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Archive for February, 2010

DJH: This is the final installment of my analysis of Barack Obama’s 2010 Federal Budget. In the first three posts, I answered the rhetorical questions: “How Big is It,” “Who Gets Hurt,” and “Hyperinflation; What is it and Could it Happen Here?

Those of you who know me, know that I never bring up a problem without having a solution. This is not a simple problem and thus neither is my solution.

Dave

10 Strategies to End Chronic Deficit Spending in the United States

1. Elect 67 Fiscally Conservative Senators ASAP: I actually have 9, not 10 strategies for ending deficit spending in America, but the truth is, as long as we have social ideologues and spineless RINO’s sitting in congress, it is unlikely any of my strategies will come to pass. I say 67, because that’s the number required to override a presidential veto. If we ever got a fiscally conservative president, we would only need 60 seats in the senate. Of course, if we had 67 fiscally conservative senators, we won’t need my other 9 strategies – because they’d do the right thing in the first place. But please read on, just to humor me!

2. Freeze Federal Spending ASAP [as a first step]: I’m talking across the board, including defense, Social Security, and, Medicare.  This is what every fiscally responsible organization does when their sales, revenue, or donations decline. It’s essential for survival.  Sure, our troops need more money, but we all know that there are dozens of new weapon programs that we either don’t need, or that are full of pork spending. I say, force the pentagon to make these choices. I’d rather have our generals do it than bureaucrats in congress.

How can I suggest that we freeze education spending? Hey, pay attention, I covered that last week in my piece “Our Education System is Going No Where Fast” by pointing out that we already outspend ever other nation on earth in education and I cited proven ways to cut educational spending and instantly improve our “bang for the buck.

Finally, as you’ll see below, I also think we must reel in entitlement growth that is being annually fueled by automatic Cost of Living Adjustments (COLA). Keep in mind, that this is a first step. It would demonstrate that we are serious about fiscal discipline and make the other 8 strategies more palatable.

3. Stabilize Economically Sensitive Tax Plans: Virtually everyone who understands economics agrees that Obama is killing the economy by floating some new plan to increase taxes every time he opens his mouth.

Get this: last year, for the first time in history, the top 1% of all wage earners in the US paid more in taxes (40%) than the bottom 95% (39%), and oh yeah, the bottom 40% of all wage earners PAY NO INCOME TAXES WHATSOEVER!

Despite all the liberal hand wringing over “tax cuts for the rich,” the cold hard facts don’t lie. According to Obama’s own economic advisor Peter Orszag, the Bush Tax Cuts actually resulted in greater tax collections and reduced the deficit. Of course, as we are all learning daily, these tax rates for the wealthy are also the tax rates for small businesses – who once created 80%+ of all new jobs in America — before Obama took charge.

Another constant whine from the left is that greedy American corporations keep moving jobs offshore. The truth is they do, but not because of corporate greed, it’s due to greedy tax collectors. The main reason US corporations move jobs offshore is corporate taxes. Look at the chart below, the US ranks 3rd behind Japan and Germany when it comes to having the highest corporate tax rates on earth!

And while I think the taxes on the wealthy and the taxes on corporations are too high, that’s not what I’m talking about here. I’m talking about Obama’s constant babble about future tax plans. It’s making everyone who runs a business in the private sector very nervous. Every successful business I’ve ever worked for plans years in advance, particularly when it comes to launching new products or building new facilities; the things that drive up hiring. But how can they plan when Obama, Reid, and Pelosi “float” plans for new taxes on them on a weekly basis? This is particularly true when it comes to capital gains and corporate taxes.

So, strategy number 3 for saving us from chronic deficit spending is to stabilize key economic taxes like the corporate tax rate, the capital gains tax, and the top individual tax rates that impact most small business. I think they should be frozen for 4 years at a time and it should require a 2/3’s majority in congress to change them within that window. The 4 year window should align with the first year of a president, so he/she can run on their “tax and spend plans.” This would enable us to vote for what we want and it would enable businesses to plan. I truly believe this would spark a new wave of economic growth. It would also force government bureaucrats to focus more on spending and less on taxes when they try to balance the budget.

4. Cut Government Worker Pay by 5-10%: Liberals tell us that the government stimulus plan was a success because it “saved” some large number of government jobs. You know what? I think that’s true. But we could have saved all of those jobs without destroying the treasury by doing what most private sector employers do when times are tough and they don’t want to have a lay-off. We could have cut government wages by, say, 5-10%. Today, government workers earn almost double what private sector workers make, and there wages have risen at 3 times the rate of private sector wages. It is really the only fair way to save jobs and cut the deficit. My 4th strategy is to save government jobs by cutting pay, not cutting headcount (necessarily). By the way, I’m not talking about furloughs like we have in California where they get every other Friday off in exchange for a 10% pay cut. I want them to work the same hours they always worked, but do it for less money – just like regular workers in the private sector.

