Government Employees

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As federal, state and local programs, agencies and bureaucracies grow, so too do the employees at the various levels of government.  In 1950, the population of the U.S. was 152 million, according to U.S. census data compiled by Data360.  In 2006, the population was 301 million or about double.  In 1950, the total government civilian workforce was 6.4 million, or a ratio of 1 government worker to 24 people.  In 2006, the total government workforce had grown to almost 20 million, a threefold increase and a ratio of 1 worker per 15 people.  The government employee growth rate of 1.5 times the growth rate of the population has occurred despite the efficiencies of computerization and communication and reveals the ever larger presence that government plays in our lives.

With about half of the population of working age, the ratio of 15 people to 1 government civilian worker means that about 7 people support each worker. The Census Bureau estimates the U.S. population at 367 million in 2030, an increase of 22%.  If the government workforce increases at the same 1.5 times the population growth rate, government employees will total more than 26 million in 2030, so that it will take one government worker to service 14 people.

What does not appear in the government employee totals is the increase in outsourcing of tasks that used to be done by government employees, a pattern that clearly emerged by 2000.  From 1996 to 2006, there was little change in the number of government employees.  Some of this was due to computerization but we can only guess at the number of federal, state and local jobs that were outsourced to private companies.  What is the true ratio of population to government worker?  Perhaps 13 to 1?

Some people and politicians clamor for more programs, more regulation, and more in general from government.  When is it enough?

TARP Deadbeats

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Pro Publica, an independent non-profit noted for its investigative journalism, has been keeping tabs on the TARP Troubled Asset Relief Program TARP program and presents its updated status here.

I dropped their figures into a spreadsheet and came up with some interesting factoids.  All dollar figures are in rounded billions of dollars.  Actual disbursements from the program have been $538, of which $343 is still outstanding.  80% of the funds were disbursed to just 12 companies, with Fannie Mae and Freddie Mac, the quasi-government mortgage giants, at the top of the list. Fannie received almost $84 while Freddie got over $61.  Neither of these public – private companies has returned any money to the treasury.

General Motors recently ran a number of ads touting the fact that they had repaid some of the funds to the U.S. taxpayer.  What the ads didn’t tell us was that GM still owed taxpayers almost $44.  What GM also failed to note was the $16 loaned to its financing arm, GMAC, which was split off into a separate company.  None of that money has been repaid. Chrysler has returned only $2 of the almost $11 it received.  GM, GMAC and Chrysler combined received $72 and have returned only $9.

AIG has returned nothing of the $47 loaned to them.  Citigroup has returned $26 of the $45 it received.  The other mega-banks, Goldman Sachs, J.P.Morgan Chase, Bank of America, Wells Fargo and Morgan Stanley have all returned the combined $115 they received.  Taxpayers made $11 on those 5 banks, a return of 9.6%.

Here’s a short summary of the $343 in outstanding monies (in billions):
Fannie          $84
Freddie         $61
GM, GMAC     $60
AIG        $48
Chrysler     $9
830 Others    $81   

Economic Weather

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Understanding and predicting the economic weather is less precise than, well, predicting the weather.  The stock market is a composite “vote” of the direction and strength of corporate profits in the coming six months to a year.  It is not a barometer of what the economy will do, but an indicator of people’s predictions, their fears, their hopes. Predicting the economic weather involves a complex interplay of many factors, which, by themselves, are not that complicated.  It is the interplay and the weight, or importance, given to each factor that accounts for the range of prediction.

Henry Blodget is a former Wall St. analyst who was indicted by the Securities and Exchange commission for ethics violations during the “dot com” boom at the end of the nineties.  Blodget subsequently founded the Business Insider, a blog about trends in business and the economy.  Here  is a compilation of charts on the labor market, housing, and manufacturing output for several decades.  You may or may not agree with Blodget’s dire prognostications but the overall picture of data that he has pulled together is worth a look.

Fiscal Foolery

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The fiscal year of the U.S. Government runs from October to September, preceding the calendar year by three months.  The 2011 fiscal year will start October 2010 and end September 2011.

By early February of each year, the President presents his budget proposal for the coming year, starting October 1st.  The proposal also includes an outline of spending priorities and income projections for the coming five years.  That proposal often becomes a starting point for budget committees in the House and Senate to craft a resolution, which is not a law but a framework of authority for various appropriations bills.  By April 1st the budget committees are supposed to present the resolutions to the full House and Senate for a vote.  Discrepancies between the House and Senate versions of the resolution then have to be worked out in the House, which passes the final resolution.  In 2006, despite majorities in both houses, Republicans were unable to reconcile and pass a budget resolution.

