Federal Deficit Solution

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This year’s federal deficit will be about 10% of GDP.  Let’s put that figure in perspective.  Since World War 2, there have only been three or four years that the deficit has exceeded 5% of GDP.  Former Vice-President Dick Cheney famously said that “deficits don’t matter” but they do – for governments, for companies, for individuals. 

States have employed lotteries to fund a number of programs, including education and state parks.  The federal government should have a lottery to help pay off the deficit.  The prize?  A 10 year holiday from federal income taxes for 50,000 winners.  High income earners would buy a lot of lottery tickets, paying back the $2 trillion in tax cuts that they were awarded in 2003.  If 146 million U.S. taxpayers bought just one $99 ticket, that would raise $14 billion less expenses. How many tickets would you buy to get a 10 year reprieve from federal income taxes?  The federal government could “kick the can down the road”, forsaking some future tax revenues for some instant revenue. 

Although high income earners would benefit the most by winning, the lottery would generate sales among those of all income classes.  Lottery tickets would have to be tied to an individual’s social security number to prevent a secondary market of buying and selling of tickets.

The federal government could sell broadcast rights to the prime time night of the lottery drawing , thus earning additional revenue.  The number of viewers would probably exceed that of any Super Bowl, presenting a bonanza opportunity for networks to sell premium advertising time. 

If we are going to have big government, let’s have smart government.  Let’s have fun government.

Health Summit

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This past week, President Obama met with leaders of both parties in a televised summit designed to enable each party to publicly state their positions on health care reform.  Ostensibly, the summit’s purpose was to find common ground between the parties but the only common ground was the line drawn in the sand between the two parties.

The summit did make clear each party’s fundamental view of the role of the federal government.  This debate has continued for two centuries and, as I noted in an earlier post, James Madison crafted the debate into this country’s Constitution as the only solution to keep the confederation of states unified into a single country.

During the seven hour summit, Mr. Obama probably put the core issue most succinctly.  After saying that the public could see the difference in each party’s position, he said “that’s what elections are for.”  He could have been referring to the past election, which gave the Democratic Party a clear mandate for change.  In a subtle way, he may have been referring to the upcoming November elections – let the voters decide which position they prefer.

What muddies the political waters are the independents and the “in-betweeners”, those who think that a limited role for federal government should not be as limited as Republican ideologues argue for.  On the other hand, these “middle-of-the-roaders” may see the large role of the federal government espoused by Democrats as too intrusive.

Politicians are prone to explain things in nutty sports metaphors, as though the general public had only a 4th grade education.  So, in case you have only a 4th grade education or are a lover of stupid metaphors, let me explain it this way:  it’s like there’s cows on one side of the fence and sheep on the other side of the fence.  The sheep believe in eating the grass all the way down to the ground.  The cows believe that they should leave a bit more of the grass blade showing so that the grass can regenerate. A bunch of people sit on the fence trying to figure out which side of the fence they’re going to jump on.

Yee-hah!

Oil Calvary To the Rescue

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Many states are struggling with large budget deficits.  It surprised me to learn that the oil industry pays for almost 90% of Alaska’s state general fund.  By state law, the state sets aside 25 – 50% of certain oil and mineral tax revenues into a reserve fund.  Over the past twenty years the state has borrowed almost $4B from the reserve fund to balance their budget, repaying the loan during the past three years as oil prices increased. The state’s 2009 Fall Forecast shows a balance of over $8B remaining in the reserve fund.

Further south, California is struggling with a $6B budget shortfall for this year and over $14B for 2010- 2011.  Because the state relies so heavily on income taxes, a downturn in incomes, especially capital gains, has a severe impact on the state’s budget.  Like many states, California closed their budget imbalance with Federal stimulus funds.  California has been the largest recipient of these funds, totalling almost $7B by the end of 2009, with an additional $15 billion in awards to be paid to the state.  New York and Texas are the runner-ups in the stimulus contest but their awards total a bit more than half of what California has marked up.

Barring any further stimulus packages, the federal spigot to the states is scheduled to shut off this year, leaving state legislatures already battered by difficult choices to make even more unpopular choices.  California’s only choice may be to mount an army headed by a cigar chomping Gov. Schwarzenegger, invade Alaska and take over their oil fields and tax revenue.

Economic Policy

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In January 2009, Bruce Bartlett, a former Treasury Department economist and the author of “Reaganomics: Supply-Side Economics in Action”, wrote an article encouraging a government policy emphasis on investment.

A Republican strategist who helped craft the tax cut policies of the Reagan era, he finds fault with the tax cuts of the Bush era.  In an examination of economic policy of the past thirty years Bartlett contrasts the Democratic and Republican policy branding.  “There is never a time when Democrats aren’t in favor of more health and education spending, aid to state and local governments, and so on–just as there is never a time when Republicans aren’t for tax cuts.”

The increasingly sophisticated gerrymandering of voting districts has lead to a polarization of the dominant political parties, driving out the very centrists of both parties who might steer a course between the ideologies of each party.  The arduous process of running for office surely discourages many sane and competent men and women who might otherwise toss their hat in the national political ring.  What’s left are ardent ideologues and large personalities pursuing their destiny.