5. Replace COLA entitlements with the Private Sector Wage Inflation Index: Government compensation schemes tie most annual pay or benefit increases to the Cost of Living (COLA) index. This index “leads” inflation to make sure you have an extra buck in your pocket when the price of a gallon of milk goes up. This is great for government workers, but is it fair? When the economy nose dives, workers in the private sector don’t get an automatic raise, in fact, they often take a pay cut. My 5th strategy is to tie all government compensation payments to the Private Sector Wage Index, which tends to lag COLA and truly represents the income level of working Americans. Government workers should never get pay raises that are bigger than those granted in the private sector. By the way, this would not just apply to government wages, it would also apply to government pensions and Social Security payment increases.

6. Set Government Worker Retirement at 65: One of the things that drives most sane people crazy is to hear a story about some city bus driver who “retired” before the age of 50, started collecting a fat pension (tied to COLA), and then went to another job (maybe another government job), and started down the track to a double dip retirement. In a courageous speech last week, the recently elected Governor of New Jersey Chris Christie cited a couple of examples of government workers who retired early with pensions worth as much as 20 times the amount of money they had contributed. While a big piece of this problem is due to the lucrative pensions themselves, the fact is the cost to the tax payers would be reduced dramatically, if government workers just had to wait until their 65th birthday to start collecting benefits — like all of the private sector workers who must pay into Social Security.

7. Phase out Civil Servant Pensions; Move Everyone to 401K’s: Why do government workers have public pensions in the first place? Why don’t they have 401K’s like the rest of us? They make more money than private sector workers; they can afford to save some of it — just like everyone else.

8. Contain Healthcare Costs: As we’ve all learned over the past year, the skyrocketing cost of healthcare combined with runaway entitlements is another piece of what’s driving chronic deficit spending. And, as we’ve also learned, Obamacare does nothing to contain healthcare costs; it simple expands entitlements and passes the tab on to the private sector in the form of new taxes on small business owners.

Here are a few of the things I’d like to see in healthcare reform:

Tort Reform – According to a 2006 study from Price Waterhouse Coopers, Medical Malpractice lawsuits and the defensive medicine they drive inflate the cost of healthcare in America by 10%. That is a huge number; the US Department of Health and Human services reported that we spent $2.3 trillion on health care in 2008. 10% of that is $230 billion, which is more than enough to cover every one of the 30 million uninsured Americans with a pretty good insurance policy!

Cross State Competition – People don’t realize that the states drive up the cost of health care by mandating what gets covered. Massachusetts may tell insurance companies that they must cover sex change operations for domestic partners, while Texas does no such thing. Insurance in places like Texas is always cheaper and I’d rather buy my insurance there.

Catastrophic/HSA’s For All – I have an insurance policy that makes me pay the first $3,500/year in healthcare costs. It’s not only cost effective, but I can tell you that it makes me think twice before I go to see a doctor. This is similar to the plan that Whole Foods has for all of their employees that everyone loves so much. I recently priced a similar plan last year for my 23 year-old daughter and it cost just $52/month. Imagine how cheap it would be in a shared risk pool?

9. Get the Costs of Illegal Aliens Out With a National Prop 187: In 1994, the people of California reacted to the growing sea of illegal aliens crossing the border by enacting Proposition 187. It was a huge victory for a state that was sick and tired of watching billions of tax dollars being thrown at illegal aliens year after year by spineless politicians.

Proposition 187 included the following key elements:i.

i. All law enforcement agents who suspect that a person who has been arrested is in violation of immigration laws must investigate the detainee’s immigration status, and if they find evidence of illegality they must report it to the attorney general of California, and to the federal Immigration and Naturalization Service (INS).
ii. Local governments are prohibited from doing anything to impair the fulfillment of this requirement.
iii.  The attorney general must keep records on all such cases and make them available to any other government entity that wishes to inspect them.
iv.  No one may receive public benefits until they have proven their legal right to reside in the country.
v. If government agents suspected anyone applying for benefits of being illegal immigrants, the agents must report their suspicions in writing to the appropriate enforcement authorities.
vi. Emergency medical care is exempted, as required by federal law, but all other medical benefits have the requirements stated above.
vii. Primary and secondary education is explicitly included.

Although the courts screwed things up in 1999 by ruling that Prop 187 was unconstitutional, this is probably the best solution to the number one cost driver, not only for the healthcare system, but schools as well. My 9th strategy would be to implement the “essence of Prop 187” on a national level as part of a “comprehensive immigration bill,” which also would include tightening our borders.

10. A National 2% Value Added Tax (VAT) Dedicated to Debt Reduction:  What did you say; how can Dave advocate new taxes? Trust me; I’m not suggesting this casually. It’s just that we must get serious about deficit reduction and paying back the national debt. My 10th strategy would be to pass a Constitutional Amendment that created a 2% Value Added Tax that would only be used for deficit reduction and one that would end when the debt reached zero. By the way, I wouldn’t touch this one until we’d finished the other 9 strategies. You may not know it, but every major industrial nation on earth is toying with chronic deficit spending as a strategy for fighting this economic recession. In fact, that’s the only reason the dollar hasn’t completely collapsed. But if we could take the global lead on eliminating our national debt, our economy would take off and we would once again be the envy of the rest of the world.

