September 11th Remembered

Thirteen years ago on September 11, 2001 terrorists hijacked four airliners.  Unlike previous airline hijackings in which the hijackers sought ransom money or escape to another country, these four planes were hijacked to use as flying bombs.

Like most Americans alive then, I remember that day.

It began normally. Like other mornings I got up early and checked my email.

Signing into Yahoo I noticed a small headline about a plane having crashed into one of the towers of the World Trade Center in New York.  I remembered as a youth having seen an old movie on TV about a plane flying into the Empire State Building on a foggy night.  My father commented that this had really happened and, seeing the Yahoo headline, I assumed that the pilot of a small plane had been in a fog or had flown off course and had crashed into the WTC.  If the Empire State building had withstood  a small plane flying into it then so could the the larger WTC, so I proceeded to my email and thought no more about it.

After breakfast I got my two sons into the car and we headed off to school and work.  As usual, one of them immediately turned on the car radio expecting their favorite FM rock station but instead got a news commentator from the AM talk station I listened to when they weren't in the car.  They pushed the AM/FM button but the same man kept talking.  Pushing the button again and same reporter was still talking.  In frustration my older son changed to another FM rock station and the same fellow was still speaking.  

I suddenly remembered that all three stations were owned by the same broadcaster and that something was going on.  It took a couple of minutes before the reporter finished the details he was discussing and gave an update on the towers having been hit by an airplane for those who had just turned in.

This is when I learned that it wasn’t a small plane going off course and flying into the World Trade Center but a commercial airliner full of highly flammable jet fuel that had been taken over by hijackers and deliberately flown into the World Trade Center.

After dropping my boys off at their respective schools, I drove to work where everyone on the office was talking about the attack.  While the community college I worked for remained open all day, most of us spent as much time on listening to updates from radios and the Internet as we did working.  The school officials did eventually announce that all evening classes would be cancelled and the college would shut down completely when the work day ended at 5 pm.

It was my youngest son’s 14th birthday and I had promised to buy some pizza and take it to the school cafeteria for him and his friends for lunch.  

I called my pizza order in to a small pizza parlor down the street and left early for lunch.  When I arrive at the pizza parlor the young lady at the pizza parlor looked shaken and told me that she had recently moved to Tucson from New York City and was worried about friends and relatives back in New York.  That is when I remembered that I had two cousins whom I hadn’t seen in years as well as my Mother’s cousin all whom lived in the New York City area.  

While none of my relatives lived in Manhattan, my two cousins did work there while my Mother’s cousin had retired and lived out in Queens.  

I managed to get my pizzas and get them over to my son and his friends, but due to heavy traffic, I was somewhat late and don’t know how much of it  they actually got to eat.

I had to wait to get home to make calls about my family.  All the lines to New York City were tied up but I was able to get ahold of my two cousin’s sister in Connecticut.  She had received an email from my cousin Tom’s wife saying that he had made it home safely.  He worked on Wall Street either in one of the other towers or a neighboring building and had been able to see the fire from his office.

His building evacuated and he spent the rest of the day walking around the traffic jams and ultimately making his way home to Brooklyn on foot.  With most public transit shut down and some bridge closures it took him hours to finally make it home.

It turned out that the company that my other cousin worked for had decided to escape the high rents in Manhattan and had moved most of their staff to an office building across the river in New Jersey a couple of years before. This cousin  had seen the towers burning but was safely away from the target area.

I wasn’t able to reach my Mother’s cousin either but did receive a call from my sister in Western New York who informed me that he and his family were safe in their home that was a safe distance from lower Manhattan.

One of my sisters had been attending some sort of trade gathering in Toronto at the time of the attack and, with the border closed and all non-military aircraft in the U.S. grounded, she ended up spending a few extra days in Toronto.

I was fortunate that everyone I knew had come through safely.  And, living in Arizona, I was far from the the disaster area.

However, I was impacted slightly a couple of years later.  Shortly after the terror attack I met and fell in love with a woman from Russia.  Having been divorced and a single parent for over a decade I was ready for a new love.  

Things went fine for us except that new laws and regulations and the consolidation of border security and immigration in the new Department of Homeland Security resulted in some obstacles and delays in our coming together.  It took longer than usual to process the paperwork to bring my new fiancee and her two children to the U.S.

Once here, I discovered that the Department of Homeland Security was so busy changing signs and headings on stationery that brought the processing of green cards to a crawl.  It thus took close to six months for my wife to get a green card allowing her to work.  

This was the economic impact of 9/11 on my household finances.  Upon her arrival my household doubled in size from my two sons and me to now include my wife, my two sons, her son and daughter and me - moving from supporting a household of three to one of six puts a big dent in a family’s finances.  

