Econ 101

In economics 101 I learned that S=I. Savings equals Investment. What brought this to my mind was the recent news about the rich paying more in taxes. When a man has a lot of money there are two things he can do with it. First he can spend it and this of course is good for our consumer powered economy. The second is that he can save his money. It is from savings that banks accumulate the money that they lend. When a business wants to invest and expand they need money so they go to the banks for loans. If the banks have customers who have put money in savings then they have money to loan. The more money the banks have to loan the lower interest rate they can charge and the more incentive there is for business to expand. If you take money from a man who has a lot you are taking money right out of the economy and making it more difficult for business to operate. Now every day in the news a different expert comes out saying that businesses create jobs though expansion yet some of these same experts are suggesting that we raise taxes on the rich. Did they never learn about savings equals investments or did they just forget what they learned. Or maybe they just don’t know what they are talking about. I vote for the latter.

Mass health plan

Since Mitt Romney decided to run for president the Massachusetts State Health Care Plan he installed has come under scrutiny. The plans main benefit was that it increased the number of insured from 94% to 98% but at what cost. The first thing that happened was a shift of the cost of health care from the employer to the employee. Between 2005 and 2009 employer cost declined while employee cost increased by 21%. Individual bankruptcy filings increased by 35% from 2007 to 2009. Rising overall costs continued to increase and are expected to double in nine years. The people are wondering if the cost to insure that additional four percent was worth the benefit. Stay tunned!

Legacy

When I first got into the financial planning business I took a lot of courses to get a lot of initials behind name. I once joked that I would have to get larger business cards. In any event my interest directed me toward retirement planning and that is where I spent 25 years working. I recall in the early days I would be constantly searching for someone who understood pensions and I couldn’t find anyone. I had to learn on my own and as the years passed I discovered that I had become the expert I was looking for and associates were turning to me for help.
I am telling you this because of the all of the news about pensions and how unions are revolting not only in the US but in Europe. I understand why they are upset and they have legitimate reasons. The problem exist in both public and private pensions but more so in the public area.
Let’s go back in time to the 1950’s and you own a company and you want to set up a pension plan for your employees. You sit down with a pension expert and set out your plan. First he asks for the number of employees and their ages and salaries. Then he asks for turnover because you have to consider how many of your current employees will still be there at retirement age. Then he asks for your opinion on what inflation will be for the next 20 years so he can determine how wages will increase over time. Finally he asks how much you expect to earn on the pension fund over the coming years. It doesn’t take a rocket scientist to quickly understand that all of these estimates are just wild guesses. In order to overcome the problems associated with these guesses he suggests that you review your pension each year and make adjustments accordingly. Plans that were developed like this and adjusted like this remained solvent but often times these procedures were not followed.
In some state plans the need for funds was so great that they diverted pension money to other projects, things like bridges and highways. Now the government requires that pensions always have enough money to meet the needs of retirees so if there was not enough the plans were underfunded and the government demanded that they be brought up to spec. Now any professional pension consultant will tell you that you must be conservative on your projections of future earnings and using the inflation rate would be acceptable. When these plans diverted pension monies they made up the difference by estimating future earnings at a higher rate. Then as the years passed and elected officials found this new source of funds the practice continued until some states were projecting future earnings at 8% even though current inflation has been less than 3% for most of the past two decades. If I save $1,000 per year at 3% for 30 years I have $47,000 but if I use 8% I have $113,000.
Please understand that over the years many of the pensioners were given retirement benefits in lieu of wage increases. This allowed the states to continue on their spending spree by pushing off commitments to the later years. Well the later years are here. It is time to pay the piper. Since states are not allowed to declare bankruptcy they must come up with a way to resolve this problem and most will have to reduce benefits and people are not going to be happy about this. Some have suggested that congress pass the appropriate laws to allow states to declare bankruptcy but many say this could be unconstitutional.
Earlier I mentioned that public pensions are in worse shape than private pensions and the reason for that lies in the negotiating process. If you own a company you are looking at your money or your stockholders money when you renew your pension contracts, If you are in the public sector you are using public money. Which do you think you are more likely to covet?
Let us look at an example. Suppose there is an election for county commissioner. The union people select a candidate who is partial to their view and campaign for this person. The not only go door to door but they contribute funds for his campaign and he is subsequently elected. Now when it comes time to negotiate a new contract the unions leadership sits down across the table from the person they helped to elect and the two sides decided on how they will divvy up the tax payers money.
This process has been going on in cities and counties across the country for 30 plus years and we now see the results with public pensions having better benefits than the private pensions. Once this cozy arrangement was put in place not only were pension benefits increased but salaries and other benefits like health care were also padded.
For you people in my generation, if this is sounding familiar, don’t be surprised for the federal government has done something similar to social security. The money in social security was used to purchase government bonds and this money was then used for things like bridges and highways. This mixing of government money with social money is known by the happy name of unified federal budget.

In the Minneapolis School District there are 3,300 teachers and 6,700 support staff. 1,500 of the support staff are members of the teachers union. If the teachers select a candidate who will negotiate contracts that are favorable to teachers and then work to get them elected, they have a very good chance of winning. If each teacher and spouse vote for a particular candidate that is 9000 votes. Now if they get their parents to vote that is another 18,000. Next if they have coffee parties and invite the neighbors plus make a small campaign contribution they can just about guarantee a win for their candidate. The proof of this is that
No DFL-endorsed candidate for the board has lost in at least 20 years.

Here are the results from the last school board election and it is easy to see why someone with a 27,000 vote head start will be the likely winner and you can be assured that all the teachers do vote.