I realized that some of you will have trouble with one or two of these strategies, but taken in total, I am convinced that they represent the best formula for ending chronic deficit spending and launching America into the greatest economic boom in history.

What do you think?

Dave

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DJH: Last week I wrote a story titled: Our Education System is Going No Where Fast essentially advocating a little “tough love” for the unions that represent our school teachers in America. Don’t get wrong, I love teachers (at least most of them), but there union must go. Even as I wrote those words, I felt in my heart,

“Dave — this is just blogging hyperbole, no one has the Cojones to stand up to the most powerful union in America.”

And then, in the immortal words of Mariah Carey, “a hero comes along.” This is a great story and one that I hope establishes a road map for reeling in greedy unions across America.

Dave

CENTRAL FALLS, R.I. — A plan to dismiss the entire faculty and staff of the only public high school in this small city just west of the Massachusetts border was approved Tuesday night at an emotional public meeting of the school board.

The board voted 5 to 2 to accept a plan proposed by Schools Superintendent Frances Gallo to fire the approximately 100 faculty and staff members at the chronically underperforming Central Falls High School on the last day of this school year in June.

Jane Sessums, president of the Central Falls Teachers Union in Rhode Island, said the board had “not been willing to bargain.”

The plan will also create a new school governance structure and requires the high school’s new teachers to take part in “professional development” that meets federal standards.

As soon as the meeting ended, the board went into a closed session and members were not available for comment.

Dr. Gallo said during the meeting that she chose what she called a “turnaround” plan, one of four offered by the state, after the teachers’ union rejected conditions in another state plan that called for increased hours without the promise of salary increases.

“Union leadership went too far because I would not commit to monetary incentives,” Dr. Gallo said.

Teachers and union members said Dr. Gallo and the board had not bargained with them in good faith.

“We have been at the table,” Jane Sessums, president of the Central Falls Teachers Union, said at a premeeting rally at a local park attended by hundreds of teachers, students and supporters. “They have not been willing to bargain.”

Dr. Gallo said she had been instructed by the state commissioner of education, Deborah A. Gist, to choose one of the four state reform plans, which were modeled on federal recommendations and included the school’s closing. Central Falls High is one of six of the state’s lowest-achieving — the only one not in Providence — and has a four-year graduation rate of 48 percent. It has 800 students.

Dr. Gallo has 120 days to submit a more detailed plan to the state.

On Tuesday night, several hundred teachers and students, many wearing Central Falls High’s colors of red and blue, packed into the meeting, shouting at Dr. Gallo and school board members. As a board member read the names of people slated for termination, many people were crying.

Joe Travers, 44, a longtime physical education teacher, said after the vote:

“They sat up there, looked us in the eye, told us we were not good enough. That’s an embarrassment.”

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DJH: After Monday’s post Chronic Deficit Spending: What is Hyperinflation and Can it Happen Here? , a new facebook friend of mine — Stephen Murphy, commented and we got into a classic liberal-conservative FB debate. I sent him a few links with facts on how Obama’s deficit is much larger than Bush’s irresponsible deficits and how Obama’s done nothing to stimulate private sector jobs.

Stephen brushed off my facts with his opinions, and then said he thought the answer to the country’s economic problems was to “invest more in education.” I challenged him and offered to send him a fact based argument on why he was wrong if he agreed to read it.

After a little more banter, he invited me to send him what I had; so here goes Stephen – enjoy!

Trillions of Dollars Later, We’ve Proven that So Called “Investing” is Not the Answer

It is virtually undeniable that more education will make an individual more employable.  That said, it’s not completely clear that more education will create more jobs on a national level. I suppose more education might create more qualified entrepreneurs who might create more companies, who could hire more people in the United States, but that would take decades and the last time I looked, we’re not teaching entrepreneurialism in our public schools.

Regardless, we already spend more money on public education that any other nation on earth and we have been the leader for decades. According to Paris based  Organisation for Economic Co-operation and Development (OECD), the US leads all other nations in terms of the share of GDP “invested” in education at 7%. Interestingly, Japan, which is often cited as a leader in terms of their national commitment to education, ranks 17th in spending at just 4.6% of GDP, almost 35% less than the US.

One would think that as the global spending leader in education, the US would turn out the brightest students on earth, but alas, we don’t — in fact, The OECD reported:

“In 2003 the U.S. ranked a middling 18th out of 40 nations in terms of mean reading scores. In 2006, American schoolchildren ranked 29th out of 57 participating countries in the mean science score. American students fared worse in math, ranking 35th in the mean mathematics score. Only five of the 30 OECD member nations (Greece, Italy, Mexico, Portugal and Turkey) had lower math scores than the U.S. More depressing still is the fact that the U.S. saw a decline in mathematics scores between 2003 and 2006. In fact, the U.S. ranked an abysmal 34th out of 39 countries in terms of “math progress.” (Source: Forbes)

Even if we had money to “invest,” and we don’t, one would be hard pressed to accept the proposition that even more spending would improve education. And as mentioned above, the linkage between improved education and a better economy is both loose and lengthy. And the track record in the United States is clear. The more money we put into our public education system, the farther behind our children fall when compared to other industrialized nations.

