The Disappearance of Proposition 2

Here in Ohio the Democrats and media are “hammering” Gov. Kasich and the Republicans for the cuts in the Local Government Funds that they passed in 2011.  It’s becoming a major campaign issue as even many local Republican mayors and council members are asking for the cuts to be restored.  Will it have an impact on the 2014 elections?  It’s beginning to look like it will.  And all the while, Republicans hardly offer a defense.

So let’s look back at 2011.  Ohio was facing an $8 billion dollar deficit.  Ohio towns and cities were finding themselves saddled with huge employee benefit expenses.  And cities and towns were on their own until the hole they were in would qualify under the “Emergency” definition.  It was only at that point that the State Auditor’s office could step in to help.

So the legislation took action at the behest of Gov. Kasich.  They addressed the issues in three ways:

1.      They cut the Local Government Fund payments to towns and cities (helped reduce the states deficit)

2.      They passed legislation (Senate Bill 5) giving cities and towns more control over their employee’s benefits costs (designed to help them deal with the cuts in funding)

3.      They added monitoring for “fiscal caution” status to the State Auditor’s office (giving it greater ability to help towns and cities who were having issues)

This looked like a good set of solutions to the issues that both were facing.  But that’s not where things stopped.

In 2012 Ohio’s public unions worked with Democrats in an attempt to repeal Senate Bill 5. They got a proposition on the ballot and conducted a campaign to convince voters to vote in favor of repealing Senate Bill 5.  Their main message was that Police and Fire staffing levels would be cut if Senate Bill 5 wasn’t repealed.  Voters took the bait and Proposition 2 was passed by a large majority.

But that left Ohio’s towns and cities with cuts to the Local Government Funds, but without the added flexibility to deal with the lost revenue that came with Senate Bill 5.  As a result, cities and towns have had to cut services, including in some cases Police and Fire protection.

So now the very same individuals who pushed for repeal of Senate Bill 5 are blaming the Republicans for the impact that their proposition caused.  And cities and towns are left with growing employee benefit costs that are well out of line with what the private sector would pay.

Unfortunately Republicans are so scared of the term “Senate Bill 5” that they refuse to tell citizens the truth.  It looks like November elections in Ohio will be much more interesting than they need to be. 

This may just be a case of Ohio Republicans snatching defeat from the jaws of victory!

 

The World’s Biggest Ponzi Scheme

Ponzi Scheme: “A Ponzi scheme is a fraudulent investment operation where the operator, an individual or organization, pays returns to its investors from new capital paid to the operators by new investors, rather than from profit earned by the operator.”  Source: Wikipedia

http://en.wikipedia.org/wiki/Ponzi_scheme

Liberals are upset if you call Social Security a “ponzi scheme”.  But what do you call a program where individuals are “encouraged” to contribute and the returns aren’t based on investment principles and market returns.  If you want to see an extreme historic example of that in action check out Ida May Fuller.  She was the first official recipient of Social Security (Old Age) benefits.

http://en.wikipedia.org/wiki/Ida_May_Fuller

According to the article, Ida contributed $24.75 into Social Security over 3 years prior to retiring.  She received benefits from 1939 until her death in 1975 (age 100).  Over that period of time she received $22,888.92 in benefits. 

 The Social Security Act was passed into law in 1935 at a time when there were 322 Democrats and 103 Republicans in the House of Representatives and 69 Democrats and 25 Republicans in the Senate.  From 1935 until 1982 Democrats controlled the House of Representatives in all but one term (average majority of 83 seats) and the Senate in all but two terms (average majority of 21 seats).  So the fate and future of the Social Security program was firmly in the hands of the Democrats.

Democrats have proudly proclaimed that Social Security was a “Pay As You Go” program.  That meant that current workers contributions were used to pay current retirees.  This seemed to work fine until 1982.  That year the Social Security Trust Fund balance dropped to only $12.5 billion or $112 for each individual contributing to the program that year.  Many of those workers had been contributing for their entire careers, but the funds weren’t there.  They had been paid out to retirees.  The trust fund had paid out 99% of what had been contributed since its inception, leaving nothing to pay the worker’s future benefits with. 

