The S&P Downgrade of U.S. Debt is Over-hyped

The news media has been making a big deal about the S&P downgrade:

1. The republican candidates are trying to take advantage of it.

2. Yesterday's stock market decline was blamed on the downgrade.

3. CNN had a psychologist on about how people's esteem would be affected.

4. Someone on TV said in 20 years, we will ask "where were you when the U.S. was downgraded?"

The truth, as Paul Krugman has stated on his blog, is that a tarnished ratings firm was quick to downgrade the U.S. - possibly for political reasons, since they botched the numbers.

The downgrade isn't justified because AAA rated countries like France have more debt per GDP and, because borrowing costs are so low, the U.S, could take on another $1 trillion of debt and future debt servicing cost growth would be negligible (0.07% GDP).

On Monday, the market rejected the downgrade because treasury bonds went up. No matter what S&P says, the world knows that U.S. treasuries are the safest and most liquid investment.

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Unions Alone Aren't To Blame For The Fiscal Mess of Our Cities and States

I read an article yesterday about Central Falls, Rhode Island filing for bankruptcy.

A lot of the comments were blaming the unions, and how they have unsustainable benefits and pensions.

I made a comment that the issue can't be entirely blamed on the unions:

To be fair, unions aren't the sole cause of the fiscal problems happening in our cities and states. In many cases, the contracts signed decades ago would have been affordable if the politicians had made the required contributions when they were due, so the amounts would have compounded. (For investment success, "time in the markets" is more important than "timing the markets".)

Instead, they skipped payments and used the money for other entitlements to buy votes. Then, they turned over management of the funds to the investment managers with the best political connections, and let them take investment risks to make up for the missing or late contributions. Instead, this resulted in investment losses and under-performing the markets. Anyone remember the rare coin investing fiasco from Ohio?

Here in Illinois, the lawmakers not only didn't make required contributions, but they kept changing the pension formulas - against the advice of their own actuaries. Now we have a big unfunded pension liability.

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San Francisco Bridge and Outsourcing: Is 6% Worth it?

California is replacing the San Francisco - Oakland Bay Bridge. It sounds like the type of large public works project that will provide needed jobs to Americans.

However, it is keeping hundreds of Chinese workers employed. To save money, California outsourced the construction of the bridge to China. The bridge pieces will be shipped to the U.S., and assembled by Americans.

California is risking criticism in three ways:

1. They outsourced jobs.

2. If there are any problems - especially fatal accidents - they will be accused of overlooking China's reputation for poor quality and cutting corners. Not to mention the possibility of damage from overseas shipping and the need to meet strong earthquake standards.

3. According to this New York Times article, in order to not buy American, they gave up federal funds.

Were these risks worth taking? Well, according to this article, the project will cost $7.2 billion, and they expect to save $400 million from having the Chinese do so much work.

That means that the total cost to get the bridge built completely by Americans would have cost $7.6 billion. Thus, California saved about 5.5%

To me, saving only about 6% is not enough compensation for risking quality, safety, earthquake standards, and not employing Americans.

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Who Is To Blame For The United State's High Level of National Debt?

There is plenty of blame to go around for our present debt situation:

1. Under Bush, we cut taxes and started 2 wars - and Obama continued this while
adding another 1/2 war (air strikes on Libya). During WWII, the folks at home made sacrifices, such as rationing, etc. that made them feel connected to the war effort. While we no longer need rationing, we should have ended the tax breaks after 911 - when we went to war.

2. The bottom line cause of the financial crisis was Greenspan pumping too much money trying to lessen the effects of the dot com crash. Booms and busts are a natural cycle in capitalism, and we keep trying to use the government to smooth out the down cycles.

3. Finally, we have had historically low interest rates for the last few years. While responsible homeowners locked in low, fixed rate 30 year mortgages, the government is still mostly stuck with short term debt. We should have been issuing less short term bonds and lots of 20, 30, and even 50 year bonds.

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"22,000 Tears" Visa Blunder - Should the U.S. Give Visas Through A Diversity Lottery?

Today, Yahoo had an article about how this year's diversity lottery experienced a computer glitch and awarded 90% of the first 22,000 (out of 50,000 openings) to people who applied in the first couple of days.

These people were elated that they won, and then crushed when the State Department said they will re-run the lottery. Immigration lawyers say they should honor these 22,000 results and randomly award the remaining openings from people who applied later.