This year, the House Budget Committee passed their resolution to the full House on March 15th.  The Senate resolution didn’t make it out of committee till April 22nd.  On July 1st the House Budget Committee chairman filed a budget resolution that addresses only the coming fiscal year and does not contain a 5 year outline.

This past week Congressional Representatives headed home for the July 4th recess.  Republicans accused the Democrats of passing a budget resolution without an outline.  Democrats answered that the upcoming bipartisan President’s Fiscal Commission’s report, due in December, would outline long term budget proposals which both houses will be voting on. (WSJ article)

Paul Ryan, the Republican ranking member of the House budget committee, answered that the budget passed by House Democrats “does not set congressional priorities; it does not align overall spending, tax, deficit and debt levels; and it does nothing to address the runaway spending of federal entitlement programs.”  (Washington Post op-ed by David Broder)

With elections just a few months away, are Democrats unable to pass a resolution that clearly spells out the doom and gloom of the coming five years?  Probably.  Voters don’t respond well to bad news. A realistic appraisal of the coming years will involve the contradictory necessity of more government stimulus for the economy and spending reductions to bring the budget down.  Voters may say they want less government but many voters don’t want anyone to trim their particular handout, whether it be Social Security, Medicare, farm supports, unemployment payments or tax breaks.

Each month the Congressional Budget Office (CBO) issues a report card on the current fiscal health of the Federal government, budget projections and the estimated effects of various legislative proposals on the budget in the coming years.  The good news is that the deficit this year is less than last year’s red ink.  The bad news is not only that the difference is slight but that the comparison hides some very troubling patterns. 

2009 included expenses for TARP and Fannie Mae and Freddie Mac, the quasi-governmental mortgage giants.  Those expenses are significantly down in 2010, helping to hide the significant increases in spending this year – 11% higher than 2009.  TARP spending is actually a negative, a phantom income that artificially lowers this year’s deficit.  Receipts this year are a bit more than 2009 and spending on health and defense has decreased slightly but various domestic nutrition and food aid programs, collected under the label “Other Activities”, have increased by 9%.  Estimates for June reveal that federal unemployment benefits paid out so far this year have skyrocketed by 50%, from $84bn to $124bn.  

The unemployment rate is unlikely to decrease significantly this year, meaning that there will be pressure on Congress to continue unemployment extension benefits. In the long term, nutrition and food aid programs provide not only humanitarian relief commensurate with the ideals of this country but make budget sense, as they reduce health spending in the future.  As the population ages, Medicare spending is only going to increase.  Until the economy improves significantly, Medicaid spending will continue to grow.  That leaves two areas to reduce the deficit in the coming years.  One – spend less on defense.  Two – increase taxes.  That twin headed serpent is a harsh reality that no politician can ride on in the upcoming election and get elected.

Unemployment Insurance Extension

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The recent failure of the Senate to extend unemployment insurance (UI) benefits has sparked debate around the country.  This Senate report from the Joint Economic Committee focuses on the question of whether extending UI benefits causes the unemployed to be less aggressive in their job search or to be more discriminating, taking only those jobs similar in rank and experience to the job they lost.  This widely held notion is based on studies done in the 1970s and 1980s that found that unemployed workers found jobs just before their benefits ran out.  The committee heard testimony from authors of these decades old studies, who replied that those studies were no longer applicable because they were primarily concerned with temporary or cyclic layoffs in manufacturing industries. Manufacturing now comprises less than 20% of the economy. 

This Senate committee was chaired by a Democrat, leading some to respond that the report is biased in favor of extending benefits.  However, the report includes testimony from Alan Greenspan, former Federal Reserve chairman and a staunch conservative, who said “when you’re in period of job weakness where it is not a choice on the part of people whether or not they’re employed or unemployed, then, obviously, you want to be temporarily generous”.

It is the states have been largely responsible for the lack of funding for their unemployment reserves.  As this National Unemployment Law Project report shows on page 3, for the past four decades states have been lowering the wage base they collect UI taxes on from almost 50%  of taxable wages to less than 30% of taxable wages.  It is the states that have been unable to extend UI benefits simply because they have not prepared for the “rainy day” of a serious recession.  Many states and advocates for the unemployed then come crying to the Federal government to help them and their citizens who are suffering from the lack of planning by state politicians.

As a small employer, I strongly oppose the numerous burdens that states and the Federal government put on employers.  Under current law in most states, UI rates charged to employers are based on the experience ratings of each employer, which penalizes those employers with greater turnover.  Thus, employers are reluctant to hire a new employee if they are not sure that the increased business will be more or less permanent.  If they let that new employee go in 4 months, the employee will be able to collect unemployment insurance, which drives up the experience rating and UI rate of the employer and costs the employer more for all employees.