At that point Congress did two things to “save” Social Security.  They raised the percentage of earnings being “contributed” into the trust fund and the maximum income level that withholdings came out of.  What started out in 1935 as a very minor “contribution” to help senior citizens became a major drain on the middle class’s income to support the Social Security and Medicare programs.  Individuals not only had to pay for the benefits of retirees, but contribute what was to be for their own benefits.

Democrats have consistently rejected any attempts to actually reform the program and put it on sound footing.  In recent years they’ve resorted to lying about the program’s impact on the Federal Budget.  While they claim that Social Security isn’t in the Budget, it appears in each of the WH OMB’s budget projections.  And while they tell people that it doesn’t add to the deficit, the 2015 WH OMB Budget projections show that Social Security Outlays ($11.7 trillion) will exceed Social Security Payroll Tax Receipts ($9.7 trillion) by $2 trillion over the next ten years.

There is one big difference between Social Security and a normal “ponzi schemes”.  Since Social Security was established by Congress, it’s “legal”.  And since the Social Security rules were set up by Congress, Congress can change them at any point in time.  And based on the current discussions on how to “fix” the Social Security program, for many Americans their contributions to a retirement plan is about to be turned into nothing more than a different name for a Federal Income Tax.

But Democrats still insist Social Security is the most successful program Congress has ever established.  The rest of us know it’s been nothing but a huge “ponzi scheme”.

http://en.wikipedia.org/wiki/Social_Security_(United_States)

Patriot's Day

I sent the following email to "Washington".  I think its self explanatory:

 

 

Dear members of the House and Senate and staff members,

 

Patriot's Day.

 

In Massachusetts it's still a major holiday.  It doesn't celebrate the Boston Marathon, though the marathon is run on Patriot's Day each year.

 

 

Does Patriot's Day mean anything to you?

 

"On the 18th of April in seventy-five,

Hardly a man is now alive,

Who remembers that famous day of the year,

The midnight ride of ..."

 

Patriot's Day celebrates the events that truly started the American Revolution.  It started with the British decision to march to Concord to confiscate the colonist's powder and arms.  Two lights were seen from a church steeple.  Seeing them, Paul Revere and others road that night to spread the alarm.  Patriots gathered on the common in Lexington, MA ready to risk their lives confronting the British regulars.  The fight broke out.  Then the British marched to Concord and were confronted at an old bridge.  They failed to go further and had a long bloody march back to Boston.

 

That's what Patriot's Day is in remembrance of.

 

Many of us in the "tea party" are just common folk who honor the memory of those first patriots by attempting to bring some sense of sanity back to our Federal Government and Nation.

 

$18 billion in debt (projected for the end of calendar year 2014) and trillion dollar deficits (when you factor in the known increase in interest expense that will occur when interest rates return to normal) are surely signs that some sanity is needed.  So as they answered the call on the original patriot's day, some of us are attempting to answer the call today.

 

Yet we are despised, ridiculed and targeted?  For what?  Asking our leaders to use common sense and to do what is right.

 

We're attempting to answer the call, will you?

 

They Answered the Call:     http://www.youtube.com/watch?v=VlvMO7qNBuY

 

Here’s to you Mr. Jefferson:  http://www.youtube.com/watch?v=CLAg8a0vCZQ&feature=related

 

Alan Davis

The Chicken or the Egg

President Obama and the Democrats are proposing a 39% increase in the minimum wage from $7.25 per hour to $10.10 per hour.  They don’t explain how they came up with that number, but they think it is only fair.  They justify the increase by claiming it’s required to keep up with inflation. 

So it brings up the interesting question “Which comes first?  The chicken or the egg?”  But in this case it’s slightly different.  “Which comes first?  Inflation or an increase in the minimum wage?”

The United States Department of Labor website has information on both topics.  They keep track of changes in the “Consumer Price Index’ (inflation) and on the minimum wage. 

http://www.dol.gov/whd/minwage/chart.htm

http://www.bls.gov/data/inflation_calculator.htm

The Federal minimum wage was instituted in 1938 at $0.25.  Congress has acted multiple times since then to increase it to its current level of $7.25 (Jul, 2009).  Using the government’s inflation calculator we see that $0.25 in 1938 would be the equivalent of $4.15 stated in 2014 dollars.  So by that measure the increase in the minimum wage has outpaced the rate of inflation over the past 75 years.  In 1991 the minimum wage was $4.25 which would be the equivalent of $7.30 per hour in current dollars.  So we find that even on a shorter time horizon the minimum wage has kept up with inflation.

