Flooding Unemployment

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We feel relief and entertain hope as flood waters continue to rise but at a slower pace. That’s the reaction to May’s unemployment report just released by the Labor Department.

“Only” 345,000 jobs were lost in May, making it the first month since October 2008 that the economy has shed less than 500,000 jobs.

In a 6/6/09 WSJ article, Justin Lahart examines the underlying labor data that reveal some trends in the US work force. Constituting 86% of the labor force, service jobs represent almost all of the US economy, nearly completing a decades long shift to a service economy. In this sector, May’s job loss of 120,000 was about half of April’s 230,000 job loss. Since this recession started in December 2007, the Labor Dept reports an all time record of service jobs lost. Some historic records are better to read about than live through.

Although manufacturing jobs are less than ten percent of the work force, companies let go even more factory workers than service workers in May.

In American Theocracy, Kevin Phillips notes that, in the past four hundred years, the decline of all leading economic powers, the Spanish, Dutch and English, have been marked by a pronounced shift in their economy away from producing goods to finance and services. Maybe it will be different this time around.

VAT Tax

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In a 6/4/09 WSJ op-ed, Daniel Mitchell, a senior fellow at the Cato Institute, makes a well reasoned argument that the U.S. should not adopt a VAT tax.

This tax, prevalent in the EU, is like a national sales tax, a consumption tax. The more cautious proponents of its adoption in the U.S. wisely advocate the repeal of the 16th Amendment, which gave the Federal government the power to tax incomes. With the repeal, a VAT tax would replace the income tax. Without that repeal, a VAT tax would become just another revenue source for politicians to spend in addition to the income tax, a point that Mitchell makes as well.

For those who advocate a VAT tax as a protection for American goods producing businesses, Mitchell concludes that a VAT tax will not accomplish their goals.

Mitchell’s use of OECD data to compare government spending in the US and the EU suffers a flaw common to other op-ed writers, as I pointed out in in a previous blog. The EU includes 75% of its health care spending as a government expense. Although the US spends more as a percentage of GDP than any country in the world, it reports only 45% of that expense as government spending.

Mitchell writes that in 2007, “government spending now consumes 47.1% of GDP in the EU-15, significantly higher than the 35.3% burden of government in the U.S.” Let’s look at a 2005 (the latest available) comparison (On left side of screen, click Health, then Health Statistics, then OECD Health Data 2008, then Health Expenditures) of health care costs from the OECD.

In that year, the US spent over 15% of GDP on health care and reported that 45% of that expense was public tax dollars. Whether it is called a government expenditure or a private expenditure, the majority of us carry the burden of health insurance. To properly compare burdens between the US and EU, we can add in 5% of US GDP that would be public expenditure if US workers paid their insurance premiums to the Federal government instead of a private insurance company. Add that to the 35.3% that the US reports and a more accurate comparison of government spending burden is about 40%, still lower than the EU’s 47.1%.

What is your vote? Should the US 1) leave the income tax system in place; 2) replace it with a flat tax; 3) replace it with a VAT tax; 4) replace it with a savings transaction tax. Each system has plenty to be said for and against it.

GM’s Car Trouble

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In a 6/3/09 WSJ op-ed, Pulitzer prize author Paul Ingrassia employs his considerable background with both GM and the automotive industry to summarize what went wrong at GM.

What was news to me was that, at the height of its market dominance in the 1970s, GM thought the lucrative contracts that it signed with the United Auto Workers (UAW) would prove too costly for smaller Ford and Chrysler, who would be forced to meet similar labor terms at their own factories. GM’s strategy and the gas crises of the 1970s helped pave the way for foreign automakers to competitively enter the U.S. market.

Bank Freeze

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For those who receive monthly government checks, including Social Security and disability payments, electronic direct deposit is convenient. On the first of every month, for example, the money “appears” in our checking account. For those who have difficulty getting around, this saves having to travel to the bank to deposit a monthly check. But there’s a catch.

In a 6/1/09 WSJ article, Ellen Schultz recounts several stories of people who found their bank accounts frozen because of a loophole in the law that prevents banks from seizing payments like Social Security and disability. Several legislators are urging the Treasury to close the loophole.

If a bank receives a garnishment from a debt collector, they may turn over part or all of the money in the account and freeze the account without any advance notification to the owner of the account. This freeze in turn generates a number of “insufficient funds” fees for the bank when it bounces checks that the owner of the account wrote in good faith.

What can we do? Urge your representatives to get this loophole closed immediately. If you or someone you know has funds electronically deposited, ask the bank what their policy is regarding garnishments. If you are having trouble paying bills or are in dispute with someone over a bill, it might be wise to discontinue direct deposit till your situation changes or you are able to resolve the matter.

Intel-ligent

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After 35 years with the company, Craig Barrett is leaving Intel. He has served as President, CEO and is currently Chairman of the Board. When he started in 1974, Intel had $50M in yearly revenue. Now, Intel has $50M in revenue every twelve hours.

In a 5/27/06 interview with PBS host Charlie Rose, Barrett discusses the transition to digital medical records in the first minutes of the hour long interview.

If you continue listening a few more minutes, you will learn earlier strategic missteps that Intel made. In hindsight, these mistakes are laughable but it shows that even the best and brightest have difficulty predicting the future.

Worth More White

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The Federal Interagency Forum on Aging-Related Statistics keeps track of the decades long transfer of wealth from the younger to the older.

After adjusting for inflation, “between 1984 and 2005, the median net worth of households headed by white people age 65 and over increased 81 percent from $125,000 to $226,900. The median net worth of households headed by black people age 65 and over increased 34 percent from $28,200 to $37,800.” Click on Indicator 10.

