motivators by leaders bent on domination.
These peoples simply do not like one another very much and it did not start in 2002 and will not end with our departure.
Is this a "War?" Technically it is not a war. We won the war and defeated our enemy, Saddam Hussein's regime. We won and we did that with a coalition of forces. We are now defending an ally from incursions from foreign countries and from revolutionaries within. We would certainly do this for our other allies, for example Israel. George Bush has failed miserably in communicating this to the population.
Why did we go in?: That is the dead horse. We may never know the reasons, but it no longer matters. Now we have to figure out how to get out.
What if we don't win? I have suggested to Hilary Clinton's campaign that the answer to that is to change the definition of winning. Why does President Bush get to define it. If Hilary is presidential material, she should define it and drive toward that victory. We have to "win" as a country. Don't ever doubt that.
So the only option is to convince the American population that we have won by defining winning in a way we can be comfortable with.
What if we leave and don't stabilize Baghdad? Lets say we leave. If we leave now, we could create a vacuum that launches World War III. I think people care about the people of Iraq and do not want to leave them in a disastrous civil war loaded up by foreigners.
Sunni countries and leaders hate Shiite countries and leaders. They all want Baghdad. Kurds hate the Turks. India hates Pakistan. Palestinians want independence. Lebanon is a split country. Saudi Arabia is a split country. Oil is everywhere and dwindling in world power value as costs and prices rise. Middle Eastern economies are seeing this. Russia needs Iran economically. The French and Germans are very tied in to the region. Qaddafi would love to be unleashed. Italy and France are very tied in to Northern Africa. Al Qiadah would love to add turmoil and dispair to their recruitment arsenal. Everyone hates Israel. We have to defend Israel. So we would be back in anyway. Is that the side we want to be on???
I would hate to be the President who makes that decision. Talk about rising oil costs.
What was the gravest error in Vietnam? First we went in for the wrong reasons in an area that did not really matter in the grand scheme of things, allied with a corrupt non-democratic regime. OK, so that is pretty much the same.
Why did we lose? We failed to kick the North Vietnamese butts. You certainly cannot tell me that if we had really gotten after it we could not have blown North Vietnam off the map until they said uncle? We never sent in the forces necessary to win. It is in all the history books analyzing that war. We did not send our "A" game. Mostly because we did not care if we won. History has proven that the stakes were very low. Who cared.
So, what are we doing in Iraq? Fewer people are fighting this war for the US than even in Vietnam. It is a bigger area. It is more relevant. The enemy is harder to find. And the stakes are very high!
Why don't we consider learning from history and going in to truly win this war? Remember it matters not why we went in, only that we are there and need to get out. The "Surge" seems to be working, shock of the week.
I suggest sending our "A" game. 12 month plan. A large aggressive surge with 400,000 troops (institute a brief draft if necessary), our full air, naval and tactical support. Establish marshall law. Take and hold what we take. No one goes anywhere except through US troops. No news reporters. No private mercenaries. No civilians. No allies. No Iraqi troops. Not until we are ready.
Stabilize the country, lock down the borders tight, control the oil fields and take over the oil trade for this period (see below), give rewards for turning in bad guys, root out all insurgents and kill them dead. Let the Iraqis handle all prisoners. Three months tops.
Stay there six months, control every street corner, highway and transportation hub day and night. Add Iraqi military. Turn over policing the cities gradually to Iraqi police, but only on teams with US military. Bring in negotiators to work with the factions, union leaders to rally and organize workers, business people to restart the economy and help the Iraqis rebuild everything. We should not need to blow much stuff up at this point.
Most important, find a true leader with charisma to run for President, have new elections. Iraq needs a leader who the people will follow. If we don't find him, someone else will.
On day one, privatize the oil industry. (this is what the big internal fight is about). Create at least five corporations and divide the oil up logically. Create pipeline companies the oil industries have to pay to get their oil to the ports. Create refining companies the oil is first sold to. Create distribution companies to deliver the oil from the refineries to the ships. Etc. Privatize the whole system and let it run. Allow the creation of new companies. The buying and selling of assets, etc. Pass strict reporting and anti-corruption laws, like Sarbanes Oxley, and enforce them, thus creating a growing accounting and legal profession.
Give every Iraqi equal shares of stock in all new oil-related corporations, that way it does not have to be perfectly even. Put them on the NYSE so that they trade and can be bought and sold easily. Let this play out for the first six months while the US runs these corporations for the benefit of the Iraqi people. Build an Iraqi management team in each and train them on corporate governance. Name a president of each corporation and create boards of directors, etc. Get Transparency International or some other international player in the good governance game to oversee this. At six months, turn them over to the management team and get out. One year later, hold corporate elections just like any corporation.
Three months after the political elections begin to withdraw first from the cities turning controlled environments over to the Iraqis and still controlling the borders and Baghdad. One year later, we should be 80% out. Retain a couple of military bases in Iraq for strategic purposes in the Middle East. Be a strong ally. My plan.
Saturday, September 1, 2007
Guideline for Life
The four tenets of Bohemian Taoism - a Lips family original philosophpy from Jon and Christie and adapted by Me, Ned Lips.
1. Be in integrity with yourself
"Integrity is one of several paths. It distinguishes itself by being the right path, and the one upon which you can never become lost." MH McKee
2. Honor what is and others
"You can't always get what you want, but if you try sometimes, you just might find, you get what you need." Mick Jagger
3. Do what you are inspired to do today
"The past is too unpredictable and the future completely uncontrollable. Live for the now for that is all there really is." Ned Lips
"Do or do not, there is no try." Yoda.
"If you have the chance to sit it out or dance - dance." Some song I can't remember.
4. (My adjustment to Jon and Christie's) Be as excellent as you wish to be, for you can be.
"Excellence is the result of caring more than others think is wise; risking more than others think is safe; dreaming more than others think is practical; and expecting more than others think is possible." Anonymous
1. Be in integrity with yourself
"Integrity is one of several paths. It distinguishes itself by being the right path, and the one upon which you can never become lost." MH McKee
2. Honor what is and others
"You can't always get what you want, but if you try sometimes, you just might find, you get what you need." Mick Jagger
3. Do what you are inspired to do today
"The past is too unpredictable and the future completely uncontrollable. Live for the now for that is all there really is." Ned Lips
"Do or do not, there is no try." Yoda.
"If you have the chance to sit it out or dance - dance." Some song I can't remember.
4. (My adjustment to Jon and Christie's) Be as excellent as you wish to be, for you can be.
"Excellence is the result of caring more than others think is wise; risking more than others think is safe; dreaming more than others think is practical; and expecting more than others think is possible." Anonymous
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