But as the minimum wage has increased, what else has increased?  A trip back in time will help demonstrate it.  I can remember back to 1956 when a first class stamp was a pink Abraham Lincoln and cost $0.04.  January 2014 the first class postage rate increased to $0.49.  During that same period the minimum wage has increased from $1.00 to $7.25.  Another example is the price of a gallon of gas.  In 1972 I could buy a gallon of gas for $0.49 at my neighborhood gas station.  Now a gallon of gas costs approximately $3.55.  During that same period of time the minimum wage has gone from $1.60 per hour to $7.25 per hour.

Since salaries and benefits are often the largest component of a business’s cost, it’s easy to see that the increase in the minimum wage has been a major contributor to the increase in prices.  The increase in the cost of benefits (mainly driven by government policies) has also driven up employers’ costs resulting in even more of an rise in prices.

President Obama and the Democrats are proposing that the minimum wage be increased by 39% over a three year period.  So if wages make up a significant portion of the cost of products, doesn’t that mean that we will see much higher prices as a result of the increased minimum wage?  It seems quite logical that we would. 

The late 1970’s to early 1980’s was a period of some of the highest inflation our country has faced in recent years.  During that time the minimum wage increased from $1.40 per hour in 1967 to $3.35 per hour in 1981.  That was an increase of $1.95 per hour or nearly 140% in just 14 years.  Is it any wonder why prices (inflation) increased dramatically too?  So we find that a rising minimum wage drives up costs which in turn drives up prices (inflation) requiring an increase in the minimum wage.  It can be a never ending cycle. 

But we also find is the price of some of the most important parts of our lives (i.e. housing and taxes among many others) can vary dramatically in different states.  We find the highest prices for those items on the east and west coasts and in large cities.  A minimum wage of $7.25 buys much less in those parts of our country than in rural and Midwestern/Southern states.  So does it make sense to have the same minimum wage in those less costly areas of our country as in the high cost cities and coast states?  If not, that would call for regional or area specific minimum wages rather than a national minimum wage.

The problem with regional minimum wages is, as high cost areas of the country raise their minimum wages, they become even more costly.  And at some point they become unattractive to businesses and individuals.  Just look at cities like Detroit and states like California if you want good examples.

So in the meantime President Obama and the Democrats want to raise the minimum wage 39% in just three years.  We already have experience as to what that will cause.  That’s a rapid rise in prices or inflation!  Yet the WH OMB is projecting that inflation won’t increase more than 2.3% a year between now and 2024?  That hardly reflects the reality of the policy they propose.

 

Social Security: The Latest from Senate Democrats

 

http://www.dailykos.com/story/2014/02/14/1277624/-Bernie-Sanders-Leads-15-Other-Senators-in-Letter-Urging-Obama-Not-to-Cut-SS-Medicare-or-Medicaid

The Daily KOS carried a story about the letter 15 Senate Democrats delivered to President Obama.  In it they ask the President not to include cost cutting to the Social Security program as part of his budget proposal.  They claimed:

"Social Security has not contributed one penny to the deficit. Social Security has a surplus of more than $2.7 trillion and can pay every single benefit owed to every eligible American for the next 19 years."

But they failed to mention that the Social Security Trustees have been warning Congress since at least 2005 that they need to make timely reforms to the program.  What reforms do these Senators propose in their letter?  None.

So while it may be true that Social Security hasn't contributed to the deficit, it's not true that it won't be.  The WH OMB 2014 Budget showed Social Security Outlays exceeding Social Security Payroll Tax Receipts by $1.8 trillion dollars over the next ten years.  And while the trustee report showed that Social Security benefits could be paid at current value until 2033, it also said that after that there would need to be a substantial reduction in benefits.  Substantial as in 23%.

Each year Congress delays in making necessary reforms to Social Security the consequences are that the required reforms are larger than if made before.

So why do the 15 Senators want us to wait?  I don't think they will be changing their minds any time soon.  So it appears that the best way to make sure that Social Security is saved is to make sure as many as possible of the 15 Senators are defeated in this year's elections. 