I think that, since the government messed up, they should let these 22,000 people have their visas, remove their names from the pool, and re-run the lottery fairly (picking a new 50,000 from the left over pool).

But, like usual, I find the comments on Yahoo to be just as interesting as the articles. In this case, a lot of people think the whole idea of a random lottery to be dumb.

I actually like it and posted my own comment defending it:

Immigration to the United States has been a big factor in us being the world's only super power. In fact, there are some who argue that, going forward, our biggest competitive advantage against China and India is that we welcome immigrants and new ideas.

I think the Visa lottery is a good idea because:

1. It involves a relatively small amount of visas compared to those given out by other programs, that target skilled and/or wealthy immigrants.

2. The visas from those programs end up going to immigrants from just a handful of countries.

In other word, you can't centrally plan creativity and innovation. I think we are richer if we give artists, poets, dreamers, etc. from other countries a shot at 5% of the visas, rather than letting them all go to high tech companies bringing in computer workers and engineers from India, China, etc.

From my comment, please don't get the idea that I don't like computer consultants from India. My point is that they are well-represented. But, it is in the best interests of the U.S. to distribute a small percentage of visas randomly to people from countries that are under-represented from other visa programs, to diversify the pool.

This way, we increase our chances for allowing in someone who ends up contributing to our society, but would never have had a chance competing against skilled workers.

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Gadhafi's Surprising.ly Internet Asset

In an ironic twist, it turns out that, whenever NATO, the U.S. Air Force, celebrities like Charlie Sheen, or just regular people, have been sending out links to their Twitter followers, they have been using a Libyan asset.

Many of the most popular free services for condensing links, such as bit.ly or owl.ly, are using domains owned by Libya.

Here is a link to the Wall Street Journal article about it:

http://finance.yahoo.com/banking-budgeting/article/112508/gadhafi-ly-web-suffix-libya-wsj

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Why The City of Chicago Pension Funds Are In Trouble

Last week, the Chicago Tribune had a two-part investigation into the city of Chicago's pension plans. The article is really disheartening because it shows how we have let incompetent individuals run things.

The whole country has probably heard that the state of Illinois is broke, and has unfunded pension liabilities. But this is about the city of Chicago itself. It has unfunded pension liabilities of either $20 billion or $40 billion (the politicians say $20 billion, but that is assuming an 8% average annual return, while the average return this decade of the pension funds has been around 4%).

The problem is that the politicians did not make required contributions to the pension funds - while also raising the employee's salaries and benefits. The politicians took the short-term, easy way out. They wanted to keep labor happy NOW, and who cares about decades from now, when they might be out of office?

The Tribune article looked at the example of the Chicago Teachers pension plan. Back in 1995, the plan was founded 100%. Then, in 1995, Mayor Daley took over control of the Chicago public school system, and he lobbied Springfield to allow property tax income (that went directly into the pension funds) to go to the school system's general fund.

In 1996, his administration went one better and got the law changed so that they didn't have to make a payment as long as the retirement fund was at least 90% funded. Because of the bull market, they didn't have to pay in for 10 years.

In 2006, they had to pay because the fund was below 90%. They contributed a little, then got the law changed again to let them make reduced payments for the next 3 years. Their excuse? Even though they didn't need to pay into the pension plan for 10 years, and thus got to keep an extra $1.5 billion, the school system spent it and was running a deficit.

Now, the fund is only about 73% funded and, by 2033, they will need to contribute $1 billion a year.

Some of the other pensions are even more seriously underfunded. Municipal workers are at 47%, police at 37%, and the fire fighter's pension is only funded for 30%.

Does this mean that the workers might lose their pension benefits? Maybe - but the Illinois state constitution was amended in 1970 to require that pensions to unionized government workers have to paid. So, slashing benefits may be unconstitutional. So, tax payers may be on the hook.

By the way, I don't think the workers are to blame. The main problem is the financial irresponsibility of elected officials.

Why do we have such incompetence?

I think the problem is that life is really hectic these days - people work long hours, then sit, burned-out, in front of their televisions at night.

Then, when it comes to voting, they either don't, or else just vote for the incumbents.

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Tax Credits For House Sales Made The Markets More Volatile

Today, there was a report that home sales dropped 33% after the tax credits ran out.

This article on the tax credit's effects on home sales argues that the credits did not create more sales - it just simply affected their timing, thus causing more volatility in the market place.

