Month: April 2009

Test Scores

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In a 4/29/09 WSJ article, Robert Tomsho summarizes results from the National Assessment of Educational Progress (NAEP), a.k.a. the “Nation’s Report Card”. 9 and 13 year students have made some progress in the past 40 years, but the scores of 17 year old students have shown no change in math and reading proficiency.

“The new report comes as colleges and employers are complaining that too many students earn diplomas without learning the skills needed for college or the workplace.”

How have younger students fared since the implementation of the federal government’s No Child Left Behind policy? 9 year olds showed a 6% improvement in reading, but younger students showed only a 1 – 2% gain.

The disturbing trend is that students gain increased proficiency in math and reading only to see those gains evaporate as they near the end of their secondary education. “Achievement gaps between white and minority students have declined drastically” but “whites still outscore black and Hispanic students” by about 10%.

It is surprising to me how many people working a cash register in retail establishments have difficulty making change. Workers with high school diplomas can not add and subtract simple fractions, a big disadvantage when doing basic carpentry. A student writing a master’s thesis can not write at a college freshman level.

Perhaps this is why some employees on Wall Street get multi-million dollar bonuses. They can read and write.

Obamanomics

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In a 3/28/09 WSJ op-ed, Robert Reich, Clinton’s Secretary of Labor, compares two economic approaches, Reaganomics (R) and Obamanomics (O).

The key distinction is the role of government in fostering economic growth. R’s essential approach was top down – lower taxes on the wealthy and benefits will trickle down the lower income workers. Before R, the top 1% of earners “took home 9% of total national income.” In 2007, the richest 1% took home 22%.

O’s approach is a bottom up philosophy – help lower income Americans become more productive and the benefits will trickle up. R places little or no value on public spending as an investment in the future. In the past 30 years, “federal spending on education, job training, infrastructure and basic R&D … have all shrunk as a proportion of GDP.”

R focuses on the low cost of labor within a country to be competitive in the global market. This approach “inevitably exerts downward pressure on the real wages of a larger and larger portion of our population.” O focuses on high productivity to gain that same competitive advantage in the global marketplace.

“R assumed that deregulated markets always function better.” Although this is often the case, it is not always the case and when markets don’t work, “all hell can break loose, retarding economic growth.”

O “views appropriate regulation as an essential precondition for sustainable growth.”

My question to Robert Reich is: who decides what is “appropriate regulation?”

Lawmakers like to use three words when they craft legislation: appropriate, reasonable and excessive. They leave it up to administrators and courts to determine what these key words mean. As an example, under Colorado law an employee is not entitled to unemployment benefits if they were terminated for “excessive absenteeism.” As an employer, I think one day absent a month is excessive. A Colorado Unemployment administrator thinks it is not. I can hire an Employment Advocate certified in Colorado to plead my case and they might be successful but it will not be cost effective if I only have a few employees. The state does not reimburse my company for costs if they lose.

R is a top down approach economically but a bottoms up approach on the regulatory side. O is a top down emphasis on the regulatory side but a bottoms up approach on the economic side. There are major problems with both of these systems.

O requires an employer to spend more resources coping with regulation than providing a product or service. R requires an employer to spend more resources to cope with a declining infrastructure and a “no holds barred” marketplace.

Corn Husks

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When a company has their best sales year and then files for bankruptcy, it signals a major shift in the underlying fundamentals of that business.

In his WSJ Cross Country column, Max Schulz reports on several Iowa ethanol plants that have closed or will close soon because of the steep drop in the price of ethanol. In 2006, “ethanol producers made $2.30 per gallon.” A few months ago, they made 25 cents.

Corn prices rose sharply in response to increased demand from ethanol producers. Demand for gasoline fell dramatically, causing producers to curtail capacity by 20%. In 2005, they had invested heavily in new plants in response to U.S. government guarantees and tax credits.

U. of Minnesota researchers calculated that it can take more than 1000 gallons of water to make a gallon of ethanol, yet ethanol replaces only 3% of U.S. oil usage. Two other researchers estimated that dedicating all 300 million acres of cropland to ethanol production would only replace 15% of the oil we consume each year.

President Obama is an ethanol advocate and is leaving current policy in place. Large food producers and oil refiners with deep pockets are looking to pick up some of these closed facilities for a song.

A Moving Story

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In response to my blog on rising office vacancies, Lydia, a veteran property manager, writes: “The only way to get a tenant these days is to steal him from someone else, and even that’s tough because a) moving costs money and b) landlords are willing to give concessions to keep existing tenants.”

Business people are moving – back home. “It’s back to the basement,” one office tenant told me. As the volume of work decreases for small businesses of one, two or three people, the owner can no longer justify paying the extra monthly expense for an office.

In the residential market, Conor Dougherty reports in a 4/23/09 WSJ article, that the Census Bureau recently reported a “national mover rate” of 11.9% in 2008, the lowest since the Bureau started keeping track in 1948. “About 35 million people moved” in 2008, compared to 39 million in 2007.

“Renters are five times more likely to move than homeowners are.” The number of people who relocate in the same area has been slowing for several years but this past year saw a steep decline. The western and southern areas of the U.S. have the most mobility.