The 15 Democrats who co-signed the letter are the following:
Tammy Baldwin (D-WI)
Mark Begich (D-AK)
Barbara Boxer (D-CA)
Richard Blumenthal (D-CT)
Al Franken (D-MN)
Kirsten Gillibrand
Mazie Hirono (D-HI)
Tom Harkin (D-IA)
Patrick Leahy (D-VT)
Edward Markey (D-MA)
Jeff Merkley (D-OR)
Jack Reed (D-RI)
Brian Schaz (D-HI)
Elizabeth Warren (D-MA)
Sheldon Whitehouse (D-RI)

Gross Negligence

The Case Against Washington’s Handling of the Federal Budget

by Alan R. Davis

 

(Written in 01/31/2012, still valid today.) 

Those in Washington aren’t dealing with the budget seriously.  In fact, some in DC are doing their best to convince the country the problem isn’t nearly as bad as it really is.  My concerns fall into five main areas:

-          Washington has invented terms to help ignore the extent of the crisis

      -          The budget includes unrealistic assumptions
      -          There is an oncoming tidal wave of Interest Outlays
      -         The budget is built on legislation that won’t stand
      -         The extent to which individuals depend on the Federal Government

“Invented” Terms:

One of the most frustrating things for me is the fact that rather than face the crisis, Washington has come up with new terms to make the budget crisis look less severe.  Those terms are:

Primary Deficit: The deficit excluding Net Interest Outlays. It allows Washington to claim that they have balanced the budget when they have made little progress in doing so.

Publicly Held Debt:  While this isn’t a new term, using it as the bench mark as opposed to Total Debt is new.  This allows Washington to ignore the fact that it has used intra-government debt (borrowing from the trust funds) as a major source of funds for the general fund.  We’ve seen Non-Public debt grow from ~10% to~ 35% of total debt since WWII.  Comparisons to Post WWII are erroneous for two reasons.  First, we started WWII with relatively low levels of debt compared to the size of our economy.  Second, our current debt was largely built up during times of relative peace, rather than during a major worldwide conflict.  You won’t even find Total Debt in last year’s budget analyses put out by the CBO!

Unrealistic Assumptions:

I first looked at the WH OMB (summary tables) in 2009 after the 2010 budget proposal was released. I was interested in seeing how they calculated Interest outlays.  (Tracking interest rate trends is a hobby of mine.)  I started with the Economic assumptions and was surprised.  The values for each of the five key assumptions appeared to be overly optimistic making the projections meaningless.  I’ve been following the budget ever since.  This year I concentrated on the inflation assumption values.  I found that both the WH OMB and CBO are using assumptions that can’t be supported by historic trending or basic economic principles.  In the original budget projections the WH OMB projected 2.0% and 2.1% as the average and maximum inflation assumption values.

Understating the values for the inflation assumptions has two significant impacts:

Compounding:  Low values compound much slower over ten years than higher values do.  That results in lower “out year” outlays and deficits.

Interest Rates:  Understating inflation allows them to use lower values for interest rates as there is a correlation between the two over the long run.  Each 1% understatement of the “effective rate” (Net Interest Outlays divided by average debt) understates Net Interest Outlays by $200 billion in a year when the National Debt (Total) is $20 trillion.  The original budget included 7 years where debt exceeded $20 trillion.

Interest Rate “Tidal Wave”:

In the early 1990’s we became concerned over the size of the debt as we saw Net Interest Outlays increase dramatically.  This occurred as interest rates decreased to “normal” levels.

90's Average:  $216 billion Net Interest on $4.6 trillion debt (Fed Fund Rate of 5.2%)

In 2010 we incurred less Net Interest Outlays on nearly three times the level of debt. 

2010:               $197 billion Net Interest on $13.4 trillion debt (Fed Fund Rate of 0.18%)

The Treasury Dept. has been utilizing a substantial amount of short term maturity instruments to finance our debt. Even long term maturity instruments have been issued at unsustainably low rates.  Once the FRB increases rates (they have indicated that will occur in 2014) it will dramatically increase the interest we’ll be paying on our Debt.  It means we have a built in “tripling” of Net Interest Outlays at current debt levels that is not being properly considered by Washington.

Legislative Assumptions:

Budget projections are built on current legislation.  The best example of how this distorts the projections is the Medicare “Doctor Fix”.  It is addressed for one year each year so as to allow the cost cutting impact of the law to be used in projections.  But the intention is to not allow the dramatic cut to physician payments to ever take effect.  There are several other items like this that allow the projections to reflect much smaller deficits than would otherwise be shown.