But we tightened our belts and made it through.  Her green card finally arrived on a Saturday and by the following Wednesday she had found a job and started working.

Textbooks and Rising College Costs

With summer over, it is back to school for the thousands of students enrolled in the nation’s colleges and universities.

For most students and/or their parents, a college education is an expensive undertaking.  In addition to tuition and room and board, books and supplies will consume a large portion of a student’s education budget.

Despite steadily rising book costs, textbook publishers have found themselves squeezed for revenue.  A major source of revenue loss can be attributed to the burgeoning used textbook market.

The used textbook market has always existed but, prior to the rise of the world wide web and sites like eBay, it was not too big of a  threat as the market for used textbooks was limited to students in the next semester’s or year’s courses.  Since many localities had only one college or university options to buy or sell used textbooks was limited.

Despite the limited re-sale market, publishers were able to narrow the market further by regularly coming out with new editions of books.  Generally this just involved a few changes (such as reversing the order of chapters, adding or replacing some content, etc), and then convincing professors to adapt the new addition for their next semester’s courses.

However, with the rise of auction and resale sites like eBay, Amazon, Half.com, etc. the market suddenly became global and textbook publishers found themselves competing for business against students selling used copies of the same textbooks the publishers were selling new.

It wasn’t just individual students logging on to sites where they could sell their used textbooks at the end of the term.  Other entrepreneurs, including entrepreneurial students, began purchasing used books directly from students and then re-selling them online at a higher price.  Some even went so far as to negotiate with the local college bookstore to purchase unsold new books that were not going to be used the next term.  This saved the bookstore the cost of shipping the books back to the publisher.  

Publishers struck back by going digital themselves.  This took the form of developing digital content, including robust content and tests (thus saving professors from having to hand out, monitor and correct tests) designed to aid in the teaching and learning.  This content required the student to purchase an access code that allowed them to enter the online site.  The pass code was good for the semester and initially only available with the purchase of a book and pass code package.

The addition of online content available via a pass code not only produced an additional revenue stream from the sale of pass codes, but, packaging the code with the textbook forced students to purchase their books new (since pass codes cannot be re-used, students could not re-sell them).  This was a blow to the used book market as students had to purchase new books in order to get the pass code for the online access which many professors required as a part of the course.

The threat of new laws or regulations on the textbook industry has resulted in many publishers offering the option of purchasing the textbook and access code separately.  This allows students to purchase the access code alone and then purchase a used textbook or, in some cases, rent a textbook.  

Purchasing the access code separately from the book offers the potential for savings.  However, it pays to shop around.  The college bookstore may sell the access code separately and also offer both new and used copies of the textbook as well as various bundling options.

However, the publisher may also sell access codes directly from their websites and prices might differ from those at bookstores.  Also, used copies of the textbook may be less expensive from an online seller than from the bookstore.  Ebooks are also an option that are usually less expensive than print books and there are some eBook and access code packages which could result in a savings.

Finally, many college bookstores offer a textbook rental option that may be a less expensive alternative to purchasing a used textbook.  Amazon.com also offers textbook rental options and this may be more of a savings than the bookstore offers.

College is expensive and textbooks are a big part of this expense.  However, investing some time checking all options can result in a significant savings in this area.  

Finally, in making your decisions on how to go about keeping your textbook costs down keep in mind that purchasing a new or used print edition gives you the possibility of getting some of your money back at the end of the term by selling the textbook.  This, of course, cannot be done with rental books or with most eBooks.

Labor Market Tightening - Could Higher Wages be on the Horizon?

Despite the sluggish economy that has been with us since 2008, there have been periodic complaints from employers about their difficulties in finding employees.  Given the high unemployment rates of the past few years these complaints seemed strange.

In the labor market, employers are the buyers of labor services and workers are the sellers of labor services. With thousands of people out of work, it was only natural for many employers to assume that finding employees would be easy.  Logically this should have been the case and for many employers this probably has been the case.

No one likes to take a pay cut and, for many people, the available jobs being offered were at lower rates of pay than their previous jobs.  For those without any options, their only choice has been to suck it in and take a lower paying job.

However, extended unemployment benefits (sometimes continuing for a year or more), free re-training opportunities, food stamps, a spouse's income and/or savings provide many unemployed people with the means to hang on and hope for a better job opportunity.  While this can' go on forever, it does partly explain why we have both high unemployment and employers complaining about not being able to find workers.

