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Avoiding the Cliff but what about the Abyss?

US Capitol-WinterCongress and President Obama finally reached an agreement to solve the “fiscal cliff.”  The compromise, the American Taxpayer Relief Act of 2012, was reached in the early morning hours of January 1, 2013.

Many of our illustrious leaders in Washington tried to sound reasonable by saying no one got what they wanted but it was the best deal they could reach.   Essentially, they were saying you may not be happy, but be satisfied.

It’s a sad day if this was the best they could do.  I have two primary contentions with the deal they reached.  First… the timing and process of the solution, and secondly, the absence of any meaningful changes in federal spending.

The process was extremely political, and the American electorate should expect more… no demand more… of our leaders.  The fiscal cliff was primarily created by two pieces of legislation.  In December 2010, Congress temporarily extended the “Bush tax cuts” until December 31, 2012.  Thus, they have known for two years tax rates would increase unless they passed legislation to extend or change the rates.  The other part of the equation was the spending cut provisions agreed to in August 2011 to settle an impasse on increasing the debt limit.  Thus, Congress and President Obama have known for 18-24 months the fiscal cliff was coming but didn’t resolve it until after the deadline passed.

I have many smart and successful clients.  It has been exceptionally frustrating and difficult for them to make business and financial decisions without knowing what the future tax rates and rules will be.  Even on December 31st, no one knew what the rules would be the next day.  In my opinion, it was an absolute lack of leadership and prudence on behalf of both branches of government, both houses of Congress and both political parties.

Although the process was frustrating, the most upsetting part of the compromise was the complete absence of spending cuts.  The tax increases are projected to raise over $600 billion of additional revenue over the next 10 years, and all spending cuts are postponed, at least for another two months.

Fiscal Cliff statementPresident Obama campaigned on a balanced approach to deficit reduction.  How can you consider $620 billion of additional revenue and no spending cuts a balanced approach?  Our political leaders have promised the spending cuts will come soon, but that’s what they promised when they passed the law in August 2011.  It was easy to promise future cuts, but when it came time to actually implement a spending reduction, they postponed them once again.

Don’t be deceived into thinking the new tax revenues will make any significant dent in our debt or deficit.  $620 billion is a lot of money, but it’s over the next 10 years.  The U.S. Government is currently overspending by $1.3 trillion each year.  The additional revenues will help, but we’ll still rack up an additional $10+ trillion in debt over the next decade, based on current spending.  The exclusion of spending cuts in this deal was another missed opportunity.  Spending cuts are never easy or popular, but I’ll offer two guarantees; 1) spending cuts will come and 2) the longer we wait, the more painful they will be.

There may have been some political winners from the whole fiscal cliff debacle, but I believe we, the American public, were the real losers.  The deal cut may have averted the fiscal cliff, but the absence of any real spending cuts pushes us closer to a financial abyss.

Check Please

November 1, 2012 1 comment

The Congressional Research Service  issued a report to the Senate Budget Committee outlining the federal spending for benefits to lower income people in the U.S. during Fiscal 2011 (year ending September 30, 2011).  The U.S. government spent $746 billion on programs for lower income people.  If you add in state spending, the total exceeds $1 trillion.

According to the Census Bureau, there were 16.8 million families living below the poverty level in 2011 ($23,000 for a family of 4).  By simple math, this means the federal and state government spent nearly $60,000 for each family in poverty, which is nearly three times the amount they earned during the year.

Less than 10% of the support is in the form of direct cash payments.  Of the $746 billion spent by the federal government, $318 billion is for Medicaid and prescription drug subsidies.  Approximately $66 billion is in the form of direct cash assistance and $73 billion is in the form of tax credits.  The remaining $290 billion of support is delivered through 80 different programs designed to help lower income families.

Given the choice, a number of families might choose to ask for a $17,000 in lieu of the other programs.

It might seem crazy, but do you think it’s efficient to have 84 different programs to help needy people?  Each program has its own objective and purpose, but there is a cost for employees, office space, computers, etc.   The more money spent on overhead, the less is being spent on actually helping people.