East vs West

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In an op-ed in the Financial Times 12/28/09 the economist, Niall Ferguson, climbed on a tall mountain and looked back on the past 500 years.  He listed 6 key traits that have given the west an edge over the east in these past five centuries: “the capitalist enterprise, the scientific method, a legal and political system based on private property rights and individual freedom, traditional imperialism, the consumer society and what Weber probably misnamed the ‘Protestant ethic of work and capital accumulation as ends in themselves.'”

Social Security Privatization

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Slowly, very slowly, I am going through a file box with articles that I clipped from ten years ago.  As the debate renews – or continues – about the privatization of Social Security, we can learn from the past. 

In 1998, there was a loud call for the privatization of Social Security, whose return on the contributions we make is about 3%.  In 1998 the stock market was continuing its historic rise due to increases in productivity, output, and employment.  The dot com and financing boom of the “New Economy” was growing in strength and returns in the stock market were above 17% per year.  Comparing that 17% return to the paltry 3% return on Social Security contributions – well, there was no comparison.

Twelve years and a “lost decade” of stock market returns later, the safe 3% return on SS contributions doesn’t look as bad as it did in the heyday of the late nineties.  In 1998, Dean Baker wrote an Atlantic Monthly article examining the myths about Social Security and the arguments for privatization.  The article is online and it’s worth a revisit.

System Disabled

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No matter the strength of the economy or the party in power, the Social Security Administration’s (SSA) Disability claim processing has been broken for decades. It is perenially underfunded so that, according to both disability lawyers and people who have worked for the SSA, it manages its caseload by denying 60% or more of claims. Claimants must then go through the lengthy appeals process which can last several years. I know of three people with MS who have experienced this case management nightmare.

This past (we hope) recession, the Great Recession, as some are calling it, has sparked a large increase in the number of people filing disability claims and a growing backlog. For 2010, the SSA is expecting 3.3 million claims, a big jump from the 2.6 million claims in 2007.

In 2007, the SSA started nationwide implementation of its Quick Disability Determination (QDD) process, which enabled them to cut their initial claims processing time by 6 days to – get this – 83 days. For most claimants, it took three months to find out that their initial claim has been denied. What was the average time for processing claims, including appeals? 441 days, or almost 15 months. That was before the recent surge in claims. No doubt that the processing time has climbed as well. Claimants get retroactive benefits once their claims are approved but how many are homeless by the time this process is complete? How many simply give up? How many simply don’t bother?

The stimulus bill contained funds to help address the problem and the SSA was planning to hire an additional 155 administrative law judges to handle the caseload. In the first half of 2009, the SSA employed 1200 judges.

Prescription Drug Managers

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A 1/15/10 Wall St. Journal article detailed a Dept of Justice case against Johnson and Johnson (J&J), accusing the company of paying kickbacks to Omnicare, a publicly held company (OCR) and a Medicare and Medicaid Prescription Benefits Manager (PBM). Omnicare is the country’s largest PBM servicing nursing homes. Prosecutors allege that Omnicare’s annual purchases of J&J products almost tripled to more than $280M.

In addition to the kickbacks, J&J paid bonuses to Omnicare for switching patient’s prescriptions from competitor’s drugs to J&J’s medicines.

PBMs typically negotiate prices with drug manufacturers and then add on a markup to their client, whether it be the U.S. government or a large Fortune 500 company. In an earlier blog, I related Caterpillar’s recent negotiations with Wal-Mart and Walgreen’s to lower their drug costs. How much could Medicare/Medicaid save by following a similar path?

Rocky Mountain Low

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As expected, Colorado announced this past week that the unemployment fund is broke and the state will borrow money from the Feds to continue paying claims. Colorado joins 25 other states who have had to borrow money from the Federal government. The loans are interest free for this year.

The national picture is grim. In the past two years, the construction industry has shed 1.6 million jobs, more than 20% of the total jobs lost in all industries. The finance sector has lost 548,000 jobs since December 2007, about 7% of it’s workforce. Office and administrative workers have thinned by 10.1%.

After going broke in the 1980s, Colorado instituted some actuarial changes to strengthen its unemployment fund and started the recession with a seemingly fat cushion of almost $700 million. In the middle of this decade, I was one of many employers who grumbled at paying a “solvency tax surcharge” to meet these more stringent guidelines for the unemployment fund’s reserves. In a 2008 report, the National Employment Law Project rated Colorado as one of 20 states with adequate reserves capable of paying at least 24 months of unemployment benefits. Colorado had actually improved since a 2007 assessment that included Colorado as one of eight states that would have financial difficulty in case of moderate or severe recession.

After several extensions of benefits mandated by the Congress, unemployment benefits now exceed a year in many states, more than double the normal 26 week limit. Designed to provide a temporary safety cushion for unemployed workers, they have become a welfare program under a different name.

Knowing that unemployment tax rates will likely double or even triple in the hard hit construction industries, employers are reluctant to take on new employees unless they are very sure of an upturn in business. Already saddled with high workmen’s compensation rates, an increase in unemployment taxes just piles on more of a cost burden on employers in this sector of the economy. Expect a slow job recovery.