3 seats 131 of 131 precincts (100%)

Lydia Lee *
61,623

Jill Davis
58,998

Carla Bates
54,691
Sharon Henry-Blythe *
39,476
Kari Reed
33,118
Doug Mann
28,416

This is why it is necessary for there to be a disinterested third party to negotiate contracts. Some thing similar to arbitration

Miranda

Last April the US picked up a suspected terrorist off the coast of Somalia and held him of a US Naval vessel for two months during which time they interrogated him. Then they shipped him to the United States and turned him over to the FBI who promptly read him his Miranda rights. I think it was a little late for that but now they say he is going to be tried in civil court. Last year the congress passed a law stating that no one could be sent to the US from Gitmo and tried here in civil court so this was Obama’s way to get around this law. Having witnessed this little tactic the congress will now broaden the law to include terrorist coming to the country from anywhere.
I believe that if you question someone for two months with no lawyer present and then read them their rights and take them to court you should have a slam dunk case and my guess is that is just what Attny Gen Eric Holder wanted. This whole thing looks like a sham and makes a mockery of the Miranda Act.

Getting elected

When a person decides to run for public office, particularly a national office, they are immediately faced with a dilemma. What happens when your basic principles conflict with your constituents? You can change your platform to fit with the voters and improve your chances of winning or you can stick by your guns and decrease your chances of winning. Assuming you are running because you believe you can make a positive contribution to the country, you realize that you can only make a difference if you win. So you decide to change your campaign to fit the desires of the people and after you are in office you move away from your campaign and toward your beliefs. This opens you to criticism from the other side but if you can pull it off you can get reelected. On the other hand if you don’t change and don’t get elected you can go home feeling like you are a person of principal and leave the improving the country to someone else.
We have such a choice going on at this time. Michele Bachmann is a person of principal who will not change to get elected and we have Obama who will. Here is a quote from Senator Obama in 2006 regarding raising the debt limit.
“The fact that we are here today to debate raising America's debt limit is a sign of leadership failure,” he said on March 16, 2006. “Leadership means that ‘the buck stops here.’ Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership . Americans deserve better. I therefore intend to oppose the effort to increase America's debt limit.”
Here is President Obama in April of this year:
“Failure by Congress to raise the U.S. debt limit “could plunge the world economy back into recession,” President Barack Obama declared Friday.
Our inexperienced President found out that there is big difference between campaigning and governing.
But here is how you resolve the problem and get set for reelection.
Obama "thinks it was a mistake," presidential spokesman Jay Carney told reporters. "He realizes now that raising the debt ceiling is so important to the health of this economy and the global economy that it is not a vote that, even when you are protesting an administration's policies, you can play around with."

Obama election

The election of President Obama came along at a critical time in our history. We all know the story of the frog in the pan of warm water. The frog is quite comfortable as we slowly heat the water until the frog finally dies. Our economy has been in the warm water for the past fifty years, as we have been on an inexorable path toward European style social democracy. If John McCain had been elected we would just have continued down that slow road to self-destruction. President Obama accelerated the process to such a degree that he woke up the American people and a kind of quiet panic set in. With each new Czar, with each new regulation, with each new stimulus the people became more and more uncomfortable. The slow moving cloud of government encroachment turned into a threatening storm and now even those who were transfixed by Obama’s oratory are having doubts about the direction of the country. Add to this the unrest in the countries of Western Europe, countries who seem to reflect where we are heading and there is grave concern about our future. The silent majority as represented by the Tea Party is awakening and soon will use the power of the vote to bring on a new wave of hope and change. We see it in states like Indiana, Ohio, Wisconsin and Florida and soon we will see it in Washington. The rise in the growth of government will slow and perhaps even diminish with the emphasis on perhaps. In retrospect we may see the election of Obama as the best thing that could have happened. Time will tell.

Ryan

When Paul Ryan came out with his plan to save Medicare, he opened the door for Nancy Pelosi to regain her position as speaker and she immediately knew that. It was a gift to her and the opportunity for the Democrats to regain control of the house and everyone knew it. The old time Republican leadership wanted to keep quiet until Obama came out with a plan but he didn’t have one. The budget he proposed in Feb was voted down by the Senate 97 to 0. It was then that pressure from the Tea Party and the newly elected 87 members of the house convinced the Republican leadership to cave and allow the Ryan plan to come to a vote. Now the Republicans are on the record of supporting changes to Medicare. At this point Pelosi is putting pressure on Obama to give up whatever but not to mention Medicare. Up to this point he has talked about Medicare but has put nothing in writing. He has said that he would reduce the fees paid to hospitals and doctors but that is about it. If he refuses to say any more he will put the Democrats in a strong position to recapture the house because they will demagogue the Ryan plan to death. They have already started with the ad showing grandma being pushed over the cliff. The Ryan plan was voted on and put forward but Obama has not responded. Rather than present a plan he just criticizes the Ryan plan and the press allows him to get away with that. I suspect that when all the dust settles we will once more push the can down the road and the idea of taking on entitlements will have to wait for some future date. For the first two years of Obama’s presidency the Democrats controlled both houses and during that time did not propose a budget. The government has now gone over 800 days without a budget.
The federal budget process is similar to the regular legislative process, but it is also different in some very important ways. First, because the Constitution requires that any bill raising revenue must originate in the House of Representatives, the House has traditionally taken the lead in the budget process.
Another distinctive feature of the budget process is that the President's role is more formalized and, therefore, significant. The Congress, by statute, has required the President to submit a budget to the Congress each year. By doing so, the President establishes the starting point and the framework of the annual budget debate.
There can be no honest debate until Obama submits his budget which he will not do unless he is forced to. As it stands now we can openly criticize the Ryan Plan but cannot criticize a plan that is non-existent.
The President has said many times that the deficit is a big problem and he wants to raise taxes on the rich but he wants to use the money to invest in education and infrastructure not to pay down the debt. This is now called revenue and invest instead of tax and spend and that is all that has changed.