A few years ago I helped a school with a grant for an afterschool educational program.  I was surprised and dismayed to discover that over 20% of the grant money was going to be spent for a grant administrator, who would do nothing but complete reports and monitor the work of others.  Sadly, I think that grant is indicative of how many government programs and grants operate; a large chunk of the money is gobbled up in administrative costs.

I’m not against helping lower income families.  In fact, I think we have an obligation to help those who are most vulnerable and in need.  The issue is how the assistance is delivered.

It has been nearly 50 years since Lyndon B. Johnson declared a war on poverty and introduced the Great Society.  Trillions of dollars have been spent over the past 5 decades, yet the poverty rate in the U.S. is almost exactly the same as when this great endeavor began. 

Maybe we should consider eliminating a number of programs and giving more cash to those who are in need.  This seems outrageous to most conservatives, who often think people are abusing the system.  Many of us have witnessed people using their food stamps to purchase cigarettes and alcohol.  There will always be people who abuse the system, and they should be punished when possible.  I also believe the current bureaucratic morass often aids them in taking advantage of the system.

Conservatives frequently complain about people being dependent upon the system.  Part of the solution may be giving people more money, which will allow them to be more independent and self-sufficient.  However, this independence must be coupled with more responsibility for their choices.

Your willingness to embrace such an idea is probably influenced by your view of people.  Do you see them as lazy and untrustworthy, requiring a rigid bureaucracy to monitor and keep them in line, or do you trust people to be independent, make good decision and do what’s right when given the opportunity?  Personally, I would rather be trusted to do the right thing, than have some bureaucrat watching over me.  Given the choice, I would prefer to forego all the programs and simply say… “Check Please.”

Arithmetic

A few weeks ago, former President Clinton scored political points while criticizing the economic plan of Gov. Mitt Romney.  He touted the Federal budget surpluses during the final years of his presidency.  He went on to say he was able to balance the budget by simple arithmetic.  He also invoked the simple arithmetic principle to argue that Gov. Romney’s plan didn’t add up and would result in a large tax increase on middle class Americans.

The truth is that neither Gov. Romney nor President Obama’s plans pass the arithmetic test.  A detailed analysis of their plans is far beyond the scope if this article, so I’ll briefly summarize.

The highlights of Gov. Romney’s plan:

  • Cut tax rates by 20% for individuals and lower the corporate rate to 25%
  • Have preferential rates for interest, dividends and capital gains
  • Eliminate loopholes and limit certain deductions for higher income taxpayers

The criticism of Romney’s arithmetic is there aren’t enough loopholes to close which will offset the reduced revenue from the lower tax rates.  Deductions would also have to be limited for lower income taxpayers to make the numbers work.

The main point of President Obama’s plan:

  • Increase the tax rates for people making over $250,000
  • Eliminate the preferential rate for dividends and increase the capital gains rate

These changes are estimated to raise an additional $70 billion in annual tax revenues.

The arithmetic doesn’t work for either of these plans to balance the budget.  For the 2012 budget year, the federal government overspent by $1.1 trillion, and the total national debt has exceeded $16 trillion.  Since the government spends approximately $3.5 trillion each year, it’s a monumental task to close a $1.1 trillion deficit.

The U.S. Treasury collects approximately $2.2 trillion in income tax revenue each year.  To balance the budget under the Romney plan, all current deductions would need to be cut in half to raise another $1 trillion.  Deductions would have to be limited even more if the tax rates are reduced.  The Obama plan is no better.  Even if his tax changes were implemented, he’s about $1 trillion short to balance the budget.  By simple arithmetic, the numbers don’t add up… for Romney or Obama.

We can’t tax our way out of the hole we are in.  We must cut spending in order to balance the budget.  This is not Washington semantics for cuts by reducing the rate of growth or cutting the amount you hoped to spend.  It means actually spending less than the $3.5 trillion we spent last year.