A recent Wall Street Journal article (U.S. Companies Schooled on Wages, Aug 21, 2014) reported that one area that employers are experiencing trouble finding applicants is unskilled labor jobs.  Workers are being sought for unskilled labor jobs in areas like construction and other industries that employ unskilled or low skilled workers

This shortage is difficult to understand given that the segment of the workforce these employers are targeting, which consists of people with a high-school education or less and little or no formal job training, continues to have unemployment rates that continue to be higher than for the labor force as a whole.

A major factor is the fact that the number of unemployed people in the 25 to 34 age group who have a high-school or less education has shrunk to less than 2.6% of the population.  According to the article, this 25 to 34 age group is where employers of unskilled labor draw most of their recruits.  Many of the unemployed in this group qualify for funding for training programs which offer the potential of improving their future job and pay prospects.  As a result many in this occupation group may be electing to continue with their training and not respond to current unskilled job opportunities.

This leaves those in the 25 to 34 age group who are neither working nor looking for work which means they are not considered a part of the labor force.  This is a potential pool of workers that employers can try to induce them to come forward and apply for these jobs.

The best, and possibly the only, way to recruit these people is by increasing the wages being offered.  This will cost these businesses more money.   More money will be needed to  not only attract workers from this group of people who currently not considered a part of the labor force but these employers may also find they have to increase the pay of current workers with some skills who are working at the next level so they do not feel short changed and leave to seek employment elsewhere.

This Increase in Unemployment is Good News for Job Seekers

Reports by the Department of Labor this past month (July 2014) showed an increase in unemployment. However, unlike previous reports, the number of workers losing their jobs was negligible.

Rising unemployment is bad news for the economy and especially bad news for job seekers as it indicates that employers are reducing their workforce rather than expanding and seeking additional workers.

However, as a result of the way the U.S. Department of Labor (DOL) defines unemployment, an increase in unemployment can be viewed on occasion as good news for job seekers.

How is that, you ask?

According to the DOL an unemployed person is one who is both not working AND is actively looking for work.

Once an individual who is not working gets discouraged and STOPS looking for work he or she is no longer officially considered to be unemployed.  For government statistical purposes they are no longer in the workforce and thus in the same class, employment wise, as young children, full time students, retired people, etc. who are not gainfully employed and receiving a pay check.

Thanks to things like savings, unemployment compensation, food stamps, income from a working spouse, etc. many people are able to scrape by without a job. 

These people were not necessarily lazy.  Rather, they simply accepted the reality that there were no jobs available and decided to hunker down and ride out the economic storm.  Also, depending upon the amount of resources (noted above) available for support, many were able to afford to patiently wait for the right type of job to come along - a job similar in pay and stature to their previous position.

The recession also forced employers to become more efficient and able to maintain or increase the output of their goods or services with the same or fewer resources.  However, there are limits to efficiency and at some point expanding output further to meet growing demand requires more resources including labor resources.

Our economy appears to have reached the point where employers are both more confident in the economy's continued growth and face the need to begin hiring again in order to keep pace with that growth.

The result is that hiring has started to increase and as the discouraged workers, who previously stopped looking for work, have begun seeing family members, friends and neighbors suddenly finding jobs, they too are deciding to begin looking again.  Once these previously discouraged workers begin actively looking for work they are considered unemployed once more.

With employers hiring rather than laying off workers the current swelling of the ranks of the unemployed is the result of discouraged workers re-entering the labor force rather than the result of more layoffs.

This is why the recent increase in unemployment numbers that were not accompanied by increases in layoffs is good news for both the economy and for those wanting to work.

To No One's Surprise Detroit Declares Bankruptcy

This past Thursday (July 18, 2013) the city of Detroit, to no one’s surprise, filed for bankruptcy.  With over $18 billion worth of debts the city appears to have had no choice.

However, some bond holders and the city’s two municipal pension funds appear to be prepared to fight to prevent Detroit’s request for bankruptcy being approved.  Ironically, it was the refusal of these bondholders and pension funds to agree to the city’s haircut proposal in which the bondholders and pension funds would have been required to accept cents on the dollar for their holdings, which, according to city officials, forced it to seek bankruptcy protection.

Detroit’s bankruptcy filing is the largest municipal bankruptcy filing in history.  However, not only is the bankruptcy no surprise but it also could have been avoided as warning signs of serious fiscal problems for the city have been popping up as the city has been declining during recent decades.

While there are many factors contributing to Detroit’s decline a major, if not the major factor, is modern liberal welfare state with its emphasis on ever expanding government and its tendency to undertake every project that presents itself regardless of cost.

A March2011 Wall Street Journal article on the 2010 Census figures for Detroit.  The paper reported that the city’s population had declined by 25% between 2000 and 2010.  The 2010 population came in at 713,777.