In my opinion, unemployment insurance should be paid for and based on the experience rating of a worker, not the employer.  If UI is to be part of the social contract, then collect it from the citizens who may benefit from that insurance, not the employers.  Some might counter that proposal with the argument that, once the burden of the insurance tax is shifted to the employee, there is the possibility of collusion between an employer and employee to defraud the system.  For example, an employee who wanted to quit a job – and would thus be unable to collect UI benefits – could ask the employer to fire him or her so that they could collect UI benefits.  Since the employer now has no “skin in the game”, the employer might agree to falsify the employee’s record to show that the employee was fired.  In the long run, however, it is the employee who will bear the cost in higher insurance premiums.

We are currently seeing the results of bad planning and policies that target and penalize employers.  Although some economic indicators show an uptick in spending and an increase in sales for some industries, businesses in general are reluctant to hire simply because the cost burden of a new employee requires such a commitment from the employer.

For now, solutions include extending UI benefits for now and dipping into federal stimulus funds for the money.  Why have the Democrats refused to touch the stimulus money to fund further extensions?  I have heard little of any substance from Democratic politicians explaining why they don’t want to pay for UI benefit extensions with stimulus funds.  If anyone has, please let me know.

The ultimate solution has to come at the state level where states need to keep adequate reserves for unemployment claims.  Secondly, states need to transition away from employer based unemployment insurance.

IRA Contributions On Sale

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In late March, I was speaking with someone about IRA contributions.  Both of us agreed that we were hoping that the market would come down a bit before the April 15th deadline to make a contribution for the 2009 tax year.  By April 15th, the market had gone even higher on early signs that a recovery was gaining steam. 

Recent data in this past month has cast doubt on hopes for a strong recovery and the market has declined 16% from its high on April 23rd.  Now might be a good time to think about making some part of a 2010 IRA contribution.  If you think the market could fall further into bear market territory, a 20% or greater correction, then stagger or dollar cost average your contributions.  Too often we make the mistake of not thinking about IRA contributions till a few months before the deadline.

The Nature of Transactions

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Conservatives are concerned about the moral behavior of individuals, but not about their economic behavior unless it is a transaction between two consenting adults which violates conservative moral sensibilities.  For that reason, many conservatives vote for laws banning prostitution, the use of drugs, and homosexuality, to name a few. 

Liberals are concerned about the moral behavior of companies, but less concerned about the moral behavior of individuals.  Conservatives and liberals have fundamental conflicting views of the nature of a transaction.

Conservatives tend to idealize process so they often view a transaction between two parties as a voluntary trade.  Liberals view a transaction as a process whereby one party gains some advantage, however slight, over another.  Because of their view, conservatives want little regulation of the economic behavior between people or between companies and people.  Liberals often mistake this view as a sympathy for companies but is a conservative reverence for the sanctity of transactions between parties that leads them to reject regulatory laws.

Because of their view of the nature of transactions, liberals want more regulations in an effort to reach a “fair” transaction where one party’s advantage over another is kept to a minimum.   What is the proper number of referees in a football game?  Conservatives want fewer referees, liberals want more.

World Trade Rising

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Each month the Bureau of Economic Policy Analysis, based in the Netherlands, releases a report on world trade.  The latest report for April, released June 24th, showed a month over month drop of 1.7% after a particularly strong increase of 4% in March.  The 3 month moving average is up about 5% with Japan, Asia and other emerging markets showing steady improvements in exports.

Liberalism

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Previously I discussed the contradictions in conservative philosophy.  Today I’ll examine contradictions in modern liberalism, which has borrowed aims, ideas and sentiments from classical liberalism but has evolved from those roots.

Liberalism claims a fundamental belief in the inherent goodness of people, that there is an implied social contract between people to treat each other fairly.  It professes commendable goals of equality and individual freedom but is less concerned with the process of attaining those goals.  The underlying morality of the means toward an end often conflicts with the morality of the goal.  To say that liberalism believes that the ends justify the means is a false oversimplification of the philosophy because liberalism is concerned with process, but that concern is subservient to the goal.  Principles compromised in the path toward a worthy goal are an acceptable trade off.

John Locke, regarded as the founder of classical liberalism, conceived of equality as a natural state that human beings are born into.   Each person is not inherently subject to another and all people in a political society have a right to be treated equally under the law.  Modern liberalism broadens that concept of equality to mean that all people in a society should have equal opportunity to further their economic station; that each person in a society should have at least a minimum amount of goods to survive.