How can this be; what the problem with education in the US?

Problem #1: The NEA’s Money is the Root of All Evil

Clearly, the problem with the US education system is not lack of funding. I believe that the amount of money that flows through our education system is actually the cause of the problem.

Over the years, an unholy alliance has emerged between The National Education Association (NEA) and the democrat party. The alliance is simple. The NEA is like any other union. They want more pay, shorter hours, and better benefits for their members. They achieve these perks by negotiating with state, local, and federal politicians. Whenever those politician are democrats, they agree to give the NEA their way in exchange for millions of dollars in campaign donations.

For more details click here.

Problem #2: The Money is Buying More Bureaucrats, Less Teachers

One of the key reasons more money isn’t improving the quality of education in the US is because the Money isn’t being spent on teachers, or education for that matter, it’s going to pay for bureaucrats!

The LA Daily News review of salaries and staffing shows that the Los Angeles Unified School District’s (LAUSD) bureaucracy ballooned by nearly 20 percent from 2001 to 2007. Over the same period, 500 teaching positions were cut and enrollment dropped by 6 percent.

The growth of LAUSD’s bureaucracy is evident in the size of the union that represents district administrators. It has seen its membership grow from about 2,100 to 2,600 members in the past several years.

Michael O’Sullivan, president of the administrators union, said the increase is due to a “proliferation” of extra programs over the past decade to support schools and students. Among the additions: administrative staffing for a special-education consent decree, supervisors for Beyond the Bell after-school academic programs, instructional coaches, and backup for small learning communities.

“There was nothing added that didn’t have a positive result,” he said. O’Sullivan added that six-figure salaries for many administrators reflect their supervisory responsibilities, as well as more and longer work days.

Like teachers represented by UTLA, administrators received a 6 percent pay hike retroactive to July 2006, under a contract that ends in June.

The district has approximately 4,000 administrators, managers and other nonschool-based employees – not including clerks and office workers – whose average annual salary is about $95,000. About 2,400 administrators are among the 3,478 LAUSD employees who earn more than $100,000 annually.

Meanwhile, the average salary for an LAUSD teacher is $63,000. And the average household income in Los Angeles County is less than $73,000.”

But that’s LA and everything is whacky in LA, how about the rest of the country? Guess what, this is a national problem and one that’s been brewing for 60 years.

“Since 1950, school districts in the United States began to shift the composition of their personnel from instructional staff like teachers and principals to administrative, district, and school support staff. In 1950, instructional staff accounted for nearly three out of every four employees, while support staff accounted for less than one out of every four employees. By 1980, the share of instructional staff fell to only two-thirds of all public school employees. Today, on average, just over half of all public school employees in the United States are teachers.” (Source: No Bureaucrat Left Behind).

Problem #3: It’s the NEA Stupid!

Regardless of one’s view of any particular method of improving America’s struggling public schools the tactics and rhetoric that teachers unions employ to block any meaningful reform is remarkable. Their motivation is simple: maintain the flow of hundreds of millions of dollars in dues. Meanwhile, union leaders’ suggestions for reform are best summarized as “more money to hire more teachers,” who are then likely to become dues-paying union members.

Former top officers at the National Education Association’s Kansas and Nebraska state chapters summarized their union’s stance on reform in a 1994 issue of Educational Freedom:

“The NEA has been the single biggest obstacle to education reform in this country. We know because we worked for the NEA.”

Paying teachers according to how well they perform, a universal rule in the private sector, is consistently condemned by teachers unions. For example: When two-thirds of Los Angeles public schools received failing grades from the state of California in 2000, the superintendent announced his support for paying teachers according to merit. The United Teachers of Los Angeles (UTLA) fought this proposal tooth and nail and eventually killed it. Then-UTLA President Day Higuchi announced that the union would accept the reform only on “a cold day in hell.”

Even when unions appear to be working to promote performance-based pay, their leaders may try to scuttle actual reform. When the St. Petersburg Times asked Pinellas Classroom Teachers Association executive director Jade Moore why few teachers were signing up for the merit pay program the union helped design for the school district, Moore replied, “Our goal was to make it nearly impossible.”

Opposition to reform has even driven union bosses to reject hundreds of millions of dollars for public education — when those dollars pay for kids in non-unionized charter schools. In 2002 philanthropist Robert Thompson offered the city of Detroit $200 million to establish 15 charter schools. Until the fall of 2002, according to the Detroit Free Press, Michigan Governor Jennifer Granholm and Detroit Mayor Kwame Kilpatrick supported Thompson’s offer. But on September 25 of that year, the Detroit Federation of Teachers led a one-day walkout that shut down the city’s schools in protest of Thompson’s offer. The deal collapsed immediately thereafter.

Stronger medicine for public education brings even stronger anger from entrenched unions. The then-president of the California Teachers Association (CTA), the most powerful state teachers union in the country, gave an incredible rationalization for the extreme measures the union used in 1992 to prevent a school-choice measure from ever reaching Californians for a vote. “There are some proposals that are so evil that they should never even be presented to the voters,” he said. He likened the proposed reform to legalizing the Ku Klux Klan and child prostitution.