 

The article quoted Mayor Bing as saying:

If we could go out and identify another 40,000 people that were missed, and it brings us over the threshold of 750,000, that would make a difference from what we can get from the federal and state government…

The fact is that state and federal funding was probably at the root of many of Detroit’s problems. 

To the politicians and bureaucrats these federal and state funds were free money that they did not have to try to extract from the taxpayers.  Unfortunately, these federal and state funds were problems in two ways:

•           First such funds usually come with strings in that they are frequently in the form of seed money to be used to start programs which the city will have to fund in the future or were for programs which the city had to share the cost with the higher level of government.

• ·         Second, taxpaying residents tend to be less concerned with the cost of such programs since they aren’t paying for them directly with their local tax dollars.  Of course, the special interests that benefit directly from the programs love them.

If local government leaders were forced to rely on the tax paying residents of the city they would tend to be more frugal with their spending as increased spending would result in increased taxes.  

Increased taxes tend to get people upset and provide an incentive to either get out and vote the current leaders out or move and avoid the higher taxes.

For years, leaders in Detroit (and many other cities as well – Detroit is just the first big city to hit the wall of reality) have ignored costs and fiscal realities by choosing to rely on financial gimmicks to keep spending.

Borrowing, aid from the State of Michigan and the Federal government, raising taxes and deferring spending for like the maintenance of infrastructure and adequately funding pensions have all been used to enable leaders to charge ahead without regard for cost.  

With few  effective checks on their spending and, as managers lacking any equity interest in the city beyond their pensions which they are theoretically contractually entitled to receive, those who have been running Detroit have been able to ignore fiscal realities and continue business as usual.

The usual reaction of managers is to concentrate on today’s problems and ignore the long term effects of their current actions.  After all, if the predicted financial consequences aren’t expected to occur for another thirty or forty years, then they don’t have to worry as they will be retired and gone before any days of reckoning occur.

Well, the day of reckoning appears to have arrived and, just as in Greece and other failing social welfare states in Europe, many innocent victims are going to pay the price for the decades of fiscal irresponsibility of politicians and bureaucrats who have safely retired someplace else.

Uncoupling Food Stamps from Farm Bill

Last Thursday (July 11, 2013) the House of Representatives voted 216-208 to remove Food Stamp program funding from Farm Bill that the Senate had previously passed and sent to the House.

This is a historic first and, if Republicans (all of the 216 votes for the proposal were from Republicans while the 208 included 12 Republicans with the remainder being Democrats) can get both houses to pass the House version of the bill and the President to sign it this will be a major step in reigning in both programs.

While the odds of passage of the bill are slim, the debate itself will be a start at weakening these two pieces of bad progressive legislation.

Farm Price Supports Have a Long History

A revolution in agricultural production accompanied the Industrial Revolution.  Like the Industrial Revolution in which technology and innovation moved to make industrial workers more efficient, so too did the Agricultural Revolution make farming more efficient and less labor intensive.  

The result of these advances in agricultural output was to increase agricultural output while reducing the number of people needed in agriculture.  At the time of the American Revolution when we became an independent nation, over 90% of the population was directly involved in farming.  Today less than 10% of the population is directly involved in raising or growing food.

The transition from a predominantly rural agricultural society to an urban industrial society is never easy or painless and this transition in the United States was no exception.  

Many farmers sought to preserve their traditional life and occupation by turning to politics.  Beginning in the late 19th and early 20th centuries the Federal and state governments began enacting legislation aimed at helping to preserve the traditional family farm through various regulations and subsidy programs.

Bundled Corn Stalks on New York Farm following harvest in 1930s (photo copyright 1936, 2013 by Estate of Charles Nugent Sr.)

By the 1930s, Franklin Roosevelt's New Deal was very active in creating agricultural cartels, enacting tariffs and quotas on agricultural imports as well as taking more direct action toward reducing the supply of agricultural output by placing quotas on how much each farmer could produce and paying farmers to keep part of their cropland out of production.

Eventually the government began determining what price farmers needed from the sale of various produce in order to continue as profitable operations.  The government then entered the market and, using tax dollars, purchased and stored large amounts of produce before it reached the market.  This, of course, reduced the supply of that produce causing the market price to increase to what was deemed necessary to keep farmers in business.

During the Great Depression of the 1930s Franklin Roosevelt's New Deal Administration began  to experiment with limited distribution of wheat and other commodities to the unemployed and poor. The program was gradually expanded but, while helping the poor was a political selling point, the program was focused and driven by the political need to help maintain farm incomes.

