Don't leave your brain home

At a recent presidential Q&A session, President Obama was asked the question "Would you please raise my taxes?"

Apparently, Doug Edwards (an ex-Google executive) forgot his brain when he asked that question. What he wanted was improved job training, better education and new infrastructure. What he asked for was for a horribly inefficient organization to take his money by legislation, run it through a wasteful bureaucratic process, then eventually spend it on three areas, two of which he could spend money on himself with zero overhead.

Yeah, infrastructure such as roads are government controlled and are easier to deal with through taxation. But if Doug wants better schools, donate time and money to schools. He's got enough money to sponsor chairs or scholarships at universities, or buy crayons for every elementary student in the country. If he wants better job training, then hire or train some people. He's been an executive at a big company before. He should know how those sorts of things work. Why not organize a job training program, or volunteer to help or donate to one that already exists?

It just boggles the mind how people (even very successful people who understand finance and business) assume government involvement will improve things more than large scale personal involvement will improve things. Get involved! Make a difference! Stop whining about what other people (or government) aren't doing, and make yourself useful.

We don't need more taxes. We need more people taking ownership and making a difference so the need for taxation goes down.

Sin Tax

Tax what you don't want people to do and you get less of it. Stop taxing what you want people to do and you get more of it. People sometimes call those Sin Taxes. Now, I'm just confused by this plan from the deficit reduction Gang of Six.

Rather than taxing vices, they're going straight after the smart folks who have been doing all the right things to provide both for themselves and for others. Wonder of wonders, that seems to be where the money is.

The home mortgage interest deduction? Charitable giving? Retirement savings? I guess the new plan is for us to be uncharitable greed-mongers who are forced into government housing and a tiny Social Security check when we're too old to work, rather than having a home and a retirement fund. A concrete studio apartment in the projects is good enough for retirement, ain't it?

Still, the answer is not to go regressive and just tax booze, smoking, sleaze and gambling either. I figure it's going to take painfully deep cuts across just about everything (particularly entitlements) to get out of the hole Congress has dug for us, and I doubt many of our esteemed Senators and Representatives have the nerve to cut deep enough to solve the problem.

That's what you get for bickering over deficit reduction until the last minute. You get a poor job slapped together in a hurry by people more interested in posturing than production, which will need to be fixed again next year if it lasts that long.

Unfortunately, there is a tipping point waiting out there somewhere. A point of no return where we just can't recover without major international disaster. Even worse, we may not even know when we've crossed that threshold. Let's hope common sense can actually be common, just this once, so we can move on in a more sensible manner as a country.

White House says stimulus is working

I saw an article in the paper today about the stimulus package, and how it appears to be on track to create or save as many as 3.5 million jobs at a cost of $862 billion, as promised by Congress. Now, that may sound like success to a lot of people, and I'll even ignore the whole "on track" bit and assume it's true. But let's do a little bit of math and see what that means.

Doing some simple division, you get $246285 per job, give or take a few cents. Now, we need to quantify what "a job" is just a bit, so I went out to the Bureau of Labor and Statistics and found a 2010 jobs report. In the report, you find this quote:

The average person born in the latter years of the baby boom held 11 jobs
from age 18 to age 44

So it's time to break out the calculator again. The study says men were employed on average 85% of that span of years, That gives a span of 21.84 working years, (26 years times 84%), and eleven jobs. One more divide tells me that the average job lasted 1.98 years based on the info provided by the BLS. That's somewhat below my own average job duration, but I'm in high tech which pushes average job lengths up a bit.

Now the magic begins. Taking our dollar amount, and the average job length, (and dividing once again. Am I being too divisive?) we get an annual wage of $124386 per year. There are several professions with high education requirements and detailed skill sets where that is a reasonable annual salary.

I haven't mentioned yet is that this would be the cost if they were paid TO DO NOTHING, as if they were a little monetary black hole, sucking in government funds. The government can, of course, employ them with government labor and get some value from them on things like road construction or hiring new IRS agents to handle foreclosure paperwork, but those are by definition not private sector jobs. We need jobs in the private sector.

Even assuming the government pays 3.5 million people to pick their noses, they can do better with minimal effort. The average personal income in the US is about $43000. By applying this wage to the amount being spent, and assuming the same average job duration, you can employ 10.1 million nose pickers. I assume it would be a simple matter to triple that to 30 million if people were hired to do actual work with value near their pay.

Then there's the trickle down effect of jobs, um, created or saved by the majority of that money going back into the economy as rent, house payments, groceries, and so on. This should make jobs per dollar go up.

I know this is counter to the way government is designed to work, but isn't it about time for the government to spend efficiently? They could have done better by randomly mailing out stimulus checks. Oh, wait. They did that already. My bad. If I remember right, members of Congress complained about how too many people paid off debt or invested their stimulus check, rather than buying stuff. People did things which take longer to show an impact, and that irritated those who wanted immediate gratification.