Forbes magazine reported that the CTA took such a hard-line stance against the ballot initiative in question that it used a variety of unheard-of tactics to keep the proposal off the ballot, including “blocking would-be signators’ access to the petition in shopping malls, allegedly sabotaging the petition with fake names and offering a signature-collecting firm $400,000 to decline the account.”

The New Jersey Education Association, the most powerful teachers union in the state, vigorously opposed in 2008 a bill to provide tax credits for scholarships to allow low-income students to escape failing public classrooms. According to a Monmouth University poll, an overwhelming 74% majority of New Jersey residents supported the measure. Union officials declared the bill too costly to implement, but an independent taxpayers group found that the project would actually save the state more than $700 million while extending a lifeline to students trapped in underperforming and dangerous schools. Nor was this the first time that the NJEA opposed private-school scholarships for kids in need, as Andrew Coulson wrote in Market Education:

In late October of 1995, officials of the Pepsi company announced at Jersey City Hall that their corporation would donate thousands of dollars in scholarships to help low-income children attend the private school of their choice. The immediate response of the local public school teachers’ union was to threaten that a statewide boycott of all Pepsi products could not be ruled out. Pepsi vending machines around the city were vandalized and jammed. Three weeks later, company officials regretfully withdrew their offer.

The control that teachers union officials can maintain over local school boards can verge on the ridiculous. Veteran education reporter Joe Williams wrote: “The United Teachers Los Angeles had such a tight grip on its school board in 2004 that union leaders actually instructed them on important policies and made no attempt to hide their hand signals to school board members during meetings.”

Excerpted from: Teachers Unions Oppose Education Reform

What Would Dave Do?

The good news is, even if we freeze education spending at 2009 levels, we will still have more money to spend on educating our kids than any other country on earth. But given the unholy alliance between the NEA and the democrat party, real reform will be difficult, if not bloody.

#1 — Outlaw Teacher’s Unions

I think that all unions for so-called public servants should be banned. Unions make sense when labor is being abused or working conditions create a health risk, but school teachers – give me a break! They get more money than the average private sector worker, they get the entire freaking summer off, and they get a pension and a Cadillac healthcare plan for life.

If we shut down the unions, we’ll eliminate one of the biggest political special interest groups in America, open the doors to competition, and move money from funding bureaucrats back to hiring teachers.

#2 – Shut Down The Department of Education

I understand that some money needs to be taken from the “haves” and given to the “have nots” to fund education equality. But, we do not need a bloated bureaucracy in Washington DC meddling in every local board in every town and city and America.

One look at the org chart for the Department of Education reveals that their mission is to meddle in local affairs:

Today, the Department of Education controls over $400 billion in taxpayer money that was collected from local communities, funneled back into Washington DC, and then redistributed according to their meddling agenda.

That’s why 50% of the people who work in our local schools are bureaucrats and not teachers. It’s so they can more effectively lobby Washington to get back the funds that were taken in the form of taxes!

#3 – Legalize and Encourage Local Voucher Programs

One of the reasons our public schools stink is because they have no competition showing them how to do more for less money.  In 2003, congress funded a pilot school voucher program in Washington DC. This was a perfect place to try it for three reasons. First, they have some of the worst performing public schools systems in America; second, they have one of the most expensive school systems in America; and third, the families targeted to participate in the program were some of the poorest families in America (average income of $22,000 a year).

The program awarded $7,500/year scholarships that could be used to fund a portion of the tuition cost for private schools. These poor families paid the rest.

This is an incredible cost savings when compared to the $24,600 per child that the DC Public School System costs taxpayers today.

Although the program only ran for 3 years, it was widely accepted as an academic success. Further, it brought hope to families who had none. Most importantly, it gave parents a way to protect their children from the widespread gang violence that has plagued inner city schools in America.

Ironically, buckling under NEA pressure, Obama and the democrat congress actually killed this program as part of the Economic Stimulus Bill in 2009!

I urge you watch this video to get a personal perspective on this uniquely successful and cost effective government program.

I’m sure there are plenty of other good ideas out there that can improve our national education “bang for the buck” from our bloated educational budget, but I have to take issue with Stephen’s comment, the problem will not be solved by “investing more money in education,” we must stamp out the greed and corruption first.

Dave

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DJH: I heard a little scuttlebutt about New Jersey Governor’s Chris Christie’s speech yesterday from a friend. I had missed the speech on the news and went out and found it on the Internet this morning. All I can say is WOW. This is exactly the way we need every state governor (and the president) to be thinking about closing deficit spending these days.

Here’s a few of my favorite lines:

NJ Governor Chris Christie

Let’s tell our citizens the truth—today—right now—about what failing to do strong reforms costs them.

One state retiree, 49 years old, paid, over the course of his entire career, a total of $124,000 towards his retirement pension and health benefits. What will we pay him? $3.3 million in pension payments over his life and nearly $500,000 for health care benefits — a total of $3.8m on a $120,000 investment. Is that fair?