On this front, I give the edge to Gov. Romney.  You or I may not agree with his proposals or priorities, but at least he’s willing to talk about cutting federal expenditures.   He was criticized and ridiculed after the first Presidential debate for trying to kill Big Bird, because he advocated ending the federal subsidy to the Public Broadcasting Service.  He has also been willing to tackle the “third rail” of politics – Medicare and Social Security.

In contrast, I can’t think of one significant cut in federal spending proposed by President Obama.  Counting money which would have been spent for the war in Iraq but isn’t going to be spent doesn’t count in my book.  It’s like saying you cut your spending by $5,000 for the vacation you didn’t take.  Furthermore, the budget deficit for 2013 will still be over $1 trillion without any spending for Iraq.  Instead of talking about spending cuts, the President is pushing for more “investments” (aka spending) for teachers and infrastructure.  These may be good things, but it doesn’t address how to balance the budget, and taxing the rich more isn’t going to close the gap.

Politicians are very good at using sound bites and obscuring the truth.  President Clinton was right… balancing the budget is simply a matter of arithmetic.  In this case, both candidates (and most members of Congress) probably need a remedial math class.

Ignore the WARNing

The Worker Adjustment Retraining and Notification Act (WARN) is a federal law requiring an employer with more than 100 employees to provide at least 60 advance notice of any mass layoffs or plant closings.  The law is intended to alert employees and communities of upcoming layoffs, and a company can be penalized for up to 60 days of employees’ wages for failing to comply with the WARN notification.

The WARN requirements have created a serious political problem.  According to the Congressional budget deal worked out last year, defense spending will be reduced by $55 billion starting on January 2, 2013.  If the spending cuts occur many defense contractors are concerned about a significant reduction in their contracts, which could lead to massive layoffs on January 2, 2013.  In order to avoid penalties and meet the 60-day WARN notification, employers need to notify their employees before November 2, 2012, which just happens to be 4 days before Election Day… ala the political conundrum.

On Monday, the Department of Labor (DOL) mailed a letter to state agencies stating it would be “inappropriate” for employers to send out WARN layoff notifications in anticipation of the defense spending cuts.  This immediately raised many eyebrows as to whether or not the DOL’s letter was politically motivated.   Suspicions were heightened, because the Department of Labor previously issued guidance to employers saying it could not give WARN advice regarding specific situations.

Three primary concerns come to mind regarding this matter.

Undue Political Influence

It’s hard to get away from politics in an election year.  Every decision is interpreted through a political prism, and it’s hard to divorce politics from the process.   Decisions like this one are made by high-ranking political appointees, and their jobs and influence are dependent upon whether or not their boss retains his job.  Thus, it can be near impossible to think politics won’t influence the decision makers.  However, it seems like elected and appointed officials are predisposed to make most of their decisions based on what’s best for their career and pocketbook, instead of what’s best for the country.  We can’t honestly know the motivation of the DOL personnel involved in this decision, but choosing to provide guidance on an issue they previously refused, certainly raises questions.

Meaningless Laws

The primary rationale for the DOL’s conclusion for employers to refrain from sending out WARN notices was the uncertainty of whether or not the cuts would remain in effect. The DOL essentially acknowledged this law was a sham in the first place and was passed for political expediency.  Irrespective of whether Congress ever intended for the cuts take effect, are the spending cuts the law or not??  According to the legislation on the books, the cuts will occur unless a new law is passed to restore the spending.  As a citizen, you’re penalized for disobeying a law or regulation, so why do politicians and government bureaucrats get to decide which laws they enforce or follow?

Ineffective Government

As a nation we are probably more divided than any time in history since the Civil War, yet the problems we face are immense.  The sluggish economy and $16 trillion debt are enormous problems.  Rather than having serious discussions and working towards creative solutions, our leaders are more focused on partisan brinkmanship and political machinations.  If history repeats itself, the defense spending cuts will probably never happen.  Rather than face a disgruntled electorate and risk losing an election, our leaders will forge some “compromise” which maintains the status quo and allows both sides to declare victory.  Meanwhile, nothing is resolved and the country plunges further into debt each day, and our leaders are able to pass laws that are never intended to go into effect to maintain the charade of getting something accomplished.