In 1939 an experimental food stamp program was initiated in which unemployed and poor could purchase orange stamps from the government at face value and, in turn, receive blue stamps equal to half the value of orange stamps purchased.  The stamps could then be used to purchase food.

This program was popular with both retailers, who saw larger sales, and farmers.  The program ended in 1943.

Following World War II new food stamp programs were initiated and expanded over the years.  As before the primary goal was to raise farm incomes.

President Ronald Reagan, during his term in the 1980s tried to kill the food stamp program.  This was not only a period of prosperity and growth with low unemployment as a result of his domestic programs, but also a period of rising farm income due to increase world demand for U.S. agricultural output.

In addition to being a popular conservative Republican president, Reagan had a Republican majority in the Senate and strong support in the House.  He had a very good chance of eliminating the Food Stamp Program and probably would have except for the fact that the opposition to eliminating food stamps was led by the conservative Republican Senate Majority Leader, Senator Robert Dole from the farm state of Kansas.

Leading a coalition of farm state conservatives and urban liberals, Senator Dole was able to thwart President Reagan's attempt to eliminate the food stamp program.  

Dole realized that farmers alone no longer had the numbers to maintain the political clout that had given them their victories in the past.  

The family farm had long since been replaced by giant corporate agribusiness and so called hobby farms - farms owned by wealthy urban dwellers as rural retreats.  Though they didn't needed and couldn't justify the subsidies and other financial support from the Federal Government, these two groups were still the beneficiaries of millions of dollars of Federal aid.

Food stamps not only helped to keep prices of farm produce high but, more importantly, provided urban political support for the continuation of farm programs.  By keeping both food stamps and the various farm support programs in one Farm Bill the two programs had the support both needed to survive.  

As separate pieces of legislation the future of both farm subsidies and food stamps the odds of both of these programs continuing could be in doubt.

Why Wages Remain Low for Unskilled Work

My spring semester Introduction to MacroEconomics course has started.  Income distribution is covered in the first assigned chapter and a number of students had questions concerning the low wages of unskilled workers.

Wages are the price of labor and, like other prices, wages are determined by supply and demand.  While there is still demand for unskilled labor in the United States, supply has been shrinking and this should cause wages to increase.

One reason why wages for unskilled labor do not  increase very much is the fact that output per worker is low.  Thus, when wages begin to increase due to declining supply, companies tend to either invest in and begin substituting capital for labor or move production overseas to a place where such labor is cheap and plentiful.

However, another reason is that the role of the price mechanism is to attract resources to areas of scarcity.  So whenever the supply of something decreases its price increases and this increase in price (and the potential profit from meeting this shortfall) results in efforts to increase the supply.

In the case of unskilled labor an increase in wages results in an immediate increase in supply.  

Unskilled workers, due to lack of training and education, have nothing to offer employers beyond time and muscle.  The fact is that any able bodied individual can provide muscle power.  As to time, if the wage rate is high enough, the opportunity cost of such jobs is generally greater than using their time working in their skilled job.

Because the supply of unskilled labor is so elastic, noticeable increases in unskilled worker wages results in the supply increasing and driving the wages back down.

Skilled jobs require training which takes an investment of time and money.  This tends to set skilled workers apart and limits the supply to only those with the necessary skills.  

So, while an unskilled worker can never compete with a skilled worker for a skilled job without first making the necessary investment of time and money to acquire the skills, a skilled worker can easily compete for unskilled positions.  Skilled workers generally don’t compete for unskilled jobs, but if the wage is high enough, they can quickly move into that market, thereby increasing the supply of available workers.

B to B Bartering - A Tool for Small Businesses

Barter is an ancient form of exchange in which a person traded something he owned for something that someone else had and he wanted or needed.

A major problem with a barter system is the fact that one has to spend time searching for another person who both has what one wants and is willing to trade it for what you have to offer. 

The introduction of money removed this inefficiency as money is a universal good that everyone wants and thus be traded for anything anyone is willing to sell.

However, while the use of barter has for the most part been replaced by the use of money it still comes in handy on occasion.

In a previous article, Bartering Pepsi Cola for Vodka and Tanker Ships, I described how Pepsi Corporation got around the problem of repatriating profits from the production and sale of Pepsi Cola in the old Soviet Union by basically accepting vodka and tanker ships in exchange the cash it earned in the Soviet Union.

Currency controls and lack of foreign exchange in some countries make it difficult for foreign companies to do business in these nations.  In these cases, barter may be a solution.  In essence the company selling its product in the country accepts goods produced in the country in lieu of cash.  It then brings the bartered goods to its home nation where it sells the bartered goods for the cash it would have earned in dealing with the nation which either forbid the export of currency or lacked hard currency reserves to make the payment.