A retired teacher paid $62,000 towards her pension and nothing, yes nothing, for full family medical, dental and vision coverage over her entire career. What will we pay her? $1.4 million in pension benefits and another $215,000 in health care benefit premiums over her lifetime. Is it “fair” for all of us and our children to have to pay for this excess?

The total unfunded pension and medical benefit costs are $90 billion. We would have to pay $7 billion per year to make them current. We don’t have that money—you know it and I know it. What has been done to our citizens by offering a pension system we cannot afford and health benefits that are 41% more expensive than the average fortune 500 company’s costs is the truly unfair part of this equation.

What a brilliant way to explain how outrageous these greedy government union plans are. Can you imagine putting $120,000 in and getting $3.8 million back, for driving a bus! One more thing, why the hell is he retiring at 49? I’ve seen plenty of guys driving buses into their 70s. Could someone tell me why government workers can’t work until they’re 65 like the rest of us.

What I really like is his solution. He’s going to jettison the NJ Transit Authority and let them sort out their unfunded pension obligations on their own. That won’t be pretty, but it’s high time someone pushes back on this unmitigated greed before it’s too late.

If you haven’t seen or heard this speech yet, I urge you to do so — you can click here to read the full transcript.

Dave

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DJH: This is the third installment of my four part series Chronic Deficit Spending; The End of Life as We Know It? In the first part, we answered the question “How Big is It?and demonstrated how Obama’s deficit spending and taxes would cost as many as 50 million private sector jobs over the next 10 years.

Then we looked at “Who Get’s Hurt?” and saw that while most government and union workers are well protected from the ravages of deficit spending induced inflation, private sector workers, in particular, retiring Baby Boomers stand to get financially decimated if the Obama budget comes to pass.

Popular Photo of German bringing a wheelbarrow of marcs to buy a loaf of bread

Today, I want to talk about an even more serious threat called Hyperinflation, which may sound like really bad inflation, but it’s actually much worst! We’ve never suffered from hyperinflation in the US and quite frankly, I’m just starting to study it myself, so there’s a lot of external sources in this piece.

How is Hyperinflation different than Regular Inflation?

Inflation broadly is defined in terms of a rise in general prices due to an increase in the amount of money in circulation. The inflation/deflation issues defined and discussed here are as applied to goods and services, not to the pricing of financial assets.

In terms of hyperinflation, there have been a variety of definitions used over time. The circumstance envisioned ahead is not one of double- or triple- digit annual inflation, but more along the lines of seven- to 10-digit inflation seen in other circumstances during the last century. Under such circumstances, the currency in question becomes worthless, as seen in Germany (Weimar Republic) in the early 1920s, in Hungary after World War II, in the dismembered Yugoslavia of the early 1990s and most recently, in Zimbabwe where the pace of hyperinflation may have been the most extreme ever seen.

The historical culprit generally has been the use of fiat currencies — currencies with no hard-asset backing such as gold — and the resulting massive printing of currency that the issuing authority needed to support its spending, when it did not have the ability, otherwise, to raise enough money for its perceived needs, through taxes or other means.

Ralph T. Foster in Fiat Paper Money, The History and Evolution of Our Currency details the history of fiat paper currencies from 11th century Szechwan, China, to date, and the consistent collapse of those currencies, time-after-time, due to what appears to be the inevitable, irresistible urge of issuing authorities to print too much of a good thing. The United States is no exception, already having obligated itself to liabilities well beyond its ability ever to pay off (Source: Hyperinflation – 2010).

Recent Hyperinflation Events

  • 1922 Germany 5,000%
  • 1985 Bolivia >10,000%
  • 1989 Argentina 3,100%
  • 1990 Peru 7,500%
  • 1993 Brazil 2,100%
  • 1993 Ukraine 5,000%”

(Source: Professor Lebow, Drexel University)

Who gets hurt the most?

One effect with serious consequences is the reallocation of wealth. Hyperinflations transfer wealth from the general public, which holds money, to the government, which issues money. Hyperinflations also cause borrowers to gain at the expense of lenders when loan contracts are signed prior to the worst inflation. Businesses that hold stores of raw materials and commodities gain at the expense of the general public. In Germany, renters gained at the expense of property owners because rent ceilings did not keep pace with the general level of prices (Source: Economic Library – Hyperinflation).

More from The German story

Although hyperinflation is usually associated with third world countries, the truth is, one of the most extreme cases in history occurred in industrial Germany in 1922. At that point in history, Germany was one of the top industrial powers in the world.

The German hyperinflation illustrates the redistribution that hyperinflation causes in a dramatic way. It eliminated the value of all life insurance policies and all savings left in banks. When life insurance policies were paid in 1923, the value of the check was usually worth much less than the stamp used to post the letter.

The hyperinflation eliminated all debts that existed prior to 1921. For example, the value of German mortgages in 1913 measured in U.S. dollars was about $10 billion; in late 1923 these mortgages were worth only one U.S. penny.