The DOL’s guidance for employers to ignore the WARN notices should set off a much larger warning.  Aside from the political ramifications, it’s a dangerous place for politicians and bureaucrats to selectively choose which laws to follow and enforce.  We’re either a nation of laws or not.  If not… then God help us.  Lawless nations and those which allow its leaders to use the laws to reward their friends and punish their enemies are always destructive to the people at large.

The Supreme Court Rules on Obamacare

In a 5-4 decision, the U.S. Supreme Court upheld the constitutionality of Obamacare (the Patient Protection and Affordable Care Act).  Lawyers, politicians, journalists and citizens are scouring the judicial rulings to understand its implications.  The law is exceptionally complex, so it will take time fully comprehend the ramifications of the ruling.

Here are a couple of the most significant elements of the Court’s ruling.

  • The penalty for failing to purchase health insurance is equivalent to a tax, which Congress has the authority to assess.  Thus, the individual mandate is Constitutional.
  • Congress does not have the power under the Commerce Clause to force you to purchase insurance.
  • Congress can require states to increase their Medicaid roles and provide financial incentives to do so, but it can’t withhold all Medicaid funding if it doesn’t.  It seems confusing and contradictory and will likely lead to further litigation.

Here are a couple of quick thoughts and observations.

  • The logic of the Court regarding the individual mandate was interesting.  Apparently, Congress can’t force you to purchase something, but they can tax or penalize you if you don’t.
  • The Medicaid issue is one of the most unclear parts of the ruling.  Unlike the individual mandate, it seems Congress can require the states to increase their Medicaid roles, but can’t penalize them if they don’t.  The issue hinges on state sovereignty, and it will be interesting to see how this plays out, especially since several states have already passed legislation opting out of Obamacare or the individual mandate.
  • The split ruling was no surprise, but it was a shock that Chief Justice John Roberts upheld the constitutionality and Justice Anthony Kennedy did not.  The unpredictability of judges and juries is what’s often referred to as the hazards of litigation.  No matter how strong you think your case is, a judge or jury may see it differently.

Today’s ruling by the Supreme Court isn’t going to end the discussions or fights over Obamacare.  There is still a lot more to come.

I welcome your comments and thoughts regarding the Supreme Court decision.  Click here if you would like to take a quick poll on whether you agree or disagree.

Is the Unemployment Rate Misleading?

The April employment statistics were released by the Bureau of Labor Statistics (BLS) last Friday.  The official U.S. unemployment rate for April 2012 dropped to 8.1%.  It hasn’t been this low since January 2009.

According to the BLS, 115,000 new jobs were added to the workforce in April.  Certainly that is good news for the 115,000 who are now employed, and after three years of high unemployment, it’s encouraging to see the rate dropping.

The report has been out for a week, which has given people more opportunity to dig into the numbers.  Unfortunately, the headline is much more encouraging than some of the supporting data.  Here are a few facts to consider

  • 310,000 people left the workforce in April (that’s nearly 3 times as many jobs which were created).  People who are no longer looking for a job contributed more to the reduction in the unemployment rate, than those who obtained a new job.
  • There are 968,000 people looking for work, who are classified as “discouraged.”
  • 7.8 million people are working part-time for economic reasons.
  • 5.1 million people have been unemployed for more than 39 weeks.
  • 324,000 women dropped out of the labor force in the past two months.

So is the unemployment rate misleading?  Personally, I don’t think it’s misleading, but you also shouldn’t take it at face value.  A deeper understanding of the supporting data will provide a better picture of what’s really happening.