The graph shows an overall trend but a look at some historical data at the site shows that older blacks did not share in the boom of the late nineties. Their net worth declined.

There are a number of other interesting stats on this web site. For example: after declining for several decades in the 20th century, a greater number of older people are working in retirement. Indicator 9 tab shows the the decades long change in the mix of income sources for older Americans.

Sham Accounting

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In the past presidential campaign, Mr. Obama and other Democrats pointed to the 90s as an example of their party’s fiscal responsibility. Voters were told that, with President Clinton at the helm, the American economy surged and there was a budget surplus in the last years of Clinton’s presidency.

What surplus? For the fiscal year ending Sept. 30, 1999, the U.S. government reported a $124.4 billion dollar surplus on a cash basis ($72.9 billion on an accrual basis). The Social Security surplus was 124.7 billion. The Medicare Part A surplus was 21.5 billion. The Government, despite all of Vice-President Gore’s rhetoric about a leaner government, still spent $21.8 billion more than it received in 1999.

The Federal government borrows money from the Social Security fund, calls it “income” and reports a budget surplus. Only in America. As long as there has been a surplus in the Social Security fund, both political parties promote this sham accounting and fight against all attempts to adopt a more rational accounting system that reflects the actual realities and liabilities of the Federal government.

When will our elected representatives come to their senses? In the latter part of the next decade, the many years of Social Security surpluses will finally come to an end as the baby boomer generation retires in greater numbers. The Federal government will no longer be able to borrow from the fund and will, in fact, have to start paying the fund back. Those paybacks will hurt the sham budget numbers that both parties dangle in front of voters eyes. Then we will see a growing political movement to have a more realistic system of accounting. These are the same politicians who are currently running a large insurance company, AIG, and will soon be running a car company, General Motors.

Small Business Health Benefits

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In a 5/26/09 WSJ article, Dana Mattioli reports on how the recession and health care premium increases are affecting small businesses.

What does the future hold? “About 10% of small businesses are considering eliminating coverage over the next year, up from 3% in 2005, according to a recent survey by National Small Business Association.” A survey by another group estimates 19% of small businesses dropping coverage over the next two years.

What are the historical trends? The Small Business Association reports that “just 38% of small businesses [provided] health insurance last year compared to 61% in 1993.”

What is not news to any small business owner is the increase in premiums over the past years. “Health-insurance premiums for single workers rose 74% for small businesses from 2001 to 2008, the latest year data are available, according to nonprofit research group Kaiser Family Foundation.” In that same period, the Consumer Price Index has gone up 22%.

As revenues drop, some business owners have been canceling health insurance in order to keep more employees on the payroll.

United States of Insurance

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The United States government has become the largest insurance company in the world.
Its citizens are among the most heavily insured people in the world. We are insured for many aspects of our lives, from our life itself to other people’s mistakes.

Some insurance fees we pay directly. These include insurance against getting old, Social Security and Disability Insurance, insurance on our health, home, car and mortgage. Some insurance fees are indirect in that the cost of that insurance is passed on to us in the price of a product we buy or income to us is reduced by these fees.

Examples of the first type of indirect insurance are “mistake” insurance, malpractice and liability. A business pays a fee to protect themselves in case they make a mistake. Those fees are passed on to us in higher prices.

Unemployment and FDIC insurance are examples of the second type of indirect insurance.
Unemployment insurance is a based on a percentage of the wages paid by an employer to an employee. An employer typically reduces the wages that it can pay an employee by that amount. FDIC insurance is a fee charged to banks to protect savings against bank failure. The bank reduces the interest it can pay on a savings account to offset the fee. Like individuals, businesses pay for many types of insurance, passing the cost on to their customers in the form of higher prices.

There is another indirect form of insurance in the form of taxes paid into a general fund.
We are insured against poverty in the form of SSI and food stamp programs, whose payments come out of general Federal and State tax revenues.

How have Federal and State governments become so heavily involved in the insurance business? With the passage of the Social Security Act during the 1930s Depression, the Federal government entered the annuity insurance business – sort of. Annuities are a type of insurance where a person pays premiums over a period of time and, at the end of that period, begins collecting payments from the insurance company. Insurance companies invest the premiums paid in order to make the payments at a later time. The Federal government, on the other hand, spends the premiums received each year, relying on future premiums to make payments. If our Federal government did not spend the premiums each year, Social Security would be more like an annuity program. Since the premiums are spent, it is a Ponzi scheme.

With the introduction of the Medicare and Medicaid programs in the 1960s, the Federal government stepped into the health insurance business. Unlike private health insurers who charge higher premiums for those with higher risks, the government charges higher premiums based on a person’s ability to pay higher premiums. This premium pricing system is most often used by those in the protection racket.

Ponzi schemes and protection rackets eventually collapse. What can we do? Elect representatives who are willing to make a transition to a valid business model. Elect representatives who will support a new law giving them a legal fiduciary duty to the voters and taxpayers. Without that duty, our elected reps have no responsibility to the public or liability for their actions other than the prospect of losing their jobs. They can enact laws and make promises with impunity. We, the voters and taxpayers, pay the price.

Indicators

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We read of lagging, leading and coincident economic indicators like the unemployment rate, housing starts and retail sales. In a Congressional hearing, somber Fed Chairman Ben Bernanke recites a litany of indications as he looks into his murky crystal ball to hesitantly forecast the future. In a 5/19/09 WSJ “Currents” article, Justin Lahart explains what some of these indicators are. And there are cool pictures.