State Taxes

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According to a Census Bureau report (follow link to Excel spreadsheet), the states collected $782B in taxes in 2008. That is about 70% of what the federal government collected in federal income taxes. This doesn’t include local taxes.

The Census Bureau breaks them down into major categories: Property, Sales and Gross Receipts, Licenses, Income and Other.

Alaska, Florida, South Dakota, Texas, Washington and Wyoming do not have a personal income tax. Texas, Washington and Wyoming do not have a corporate income tax.

13 states do not charge a property tax. Alaska, Delaware, Montana, New Hampshire, and Oregon do not charge a general sales tax. Alabama, Alaska and Arkansas do not charge an estate and gift tax. 16 states do not charge a severance tax, a tax on extracted resources like coal, oil and gas.

While Texas and Alaska do not charge on income tax, they don’t need to. Texas collects $4B in severance taxes, Alaska $7B. Together the two states collect almost 2/3 of all the severance tax collected by the states.

What did they spend all this money on? In 2008, Medicaid spending was estimated at $164B, a whopping 20% of state revenues. As unemployment continues to rise, Medicaid spending will also rise.

What steps are states taking to control these costs? As this Kaiser Family Foundation table shows, there is a lot of room for improvement.

Almost 2/3 of states have some pharmacy cost controls including approved manufacturers, use of generics where possible – routine controls that patients with health insurance encounter. Only 3 states have co-pays. The Federally mandated maximum copay for a Medicaid patient is $3, less than a Big Mac. As long as Health and Human Services designates such a low copay, most states probably will not bother to try and collect.

Only 8 states have any cost containment programs for long term care, which is 44% of Medicaid spending. As the population ages, this cost will increase dramatically. Only 3 states have any restrictions or reductions on benefits.

All of the states complain about the growing Medicaid expense and its impact on their budget. But what are they doing about it? Maybe we should ask our state representatives.

State Budget Shortfalls

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The Center on Budget and Policy Priorities (CBPP) reports that 47 states will probably face budget shortfalls in 2009 and 2010. The article contains a listing of all the states and their projected shortfalls. California’s budget gap is projected at over $13B this year and going to $25B in 2010.

Included in the recently enacted “American Recovery and Reinvestment Act”, the Federal Government will provide $135 – $140B in aid which will close about 40% of the total gap in state budgets. Bloomberg.com calculates that almost $13T has been pledged by the federal government to the financial industry.

Moody’s, the credit ratings firm, has recently issued a negative outlook on the creditworthiness of every local government in the U.S.

The CBPP article notes that “the vast majority of states cannot run a deficit or borrow to cover their operating expenditures. As a result, states have three primary actions they can take during a fiscal crisis: they can draw down available reserves, they can cut expenditures, or they can raise taxes.”

Small Business Stimulus

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In the 3/10/09 WSJ Small Business section, Kelly Spors notes that the federal stimulus bill mandates that the government “aims to award 23% of all contract dollars across all agencies to small businesses every year.”

There are several examples of new contracts recently awarded but the author notes the difficulties that small businesses have to secure government contracts. A company may have to invest a lot of employee hours to cope with the many regulations and abundant paperwork in order to bid a job. A former president of the Entrepreneur’s Organization says that it may be better for a small business to subcontract on a few projects to get some idea of what is required.

The government has a website where you can register and survey the various business contracts available.

Executive Pay

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On April 7th, the Chairman and CEO of the giant investment firm Goldman Sachs said that banks and securities firms should pay their top executives mostly in stock awards that should be held for at least three years to tie the performance of those executives to the long term health of the company. He further suggested that lawmakers and regulators might have to force these changes on the industry.

Top executives at these companies have long resisted stockholder proposals to change their pay structure. Long overdue is a restructuring of corporate bylaws in this country that enable top management to effectively freeze out the owners of the company.

Another long fought over issue is direct nomination of board directors by shareholders. Here is a brief summary of SEC proposals in the past several years.

Bailout Timeline

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The NY Times maintains an updated summary of the bailout since last September. You might want to print this out and keep it in your pocket or purse for those summer barbeque discussions with friends and family about who did what and when.

Bernanke is the Fed chief who took over from Alan Greenspan.
Bernie is Bernie Madoff who ripped off people for what may be over $50B. They sound alike so don’t get them confused or you might lose face in front of your brother-in-law.

Paulson is the former Treasury Secretary. He looks like the guy on WWF’s Smack Down in 2002 but that isn’t him although Hank Paulson was an All-American football player. Casually inform your brother-in-law that Paulson was an assistant to Ehrlichman during the Watergate scandal. That will shut him up.

Production Doldrums

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On April 15th, the Federal Reserve released its March data on industrial production. “The capacity utilization rate for total industry fell further to 69.3 percent, a historical low”

In a 4/15/09 WSJ “Ahead of the Tape” column, Mark Gongloff notes a Congressional Budget Office estimate that “GDP growth could be 7% below potential for the next two years” and that it is “the deepest underperformance since the 1981-82 recession.” The investment firm Goldman Sachs estimates that “getting GDP back to trend will require unusually fast catch-up growth – 4.75% per year in order to close the output gap by 2015, or 3.75% per year to close it in a decade.”

Gongloff concluded with a comment from Goldman Sachs that “such speedy growth closed the wide output gap of the early 1980s … and it didn’t create inflation.”