Realize the unemployment rate is only an estimate.  No one knows for sure how many people are truly unemployed and looking for work.  For example, many people think it’s misleading to exclude those who have given up looking for work.  While that may be the case for discouraged and frustrated people who can’t find a job, what about those who retire, start their own business or decide to stay home to take care of a family member?  Those people may have no intentions of re-entering the workforce, at least in the near term, so it would also be misleading to count them as unemployed.  Thus, the quandary of who should be classified as unemployed.

I don’t think the unemployment rate is misleading, unless the BLS changes its data collection and classification measures, which happened at the beginning of 2011 (read more here).  Since the BLS hasn’t changed their methodology recently, the drop in the unemployment rate can be considered legitimate.  However, you should investigate some of the supporting data, and draw your own conclusions about the U.S. employment situation.

Since it’s an election year, expect politicians and political pundits to quote the rate as a measure of their job performance or some other elected official and make their political argument for supporting a particular candidate.  Don’t be misled by a headline or political statement, since they rarely tell the whole story.  The unemployment rate may not be misleading, but other people can be.

A New Record

On Wednesday, the United States of America established a new record, although it may not be one we want to boast about.  As of the close of business on Wednesday, the U.S. total debt exceeded $15 trillion.

This bad news gets worse… don’t expect the debt increase to stop or slow down anytime soon.  We’re already two months into the current budget year without an approved budget (that’s a different matter).   However, the 2012 Budget proposals put forth so far expect to add at least another $1 trillion to the debt, which is approximately $3 billion per day.

Interestingly enough, there was very little media coverage regarding this matter.  There was more coverage about Occupy Wall Street, the Supercommittee and the Penn State scandal than our debt breaking the $15 trillion barrier.  After all the acrimony earlier this year about raising the debt ceiling, it might not be considered important news.

Here are a few details about our national debt which might interest you.

  • The U.S. population is approximately 310 million people, which means there is approximately $48,000 of debt for every man, woman and child.
  • The debt is divided into two broad categories; intragovernmental debt and debt held by the public.  The intragovernmental debt is $4.7 trillion and the debt held by the public is $10.3 trillion.
  • The intragovernmental debt is essentially money owed to the Social Security system. When politicians refer to the Social Security Trust Fund, this is what they mean.  Its debt the government owes itself.
  • Even though it may be considered an independent government agency, the U.S. Federal Reserve is now the largest stakeholder of the debt held by the public.  The Fed currently holds $1.665 trillion of U.S. Treasury Securities.
  • China is the second largest holder of debt, with $1.148 trillion.
  • As a result of the Federal Reserve’s quantitative easing, its stake in U.S. debt obligations increased by over $850 billion over the past year.

I may be a bit cynical, but unfortunately I don’t think there is much hope Congress will act to stem the flow of red ink in the near term.  They battled a few months ago and agreed the debt will rise to over $16 trillion by the end of 2012, so I don’t expect much to happen on the political front.  The lack of media coverage is an indication of the lack of interest by Congress in this dubious milestone.

On the bright side, one thing that’s preventing us from being crushed by our own debt is that nearly one-third of the $15 trillion of Treasuries is effectively being held by the federal government (i.e., Social Security and the Federal Reserve).  Thus, our real debt to investors is effectively $10 trillion.  Not a good situation, but better than $15 trillion.

At the same time, it’s not a healthy position for the government to hold so much of its own debt.  Congress may have played fast and loose with the Social Security funds, but the day has arrived when the Social Security payments exceed the taxes collected.  It’s going to put more strain on the budget, and the real cash flow of the federal government, as Social Security starts cashing out its intragovernmental loans.

It’s also not great for the Federal Reserve to continually increase its Treasury holdings.  As I and others have previously written, the Federal Reserve essentially printed money to buy up a huge chunk of government debt issued over the past 12 months.  Quantitative easing may have some economic benefits, but there are tremendous long-term risks from this strategy.

Americans like to break records, and we just broke another one.  Unfortunately, it’s an honor we could have done without.  The real question is what are we going to do to stop the hemorrhaging and get our fiscal house in order?  We just set a new record, and it’s only a matter of months before we break the $16 trillion mark.