Small businesses, especially those starting out often lack the funds to obtain the supplies they need to produce their product.  Barter can be a solution in these cases as one small business can trade the goods or services it has to offer for goods or services it needs from other small businesses.  However, searching for such matches is inefficient.

Enter barter exchanges.  These are organizations that enable small businesses to trade their services without having to spend time searching for those  both offering the good or service the business needs and also wanting what the seeking business has to offer.

With a barter exchange, a business simply provides its good or service to a business seeking that good or service and receives a credit to its account with the exchange for the value of what it provided.  The selling business can then use the credit to purchase a good or service it needs from another participating member. 

For example a motel (most of which, despite bearing the name of a national or global chain are actually franchises and thus operate as a small local business) may need some computer work done.  Rather than searching for a small business providing tech services, the motel owners simple look in the local barter directory for a tech company and call to have the work done. 

The motel pays for the work by transferring barter credits (either by writing a check against its barter account or transferring them electronically) from its account with the exchange to the tech company's account.  The credits are equal to the dollar value of the services it received. 

What the tech company receives is not motel services but the dollar value of these services.  It can then use those credits to purchase some other good or service it needs such as tools or replacement parts for computers or services such as marketing, printing, meals at a restaurant, etc.  However, somewhere along the line some other member, who has never provided services to the motel may need a motel for a meeting or workshop will use its credits from other trades for the room at the motel.

Generally the barter exchange will charge small membership and exchange fees which have to be paid in cash but these are small compared to the value of services being exchanged.  Also, the dollar value (which is what is credited to a member's account when trades occur) is reported to the IRS for income tax purposes.

The best way to become involved with barter is to join an exchange or use a service like Craigslist.  Links for some large exchanges are listed below.

IMS Barter Exchange Network

Barter Exchange Network

Superbiz

Trouble Ahead for Social Security Recipients

As I described in a previous, December 11, 2012 post, a stock of productive capital is needed to generate the output and associated income needed to support people in retirement.

In other words, current workers need sufficient capital to enable them to produce enough goods and services to not only support themselves and their families but also current retirees.

The economy is like a pie in that the larger the pie, the more people it will feed and what retirees need is an economic pie that is large enough to feed them along with everyone else even though they are no longer working and producing.

The U.S. Social Security System has always been a risky bet at best, being basically a ponzi type system in which current investors (eg., workers) payments are used as payouts to existing retirees rather than being invested for their own retirement.

Like any ponzi type scheme, the system worked initially as the number of working people was more than enough to support existing retirees.

By having large families, the post war generation of workers ensured that the system would take care of them despite the fact that their life expectancy ended being considerably longer than that of the first generation of retirees under the system.

However, the post World War II Boomer Generation (of which I am a member) is not going to be so lucky.

First of all, this generation tended to postpone marriage and having children until later in life with the result that the generation immediately behind them is small.  As the boomers approached their forties, they did start having children and, on net, have a generation as large as their own behind them.

However, most of this generation was born late and is just now entering the workforce at the same time their parents are beginning to retire.

Second, the prolonged 2008 recession has resulted in double digit unemployment for the new generation just as they begin their careers.  Not only is this high unemployment among youth keeping any of them from working and paying Social Security taxes now, the late start in the labor force will impact their future wages which will further reduce money available for benefits.

Finally, the recession has also resulted in many members of the boomer generation losing their jobs and having to take Social Security early putting further pressure on the system.

Many people may be surprised to learn that Social Security is not a pension plan in the sense that benefits are paid out of earnings on the investments made with their tax payments.  Instead, the program has always been a simple transfer of income from current workers to retirees.

For the Social Security System to work as planned for the boomer generation, the U.S. will need a quick end to the current recession as well as strong economic growth.

Given what is happening in Greece and other places where Social Security type systems are breaking down, it is probably a good strategy for current recent retirees and those near retirement to have a back-up plan for possible cuts in the system.

I doubt that the system will disappear completely, especially for older retirees.  However, at a minimum the cost of living adjustment (which was not a part of the original law but an amendment added during the inflation of the late 1960s and early 70s) will be adjusted or eliminated completely.

There is also talk about means testing for benefits which means that benefits would be reduced or eliminated for those with other sources of income (pensions, IRAs, 401(k)s, part-time jobs or other household income.

As mentioned above, Social Security is not a pension plan but basically a welfare program designed to transfer income from those with wage incomes to those retired and not receiving a wage income.