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David Einhorn Thinks The U.S. Debt Will Be Our Problem - Not Grand Kids

It's become a cliche that our government debt will be a legacy that future generations have to repay.

However, David Einhorn, of Greenlight Capital, made a speech saying that our future generations can rest easy.  The explosion in government spending during the last few years means that WE will end up paying for it.

In his insightful speech, Einhorn lays out how last year's "stimulus" wasn't really a stimulus because, rather than being a one-shot boost to the economy, it permanently increased government base-line spending and created / preserved government jobs.

The speech details how official government statistics are manipulated and understate inflation. 

The Fed has us on a cycle -  going from one bubble to bailout to next bubble.

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Haunting Images of the BP Oil Spill

These photographs give a hint of the magnitude of this disaster.

So what is the solution?

I value simplicity and minimalism in government, but that is different than being a strict libertarian.

Mainstream democrats and republicans (i.e. today's congress) will hold hearings and purpose new legislation. The problem is it probably won't simplify the existing law by weeding out the ineffective rules.

We already have multiple government agencies involved in offshore drilling (EPA, U.S. Minerals Management Service, and the Department of the Interior) - yet we still had this disaster. They probably have too many laws - most of them covering trivial issues.

If you have complex laws and bureaucracy, it is too easy to "miss the forest from the trees" (enforcing nitpicky stuff but missing bigger issues.) There also might be loopholes inserted by lobbyists.

The libertarian view, of course, would be that BP should never be overseen in the first place. They are taking a publicity hit for this disaster, and it should be left to the markets to punish them.

But there is a third way - the simple, elegant way. We should go for quality over quantity:

1. Eliminate loopholes and trivial rules. Enforce a few, basic practices to prevent a repeat of this disaster.

2. Let oil companies be aware that future incidents will result in massive fines. By "massive", I mean a percentage of quarterly revenue - so if a company the size of BP is found to have cut corners, they will pay billions of dollars.

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Tax Carnival #66

Check out the 66th Tax Carnival - it has a good collection of tax-related blog posts.

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My Simple Three-Step Solution For Healthcare in the United States

Instead of the bloated, complex healthcare plan they're debating in Congress, I have a cheap, simple, and elegant three-part solution:

1. A universal catastrophic healthcare insurance plan - basically, we extend Medicare to everyone under 65 with a large deductible - i.e. $15k to $20k.

It will be no-frills: no payments to providers, etc. On April 15, anyone who went over the deductible in the previous year would file a claim, submit all bills as proof (whether paid by them or insurance), and receive a check.

Importantly, the deductible will automatically be adjusted each year by the rate of medical inflation. It can only be overridden by 60 votes in the Senate. That way the medical establishment can't raise prices and make everyone qualify for reimbursement.

People can cover the amount before deductible through health savings accounts and private insurance.

The idea is that the deductible should be high enough that it won't cost the government much, but it will reduce insurance rates, and make insurance more widely available - because insurance companies know their payments are capped.


2. An insurance company that is allowed to sell insurance in any one state can automatically sell insurance in any other state. This, along with the high deductible government policy, will make insurance affordable and available to more people, including those with existing conditions - without any government micro managing and mandates.


3. Require drug companies to set 4 price levels on each drug. The Social Security Administration knows how much money you made in the previous year so, accordingly, they will mail you a card with your price level on it. Alternatively, pharmacies can have access to an online database which reveals every family's price level (but not actual income). Anyone not showing a card and/or refusing to let the pharmacy look up their level will be charged the most expensive level.

The government will not have authority to micro manage (i.e. set prices or mandate the difference between levels). Market forces will do that. If one company, for example, set all 4 levels the same, another drug company could lower their level 1 price and raise their level 4 price to compensate, and steal away the lower income customers.

This is an elegant way to subsidize the poor's access to drugs, directly with 100% efficiency - without the money flowing into Washington first and getting skimmed off by lobbyists.

I know that Libertarians won't like steps 1 and 3 - but the fact is that modern society wants subsidized care. That's why I'm a "Simplicist" instead of Libertarian. If the majority want the government to do more than Libertarians want, that is reality - but, then we need to make "small and simple" the core values.

If we make simplicity priority 1, and use a little creativity, I believe we can meet society's needs with a government much smaller and less intrusive than it is today.

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Bad Sign For Civilization?

Mexico is getting shut down by a swine flu pandemic and Pakistan is starting to fall to the Taliban...

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What happens in Vegas...