In Locke’s view, each person has a right to own property – property of any sort, not just land – and it is the government’s chief role to protect that property. No person may be forced to give up their property unless that person chooses to do so by some sort of implied or explicit contract.  As modern liberalism expanded the idea of equality, a contradiction in principles arose.  If a society was to ensure some level of survival to all people in that society, it would have to take property from those who had it in order to give it to those who didn’t.

Equal opportunity is a utopian ideal.  Few modern liberals would reasonably assert that such an ideal is attainable.  What is attainable is more equal opportunity.  In pursuit of that goal, public educational institutions were founded – funded not by taxes apportioned equally among the citizens but by monies – property – taken from those who had property.  No one can reasonably question the immense value that a schooled citizenry has to society.  Over the past 150 to 200 years, the outcome of such a policy has been a great boon to society.  If the means of getting there has meant some compromise of the principle of protection of private property, that is an acceptable trade off, modern liberals would argue. 

Equality, or fairness, under the law is a core concept of classical liberalism.  No reasonable person would argue that it is fair that someone starve to death on the street while those with full bellies walk by.  Although modern liberalism professes a belief in the inherent goodness of people, it does not trust in the goodness of people to freely choose to help those in need.  This contradiction is so profound that, for some, it undermines the moral basis of modern liberalism.  Modern liberals assume that there are not enough people who will freely choose to help those in need that people must be made to help those in need.  Rather than passing the hat, liberals pass a tax.

Inequality of circumstance, of station, of living standard – is unavoidable.  That is the natural state that human beings – in fact, all creatures – are born to.  To minimize that inequality in pursuit of a vision of justice and fairness may be a laudable goal but the mission is sullied by a less than principled process in pursuit of a worthy aspiration.  Some people will doubt such noble intentions, others will fight confiscatory laws or hide their property – making it all the more difficult for modern liberals to attain their ends.  Process matters.

Conservatism

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Modern day conservatism and liberalism have several contradictions which make it difficult to forge pragmatic policy based logically on either theory.  Today I’ll look at the contradictions of the conservative philosophy.

Conservatism emphasizes individual freedom in a pro-forma manner but the philosophy particularly targets individual economic freedom.  Conservatism professes a support for moral freedom but herein lies one of many contradictions in the philosophy.  Advocating for tradition and the nuclear family, conservatives all too often prescribe moral values as part of their philosophy.  Politicians in the social conservative camp thus propose laws which aim to enforce certain moral choices – in effect, curtailing moral freedom.

Conservatism champions free market capitalism as the economic structure which will give the most individual economic freedom.  The haphazard to and fro of the marketplace does not promote social equality or deliver restorative justice and conservatives contend that government has no business intruding on an individual’s economic freedom in order to accomplish either of these goals.  Thus conservatism maintains that all government income redistribution schemes are baseless.  Here conservatism reveals its utopian roots.  While liberal philosophy has utopian aims, conservatism has utopian means.  In principle, free market capitalism is a sum of individual choices.  In practice, the participants in a free market try to gain an economic advantage through legal or political access, thus compromising the freedom of other individuals to make choices in their own self interest.  This inevitable contamination of the pure utopian model of capitalism transforms it to some degree into an income redistribution scheme.

Conservatives argue for limited government at the federal level but steadfastly propose a strong national defense, which requires more spending, more taxes and an increased intrusion by the federal government on both individuals and the separate states.  Despite their professed support for individual freedom, many conservatives have supported a military draft during the past century.  In addition to government’s role to protect its citizens from external threats, conservatism advocates a strong role for government to maintain an internal order.  Thus, conservatives support a strong police presence, a well funded judicial administration and penal system to dissuade and punish those who make moral choices which threaten the moral and social order.  Conservatives deny that any social benefits programs help maintain an internal civil order and so argue that the federal government should have no role in social welfare programs. 

Who shall determine the proper moral and social order?  Conservatism’s answer is majority rule but there lies another contradiction – a support for a populism which is antithetical to the founding principles of this country.  Conservatives hold a well deserved regard for the original text of the Constitution as they interpret it.  Yet the politicians who wrote the Constitution of this country were afraid of majority rule, regarding it as mob rule, and one of the most dangerous threats to a free people.  Accordingly, they enacted political institutions and processes designed to mitigate the danger of majority rule, creating a republican form of democracy. 

As an economic and political philosophy, conservatism is pro-forma anti-statist.  However, the practice of conservatism requires an intrusive statist framework to enforce traditional values.  In the U.S., these traditional values are based on Christian moral values as set forth in the Bible.  Since the Bible contains a set of rich, all-encompassing and deeply contradictory values subject to centuries of competing interpretations, it is not surprising that any politico-economic philosophy that embraces the Bible should embody contradictory aims.

These contradictions ensure disagreement not only between conservatives and liberals but also within the ranks of conservatives.