While I doubt that the Social Security program will be eliminated completely (as retirees plus those who have been paying Social Security taxes for a number of years probably outnumber, in terms of votes, those who are just entering the labor force and have no real financial stake in the system, as either long time tax payers or recipients) but I will not be surprised if cuts and restrictions are enacted in the foreseeable future.

I elaborated these concerns about Social Security cuts and arguments supporting my concern (including links to Supreme Court cases stating that Social Security is not a pension system but a welfare plan which Congress can change at any time) in a HubPage article entitled The Social Security System's Achilles Heel. 

In a third and final post I will explain potential problems with employer administered defined benefit pension plans.

Hang On We're Heading Over the Fiscal Cliff

As usual, listening to the Washington Beltway crowd and their friends in the Mainstream Media one can easily conclude that the American economy is headed for a major crash as the economy careens over the January 1, 2013 Fiscal Cliff.

Despite Chicken Little scaremongering by the chattering classes, most people seem to be taking the cliff fairly calmly.  The stock market has declined a bit as it usually does when faced with uncertainty and potentially bad news but the nation has remained calm.

The so called Fiscal Cliff is basically a fiscal tightening or anti-stimulus that involves cuts in Federal spending and increases in taxes.  This is the opposite of a Keynesian obsession with throwing money at the economy.

Following the end of World War II we hit a major fiscal cliff in 1946 and beginning of 1947.  Then as now, Keynes and his followers were certain that going over the fiscal cliff would result in an economic crash and renewed economic depression. 

According to popular myth, World War II brought us out of the Depression.  Granted, everyone not drafted into the military had a job and factories, mines and farms were at full production throughout the war.  Government spending on materials needed to fight the war amounted to a huge economic stimulus which had the economy operating at maximum capacity.


While the statistics looked good, consumer production was minimal leaving workers with little on which to spend their earnings. Everyone had a job but only limited quantities of bare necessities were available for purchase by consumers.

It was in this immediate post war period that President Truman in a speech uttered words to the effect that war is hell but peace could be worse, alluding to the Keynesian belief that, without the continued stimulus of massive government spending, the economy would quickly collapse.

The dropping of the atomic bombs on Hiroshima (August 6, 1945) and Nagasaki (August 9, 1945) coupled with the Soviet Union joining the war against Japan on August 8, 1945 quickly brought the war to an end on August 15, 1945.

Not only did the war end much sooner than expected, but, under pressure from the people who were sick the austerity that marked the Depression and World War II, the U.S. government immediately began demobilizing the troops (which represented about 18% of the labor force), canceling contracts for military material and lifting wartime regulations and restrictions on consumer production.

 

In the1946 mid-term Congressional elections the Republicans retook the House of Representatives defeating 54 Democrats and 1 left wing Progressive Party member to obtain a majority of 246 seats against the Democrat's 188.  In the Senate the Republicans picked up eleven seats from the Democrats plus defeating the left leaning Progressive Republican Robert LaFollette Jr.in the primary and keeping the seat for a 51 to 45 Republican majority in the Senate.

While Democrats and believers in Keynesian economic theories fanned fears that there would be a major Depression in 1946, it never materialized as the private sector, freed of many of the New Deal regulations and controls quickly switched from war production to civilian production. 

Federal spending fell from $84 Billion in 1945 to less than $30 Billion in 1946.  The sharp drop in spending  enabled the Federal Government to both quickly begin paying down the war debt. The deep cuts in spending also resulted in a small Federal budget surplus in 1947.

Both the Depression of the 1930s and the current massive economic downturn under President Obama have resulted from the ill conceived stimulus spending and massive increase in unnecessary regulations. 

Going of the Fiscal Cliff may not be that bad and could result in the economy quickly turning around and recovering early in 2013.


Click the links below for more on the feared Depression of 1946:

Stimulus by Spending Cuts:  Lessons from 1946 - Cato Institute Policy Report

Cheer Up!  The Cliff Doesn't Look So Grim - Barrons December 31, 2012 issue 



 

Will Charities Survive if Congress Eliminates the Charitable Tax Deduction?

The Christmas Season is upon us and this is a traditional season of giving.

It is not just the gifts for family and friends, but also the giving of goods and money to charitable causes. 

Giving and sharing with those less fortunate makes the giver feel good.  Giving is also a part of most cultures and is reinforced by the dictates of most religions which require believers to give as a part of their religious duty.

In the United States people who give money or goods to charities have an additional, financial, incentive to give and that comes in the form of lower income taxes.  Both the Federal government and most states with an income tax allow people to deduct the value of charitable contributions from their gross income for tax purposes.

Now with concerns about the fiscal cliff and the Federal government's need for more revenue to pay for its out of control spending the search is on for ways to increase revenue.

