Transparency

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In a 4/29/09 WSJ op-ed, two senior research fellows at George Mason U., Veronique de Rugy and Eileen Norcross, make a case for the Federal Government to adopt a policy of true transparency. This would involve “putting specific details of every government expenditure online”.

Several states already so this, enabling the public to become watchdogs. The authors cite the example of the Missouri Accountability Portal (MAP) which posts all state expenditures. When the National Taxpayer’s Union “discovered more than $2.4 million spent for questionable purposes over the past eight years”, the Republican governor Matt Blunt asked for an audit.

The authors note that the Federal effort at Transparency, Recovery.gov, “only requires states and cities to disclose project-level expenses,” leaving the details out. While the authors want the Federal web site to list detailed expenses, I think that that is more appropriately a state function.

Missouri’s web page (link above) only says that stimulus expenditures are “coming soon” and we can only hope that they will offer the same kind of openness in revealing the details of stimulus spending. A big huzzah for Guv Blunt and the folks at Missouri’s state offices. Let’s encourage our states to follow their example.

In a 50 state survey the non-partisan Institute for Truth in Accounting found that “the same accounting rules are not being used for budget calculations as for financial reporting. Second, Comprehensive Annual Financial Reports (CAFR) are not being issued in time for legislators or governors to review the results meaningfully before planning the next year’s budget.”

States with billion dollar budgets are using the same “cash basis” accounting method that a very small business uses. States disregard liabilities for payments in future years in crafting their current year budgets. “All [legislators] have to focus on is expected cash flow in the coming fiscal year, and they can ignore amounts that will be paid in future years.”

If you reside in California or Illinois, skip this next part. It’s ugly. “California’s budget calculations included no estimate of revenues. Only estimated expenses are noted.” “The Illinois budget .. shows an ever-expanding hole between what was budgeted and what actually transpired during that fiscal year.”

Yay for Vermont, which “is carrying a positive net operating balance, and its budget tracks its CAFR comparatively well. Informed with such information, Vermont taxpayers, legislators, and media have a truer depiction of the state’s financial condition.”

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.