...doesn't stay sealed in divorce court, unfortunately for the Governor of Nevada.

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Troops to the Mexican Border?

They should just legalize drugs and get rid of this second Prohibition...   Looks like Mexico is becoming unstable like Iraq or Afghanistan , with all the drug wars and killing on the border.   The drug cartels are now crossing over and killing people on the U.S. side of the border.   Obama is considering sending troops   http://www.mcclatchydc.com/227/story/63800.html

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A Voice of Reason In Government: Ron Paul on D.L. Hugley's Show

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Bank Bailout Not Working

If they actually did think that the bailout was meant to help, I hope they now realize it is a waste of money.  I think the government will have to bite the bullet and acquire Citigroup (and maybe BofA), restructure and break it up, wipe out the shareholders, and make the bond holders whole.  Then, sell the restructured companies back to the public. From yesterday's Washington Post: Shares of Citigroup stock peaked in 2006 at $55.70, which gave the company a market capitalization (price of stock times number of outstanding shares), or value, of $277.2 billion. Today, Citigroup's market cap is $5 billion. But keep in mind that the federal government has already plowed $45 billion into Citigroup, which means the company is worth far less than the actual amount of cash it has received. Astounding. The bank has become a black hole. Cash goes in and never comes out. Citigroup and Bank of America are deemed by most analysts as being the sickest of the big banks -- the ones whose balance sheets are most poisoned by toxic assets.

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Wayne Allen Root's Economic Stimulus Plan

Robert Ringer included a guest post from Wayne Allen Root, last year's Libertarian vice presidential candidate.

The post highlights what Root would do about the economy:

1. One year income tax vacation for all Americans.

2. Phasing out capital gains taxes over a 5 year holding period.

3. No taxes on capital gains, interest, and dividends for Americans over 55.

4. A business tax cut.

5. No taxes on the sale of one's principal residence.

6. $7500 tax credit for employers who hire a worker.

7. After the tax vacation, institute a reverse flat tax.

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Simple, Elegant Solution to the Mortgage Crisis?

So far, throwing billions of dollars at major banks like Citigroup does not seem to be working.

This is because mortgages are continuing to default, causing the bank's mortgage backed derivatives to deteriorate further.

I wonder if we can't solve this problem elegantly, without spending any more money.

Why can't the government stop foreclosures by requiring the banks to rework mortgages with variable terms?

A variable-rate mortgage is where the rates change, depending on the interest rate.

Instead, why can't the banks work with individual homeowners and simply change the terms until they reduce the monthly payment to something the homeowner can afford?

For example, change the term from 30 years to 40, 50, 60. Heck, even go out to 100 year mortgages in some cases, if needed.

You could argue that the homeowner would not live long enough to pay off a 100 year mortgage, but the point is this would be a mathematical abstraction to keep the homeowner in the house, and stabilize the mortgages underlying the derivatives.

Chances are, these long term mortgages, like all mortgages, will end up getting paid off within 20 years when the owners refinance or move.

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How To Understand The Stimulus Bill

Shortly after class, an economics student approaches his economics professor and says, "I don't understand this stimulus bill. Can you explain it to me?"        the professor replied, "I don't have any time to explain it at my office, but if you come over to my house on Saturday and help me with my weekend project, I'll be glad to explain it to you." The student agreed.        at the agreed-upon time, the student showed up at the professor's house. The professor stated that the weekend project involved his backyard pool.        They both went out back to the pool, and the professor handed the student a bucket. Demonstrating with his own bucket, the professor said, "First, go over to the deep end, and fill your bucket with as much water as you can." The student did as he was instructed.        The professor then continued, "Follow me over to the shallow end, and then dump all the water from your bucket into it." The student was naturally confused, but did as he was told.        The professor then explained they were going to do this many more times, and began walking back to the deep end of the pool.        The confused student asked, "Excuse me, but why are we doing this?"        The professor matter-of-factly stated that he was trying to make the shallow end much deeper.        The student didn't think the economics professor was serious, but figured that he would find out the real story soon enough.        However, after the 6th trip between the shallow end and the deep end, the student began to become worried that his economics professor had gone mad. The student finally replied, "All we're doing is wasting valuable time and effort on unproductive pursuits. Even worse, when this process is all over, everything will be at the same level it was before, so all you'll really have accomplished is the destruction of what could have been truly productive action!"        The professor put down his bucket and replied with a smile, "Congratulations. You now understand the stimulus bill."

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