While logically the solution should be to bring spending into alignment with revenues, politicians and bureaucrats tend to take spending as a given and look to tax increases to make up the difference.

Currently, two approaches are being explored for increasing tax revenues.  One approach is to simply raise tax rates despite the fact that, historically, that tends to result in less revenue.  A second approach calls for keeping current rates but restricting or eliminating deductions.

Deductions allow people to subtract certain types of expenses from their gross income thereby reducing their income for tax purposes.  Eliminating or restricting deductions would certainly result in more revenue for the government as people's ability to reduce their taxable income would be curtailed.

Of course, organizations and businesses, whose activities or products are affected by people's ability to reduce their tax bills by contributing to or buying from these organizations, are opposed to this solution - at least as far as their activities are concerned.

However, while it is clear that deductions for home mortgage interest and local real estate taxes provide a powerful incentive for people to buy rather than rent their living quarters, there is some question as to whether allowing people to deduct charitable contributions is an incentive for people to give to charity.

Proponents of eliminating the deduction cite statistics showing that charitable giving in the U.S. has remained a relatively constant 2% of Gross Domestic Product despite numerous changes in tax laws affecting such giving. 

Charitable giving also has a long history going back to ancient times - long before there was an income tax and the need for income tax deductions.  Long before governments became involved in building social safety nets, churches were involved in soliciting money from members to help those less fortunate.  Hospitals, orphanages, poor houses, etc. all began as services provided and paid for by churches.

In the Western world the idea of people having a duty to look out for those less fortunate has long been ingrained in the culture.  Sharing one's good fortune with those less fortunate is the thing to do for many people.

As one who not only contributes to charity but also keeps records of contributions for tax purposes and benefits from the deduction, I can honestly say that I would miss the deduction but, after reviewing my contributions haven't found any that I would stop donating to in the absence of the deduction.  Friends I have spoken with have said the same thing about continuing their contributions in the absence of a tax deduction.

That being said, eliminating the tax deduction will reduce contributions to many non-profits.  Part of this will result from people taking a closer look at an organization, its mission and how efficient it is with their money. 

In the absence of  a tax deduction, those donating to charities will be apt to take a closer look and how the charity uses their money.  Those charities in which administrative and/or fundraising consumes most of each dollar received will find contributions being redirected to other charities where the bulk of each dollar goes to helping those in need.

French Actor Gérard Depardieu's Reply to Prime Minister Ayrault

 Conservatives and reputable economists for years have argued and used income tax data to show that high marginal income tax rates result in lower tax revenue as people adjust their work to reduce income and the tax burden or avoid the tax by leaving the jurisdiction.

So it was no surprise when French actor Gérard Depardieu, best known as the star of the world-wide 1990 hit movie Green Card, quietly relocated his residence to the Belgium town of  Néchin, located a stone's throw from the French border, earlier this month.

It was obvious that Depardieu's move, like that of many other wealthy French people in recent weeks, was in reaction to Socialist French President François Hollande's plans to levy a 75% tax on incomes above 1 million euros.

Most of the others left France quietly as Depardieu tried to do.  However, unlike some of the others who ignored the insults from socialist government officials and France's far left press, Gérard Depardieu reacted publicly and with anger this past weekend following last Wednesday's (Dec 12) harsh and insulting comments about him by France's Socialist Prime Minister, Jean-Marc Ayrault.

Speaking on the television channel France 2, the Prime Minister referred to Depardieu's decision to leave France as being "rather pathetic."   Adding “He’s a great star, everyone loves him as an artist,... [but] to pay a tax is an act of solidarity, a patriotic act.”


The actor responded the Prime Minister's comments with a three page, open letter that was published in the Saturday (December 15th) edition of the French weekly Journal du Dimarche.

In his letter, which I translated using Google Translate, Depardieu starts by writing:

Miserable, you say "pathetic"? As it is pathetic.

I was born in 1948. I started working at the age of 14 years as a printer, then as a warehouseman then as dramatic artist. I always paid my taxes regardless of the rate under all governments.

He goes on to state that he has always paid his taxes, including his 2012 taxes and further notes that over his 45 year career he as paid over €145 million in taxes to the French government. 

In a telling line he states:  I am leaving because you consider that success, creativity, talent, in fact, the difference must be punished.  

And toward the end of the letter he adds, 

I am a free being, sir,...

These last two comments reveal what the true objectives of socialist leaders like French President Hollande and U.S. President Obama with their tax the rich policies.  The goal here is to discourage individual initiative and freedom and, instead replace it with dependency on government.

While not good for freedom loving individuals, this is the perfect prescription for big government politicians who want to ensure the continued growth of big government.