Oil Calvary To the Rescue

March 1, 2010Leave a comment

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

February 14, 2010Leave a comment

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

February 14, 2010Leave a comment

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.'”

System Disabled

January 29, 2010Leave a comment

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

January 29, 2010Leave a comment

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?

State of the Union

January 28, 2010January 27, 2017Leave a comment

I have received a preview of tonight’s speech by President Obama

Rocky Mountain Low

January 25, 2010Leave a comment

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.

Consumer Spending

January 24, 2010January 27, 2017Leave a comment

OK, you’ve just finished your winter book project, War and Peace, and now you’d like something not quite as long. How about a 100 year history of consumer spending? This 69 (PDF) page report has lots of easily understood graphs and brief summaries of the economic household picture at selected periods during the last century.

Most revealing are the 100 year trend graphs near the end of the report. In chart 40 on (PDF) page 64,

we can see the century long rise of consumer spending in real 1901 dollars despite the fact that food, clothing and housing expenses take up far less of our income today. What are we spending our money on? Chart 43 on (PDF) page 67 shows the share of income that the average household spends on non-necessities, from a low of less than 25% in 1900 to 50% today.

While the percentage of income for most categories of spending have changed, there is one expense that has changed little during the past 100 years: entertainment. Those expenses have decreased only slighty, taking up just over 5% of the average household income.

The last page of the report summarizes the century’s changes in discretionary spending: ” households throughout the country have purchased computers, televisions, iPods,DVD players, vacation homes, boats, planes, and recreational vehicles. They have sent their children to summer camps; contributed to retirement and pension funds; attended theatrical and musical performances and sporting events; joined health, country, and yacht clubs; and taken domestic and foreign vacation excursions. These items, which were unknown and undreamt of a century ago, are tangible proof that U.S. households today enjoy a higher standard of living.”

It is doubtful that we will enjoy an increase in discretionary spending as dramatic as the last 100 years. Chart 43 on (PDF) page 67 shows the leveling that has happened over the past 25 years.

A comparison of a century’s worth of income data shown in Table 27, (PDF) page 56, reveals that there has been dramatic changes in income for the working person. In 1935, the average manufacturing wage was 58 cents an hour, or $7.62 in 2002 dollars. Real manufacturing wages have doubled in 80 years. Real construction wages ($.49 in 1935 = $6.39 in 2002) have tripled in that same time. In the finance and insurance industry, wages have seen the smallest increase in real terms but even those have swelled by 60%. However, after adjusting the wage data in Table 27 for inflation reveals that real wages have decreased in the past 30 years. The boom happened a long time ago.

Accompanied by that dramatic rise in real discretionary income has come the explosive rise of advertising dollars aimed at enticing us to part with that extra income on new cars, electronics, service contracts for cell phones and internet and cable service that we simply can’t do without. In short, the average American household has been sold the idea that these non-essential items are, in fact, necessary.

As noted earlier, the growth in discretionary income as a percentage of total income has slowed, leveling at about 50%. Wages have declined for more than a generation. Until there is some increase in real wages or the invention of a Star Trek like Replicator machine, the proportion of discretionary income will probably remain stagnant and households will continue to tighten their belts.

Bank Tax

January 23, 2010Leave a comment

The Obama administration is proposing a tax on the largest banks, based on the amount of leverage they employ. The estimated annual amount of the tax is $10 billion a year. Goldman Sachs estimates that the largest banks made $250 billion last year before taxes and loan-loss provisions. Based on those numbers, the tax amounts to a manageable 2/10th of 1 percent.

Some banks have protested. The 2008 TARP law did require the White House to come up with some system to pay for any losses under the program but a government estimate of $120 billion in losses consists largely of losses in the automotive industry. Jamie Dimon, the CEO of J.P.Morgan says that banks shouldn’t have to pay for another industry’s losses.

That does seem unfair but Dimon overlooks the long term liability of credit default swaps that the government has assumed in the AIG bailout. The Depository Trust and Clearing Corporation estimates the net value of these swaps at $82B. Also overlooked is the full price that AIG paid banks like Goldman Sachs and Societe General on credit default swaps (CDS) totalling $62.1B. In the late part of 2008, many of these swap contracts were selling for as little as 25 cents on the dollar. Let’s conservatively estimate that AIG paid these banks $30B above market price.

Additionally, the Federal Reserve bought $1.45T in Fannie Mae and Freddie Mac mortgage bonds, paying full price for bonds that had fallen 30 – 40% in value. Among these investors were the large investment banks, who took the money from the Fed and re-invested it in Treasury bonds. I have not been able to find estimates of this gift from the U.S. taxpayer but it must be at least $100B for the larger banks as a whole.

In short, the banks will be repaying taxpayers far less than they will have received from taxpayers.

Innocent Investor

A helpful understanding