“Individuals” & the Federal Budget:

I ran across a historic schedule on the WH OMB website that broke out Outlays in much different categories than I had previously seen.  That schedule showed the following for 2010 Outlays:

National Defense:                      20.0%

            Net Interest:                                 5.7%
            Payments for Individuals:          66.5%
                          Subtotal                         92.2%
             Other Grants:                               5.8%
             All Other:                                     2.0%
                          Total                            100.0%           

With so much of the Federal Budget going to individuals (directly or indirectly through state and local governments) any serious cuts to the Federal Budget will have serious consequences for towns like Chillicothe. Add in the fact that soon we will see a dramatic increase in Net Interest Outlays and the size of required cuts to balance the budget are staggering!  Yet this isn’t being properly discussed in Washington.

Unless the real extent of our Nation’s financial crisis is brought forward for public debate, we won’t see it properly addressed and financial collapse becomes more likely.  Addressing it appropriately will result in real hardship for many.  But unfortunately hardship comes either way.

 

“There are two ways to conquer and enslave a nation.

One is by sword.  The other is by debt.”

John Adams 1826

“The battle, sir, is not to the strong alone; it is to the vigilant, the active, the brave.”

“Eventually Increasing the Risk of a Fiscal Crisis”

By Alan R. Davis

“Such large and growing federal debt could have serious negative consequences, including restraining economic growth in the long term, giving policymakers less flexibility to respond to unexpected challenges, and eventually increasing the risk of a fiscal crisis.”  CBO Director Douglas Elmendorf to Senate Budget Committee 2/11/2014

See more at: http://cnsnews.com/news/article/susan-jones/cbo-director-large-and-growing-federal-debt-could-produce-fiscal-crisis#sthash.JVxpfDmA.dpuf

On Tuesday February 11, 2014 Director Elmendorf of the Congressional Budget Office warned the Senate that the Nation’s increasing federal debt “could have serious negative consequences” including “…increasing the risk of a fiscal crisis”.  His choice of words was intriguing. It’s a lot like watching someone’s house on fire and saying that it “could have the serious negative consequence of increasing the risk of having to find alternative housing”.  If someone’s house catches fire they WILL have to find alterative housing, at least for awhile.  And having already run deficits for all but four years since 1969 we already have a fiscal crisis.

Washington is full of tricks to keep from recognizing the size and immediacy of the crisis.  Just a few of them are:

-          Using unrealistically low values for the inflation and interest rate assumptions in their projections.  Both the CBO and WH OMB have made a habit of using artificially low assumption values.  The CBO is projecting inflation won’t exceed 2.4% and the WH OMB used 2.2% in their 2014 Budget.  We’ve only had nine years of inflation that low or lower since 1965.  Each of those were years of recession or extremely low economic growth.  Using low inflation values allows them to use low interest rate values since they are in large part based on inflation.

-          Using current law even when Congress makes a habit of ensuring that some of current laws’ provisions don’t get implemented.  There's no better example than the required reduction in physician Medicare payments.  Each year Congress passes the “doctor fix” which applies to only one year leaving the required reduction in the remaining nine years of projections.  I believe that’s gone on for 15  years and the current value for the reduction is 24%.

-          Using newly defined ratios.  Look back prior to the WH OMB’s 2012 Budget and see if you can find any reference to “Primary Deficit”.  I didn’t.  But now they calculate the deficit without Net Interest Outlays because Net Interest Outlays are about to explode.  They also use Public Debt to compare to GDP rather than using Gross Debt because we've already exceeded 100% of GDP when Gross Debt is used.  100% is the "point of no return."

-          We all know how Washington also used the Government Trust Funds as a “free” source of funds.  There's no better example than the Social Security Trust Funds.  Individuals were required to contribute into the trust funds so there would adequate funds to pay future benefits.  But the money has already been borrowed to offset General Fund Deficits.

The CBO’s baseline projection report starts by showing a graph of budget results from 1974 through the 2023 projections.  There are only four out of those forty one years in which we've had surpluses.  For a Nation that had more than twice as many surpluses than deficits in its first 140 years of existence that’s a terrible record.  We once believed we should run surpluses in times of peace and prosperity so we could run deficits in times of war and economic difficulty.  Now we accept deficits just because we've happened to run them in the past.  That’s a sure sign of a significant fiscal crisis.