By 1924 the inflation had radically redistributed the wealth of Germany. The segment of society that was hit the hardest seems to have been the middle class. The poor had little wealth to lose while the rich were often able to get their wealth into forms not adversely affected by inflation. Wealth held in foreign bank accounts, gold and precious metals, and land maintained value.

If redistribution were the only effect of inflation, one could argue that it is not a serious problem. Since for every loser there is a winner, society as a whole may break even (if this redistribution is not seen as being too “unfair”). However, inflation also makes ordinary decisions more difficult to make, and it causes people to change their behavior. The changes in behavior, which cause social losses, are again dramatically illustrated in a hyperinflation.

Costantino Bresciani-Turroni argues that the hyperinflation destroyed the wealth of the stable classes in Germany and made it easier for the National Socialists (Nazis) to gain power (Source: The German Nightmare)

Could it happen here?

In many ways, we are behaving much like Germany in the 1920’s. We are printing money at unprecedented rates and even more frightening, our President has put forward a ten-year budget that requires another $10 trillion expansion in the money supply.

In his piece US Crosses the Bernholz Line — Hyperinflation Early Warning Signal, economic historian Peter Bernholz has identified that inflation starts to take on hyperinflationary characteristics some time after the deficits of a country as a share of government expenditure rise above a third and stay there for several years.

According to Bernholz, the great hyperinflations of France, Germany, Poland, Brazil, and Bolivia all occurred after deficits reached that magic percentage or higher (In Bolivia, it reached 91%). The United States crossed over the Bernholz line last year.

Japan is even deeper into the warning despite concerns of many that it has a deflation problem. Ambrose Evans-Pritchard writes:

2010 will prove to be the year that Japan flips from deflation to something very different: the beginnings of debt monetization by a terrified central bank that will ultimately spin out of control, perhaps crossing into hyperinflation by the middle of the decade…

Japan has been [above the Bernholz line]…almost continuously for the last eight years….Japan’s Bernholz index will rise above 50pc this year for the first time, meaning that it will have to borrow more from the bond markets than raises in tax revenue.

Clearly, crossing the Bernholz Line does not mean that hyperinflation is immediately around the corner. It’s an early warning signal. What it does indicate is that a government is having trouble raising money outside of borrowing it. This results in tremendous supplies of new debt that the markets must absorb, pushing interest rates higher, and thus putting enormous pressure on a central bank to monetize the debt.

The specifics of how long after passing the Bernholz Line a hyperinflation kicks in varies greatly. But like a doctor, who detects in a patient the first signs of Alzheimer’s, the prognosis is not good (Source: The US Crossed the Bernholz Hyperinflation Line)

Is Hyperinflation Obama’s Secret Plan?

Okay, I think we can all agree that hyperinflation is a really bad thing. I also think we can agree that Obama is either on a path to bring about a hyperinflation event in the US, or at the very least, playing with fire.

But think about this, everyone I talk to agrees that Obama must know that the US cannot sustain these massive deficits, but what if Obama is not worried about hyperinflation for one very frightening reason. Hyperinflation wipes out all debt! That would include the $14 trillion that Obama and the dems have recently approved. What if Obama is actually counting on hyperinflation to complete the annihilation of the private sector in America?

I’m not a conspiracy theorist, just saying…

Dave

Postscript

Last week the EEU bailed out the nation of Greece, which was on the verge of bankruptcy due to the kind of reckless deficit spending that Obama has been pursuing in the US. Click here to read the story:

Collapse of the euro is ‘inevitable’: Bailing out the Greek economy futile, says FRENCH banking chief

Coming Next — Chronic Deficit Spending: What would Dave do?

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DJH: In the last 24 hours, I’ve read two stories about greed and abuse of power from labor unions. Understand, I wasn’t researching this subject; they just came my way from different news feeds I monitor. I’m not sure if this is because abuse is on the rise or because the media is finally focused on the way unions are robbing the American public.

Dave

Forced Unionization

February 11, 2010 06:40 AM EST by John Stossel

Michelle Berry runs a day-care business out of her home in Flint, MI. She thought that she owned her own business, but Berry’s been told she is now a government employee and union member. It’s not voluntary. Suddenly, Berry and 40,000 other Michigan private day-care providers have learned that union dues are being taken out of the child-care subsidies the state sends them. The “union” is a creation of AFSCME, the government workers union, and the United Auto Workers.

This racket means big money to AFSCME, which runs the union, writes the Mackinac Center for Public Policy, a free-market think tank.

Today the Department of Human Services siphons about $3.7 million in annual dues to the union….

The money should be going to home-based day-care providers — themselves not on the high end of the income scale. Ms. Berry now sees money once paid to her go to a union that does little for her…

Patrick Wright, a lawyer for the Macknac Center, says the union was forced on the women after a certification election conducted by mail in which only 6,000 day-care providers out of 40,000 voted. Wright told me his clients, like Berry, say they were “shocked” to learn they were suddenly in a union.

They want nothing to do with the union. One of my clients has said, “Look, this is my home, I’m both labor and management here.” They’ve wanted nothing to do with this union and don’t think that it has any purpose besides than to siphon money away from them.

Michigan isn’t the only state funding unions this way. Fourteen states have now enabled home-based day-care providers to be organized into public-employee unions, affecting about 233,000 people.
Click here to read full story:

Madison Metro driver highest paid city employee

DEAN MOSIMAN | dmosiman@madison.com | 608-252-6141 | Posted: Sunday, February 7, 2010 3:00 pm

Madison’s highest paid city government employee last year wasn’t the mayor. It wasn’t the police chief. It wasn’t even the head of Metro Transit.

It was bus driver John E. Nelson.

Nelson earned $159,258 in 2009, including $109,892 in overtime and other pay.

He and his colleague, driver Greg Tatman, who earned $125,598, were among the city’s top 20 earners for 2009, city records show.

They’re among the seven bus drivers who made more than $100,000 last year thanks to a union contract that lets the most senior drivers who have the highest base salaries get first crack at overtime.

And there was a lot of overtime – $1.94 million last year, $467,200 more than the bus system budgeted for and the most ever for the system – as employees exhausted sick leave and took advantage of unpaid leave through the federal Family Medical Leave Act, officials said.

“That’s the (drivers’) contract,” said Transit and Parking Commission Chairman Gary Poulson. “(But) I think we want more information to the TPC and a discussion of all the facts.”

The high salaries for Metro bus drivers come as Metro’s ridership continues to grow and the system ranks high among peers according to a 2009 state audit. Metro, which increased fares last year, carried 13.58 million riders in 2009, the second highest total in 40 years.

Click here to read full story.

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DJH: I don’t know about you, but these stories make me sick. Keep in mind that Obama has essentially directed virtually all stimulus money to saving government jobs. And don’t forget his outrageous plan (revealed during his SOTU speech) to forgive all college loans in 10 years just for government workers.

Is there anyone out there who still thinks that we need to cut government workers a special break?

I’d like to give them all a 5% pay cut!

Dave

It’s Boom-Time for Public Employees

By Rich Lowry

For most Americans, the Great Recession has been an occasion to hold on for dear life. For public employees, it’s been an occasion to let the good times roll.

Rich Lowry National Review

The percentage of federal civil servants making more than $100,000 a year jumped from 14 percent to 19 percent during the first year and a half of the recession, according to USA Today. At the beginning of the downturn, the Transportation Department had one person making $170,000 or more a year; now it has 1,690 making that.

The New York Times reports that state and local governments have added a net 110,000 jobs since the beginning of the recession, while the private sector has lost 6.9 million. The gap between total compensation of public and private workers has only widened during the downturn, according to USA Today. In 2008, benefits for public employees grew at a rate three times that of private employees.

Public employees have developed an inverse relationship to the rest of the economy – as it shrinks, shedding jobs and cutting salaries, they draw on a never-ending taxpayer bounty. It used to be said that the Great Depression wasn’t so bad, if you had a job. The Great Recession has practically been a boom, if you have a government job.

Public employees can thank the union label. In 2009, for the first time ever, a majority of union members worked in the public sector. Unionism has been a long, secular decline in the private sector (down to 7.2 percent of all workers), but increasing in government (up to 37.4 percent of all workers).

These public-sector unions are flush with cash, politically connected, and unabashedly self-interested. They are an active and growing conspiracy against the public fisc. The states where they are most powerful – California and New York – lumber toward insolvency. The federal government follows not far behind, on the kind of diet geese enjoy prior to becoming foie gras.

Public-employee unions can effectively occupy both sides of a negotiating table. They donate to and elect the politicians who bargain with them at contract time. Understandably, union-backed politicians forget which side they’re on. Fred Siegel, a visiting professor at St. Francis College and contributing editor at the Manhattan Institute’s City Journal, recalls then-New Jersey governor Jon Corzine telling a huge rally of state employees in 2006: “We will fight for a fair contract!”

How often does a union hear that from management? This is why even Franklin Roosevelt maintained, “The process of collective bargaining, as usually understood, cannot be transplanted into the public service.” He’d blanch at the ways of 21st-century government.

In the Golden State, the California Teachers Association has all but become a branch of state government. Its exertions have given the state some of the worst schools in the country – and the highest-paid teachers. California’s prison guards have a powerful union – and also the highest salaries in the nation. The state instituted a reckless pension plan for public employees in 1999 that means more than 5,000 of them get more than $100,000 a year during retirement. It’s not a coincidence that California was reduced to issuing IOUs to cover its obligations for a time last year.

Government by and for the public-employees unions is bankrupting, both fiscally and ethically. In his post-Massachusetts explanations of why health-care reform stalled, Pres. Barack Obama vaguely acknowledged a few lapses in transparency. But he never mentioned the grossness inherent in inviting union bosses to the White House so they can exempt their members from a tax. That would cut too close to the bone, since it’s hard to tell where the unions end and the Democratic party begins.

“You must first enable the government to control the governed,” James Madison wrote, “and in the next place oblige it to control itself.” That’s impossible if government employees use public funds to muster themselves into a political machine devoted to their own interests and expansion.

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