We as citizens can fix this problem, and we are fixing it gradually. It takes time, hard work, and thinking as much about your neighbor's job as you do your own. Small businesses are the engine of the economy. As a group, we provide the goods, services and jobs which will bring us back to a stable economy which is capable of sustaining a lower and healthier unemployment rate. If we wait for the government to bail us out on this one, it will be a long wait and a burden to be shouldered by our children and grandchildren.

Jobs Created or Saved?

We've been hearing since 2008 how large numbers of jobs have been created or saved via government intervention. Hooray for us! All those folks are employed now! Everything is just great! But wait. Recently, they announced that some education stimulus funding was going to have to be continued in the last half of 2010, or we would suffer massive teacher layoffs, and children would have to deal with gargantuan class sizes.

This got me thinking that the stimulus-related jobs aren't described in enough categories, so I'm going to define my own. Each category defines a particular group of jobs which exist now because of the stimulus.

Jobs Created

• These jobs are self-sustaining long-term jobs created through a bootstrap process which was funded by government intervention. This means government jobs don't get counted here, which I think is a good thing. This could include things like spin-off companies from universities which receive federal funds.

Jobs Saved

• These jobs return to being self-sustaining long-term jobs after suffering a short period where the job would have been lost without government intervention. Still, don't put goverment jobs here. Some small businesses are saved through loans, or through tapping into house equity. Too bad most lenders seem to be in lock-down.

Temps Created

• These are short-term jobs which result in the temp workers filling jobs with known end dates. There are actually two sub categories here, since there are those temp jobs where the employee earns more than the government spent to create the job, and there are those where the government pays at least equal to their wages. For this category, think new construction projects like roads, or things like census takers. The majority of the paychecks come either directly or indirectly from the government.

Temps Saved

• These are short-term jobs which would have been eliminated (as all temp jobs are) if it had not been for government intervention putting off the ending date. Most of these would be employees of small businesses who found some sort of windfall through the stimulus which allowed them to keep employees longer than they had planned. Meh.

Government Jobs Eliminated

• Woudn't it be cool if they would report this as a positive number? I'd want it to be a net value so it would be an actual reduction in the number of government employees rather than the elimination of X jobs while the government is off creating Y new ones elsewhere.

Jobs Subsidized

• These are long-term jobs which require ongoing funding to avoid collapse. This is where you count government jobs (both created and saved) as well as any others which would go away without continued government efforts to prop them up. Granted, some jobs such as teachers could be on their way to being self-sustaining at existing taxation levels, so it's a matter of deciding how long we're willing to pay and pray.

So, which do think we have the most of now that we've been stimulating the economy for nearly two years to the tune of hundreds of billions of dollars? It should be blindingly obvious if you follow the news. Now for the tough question. Since the government can't and shouldn't take care of everything, what do we as citizens do about it?

Geese and Ganders in Budgeting

President Obama announced new initiatives today to help citizens save more money for retirement, making it easier to contribute to IRAs and 401(k) programs. I applaud his administration's efforts. An administration official (not named in the Reuters article I read) was speaking about the personal savings rate which has risen to 5% today from as low as 0.8% in April of 2008, and has even been negative in recent history. He said, "Right now the situation in national savings is unsustainable." He also called the negative savings rate, spending more than we make, of past years a "major macroeconomic challenge."

It's so amazingly refreshing for someone in government to say that it's not okay to continually spend more than you bring in, and that it's unsustainable to do so. Overspending increases your debt load, and increases interest payments to loans rather than paying for goods and services. When expenses exceed income it is called deficit spending.

Having a positive savings rate as individuals is absolutely critical as we make our personal budgets, and a positive savings rate is the result of having, of all things, a balanced budget. But wait. To go from zero to a positive savings rate, you also need to have something left over and unspent. That leftover is what you use to either pay down the debt you've built up in the past, or to build up savings. That unspent amount is the 5% mentioned above.

The really slick part is that once you've paid off your debt, your cash available to spend on goods and services goes up by whatever you used to be paying in interest. Then if you build up a nest egg of investments, the interest from those investments can either accelerate your savings or become additional spending money. So eventually, you can get to the point where you have everything you did while spending yourself into ever-increasing debt, but without actually going into debt to do it. Neat trick, isn't it?

It's the difference between sacrificing for the future, and sacrificing the future. To make this work, those who are overly fond of deficit spending (on a personal level or otherwise) need to trade in their audacious chutzpah for a backbone, sort of like a Cash for Clunkers program.

Wizard of Id...Got it right!

How to Fix the Economy

Let's start with the obvious. Throwing a trillion dollars at big companies and Senator's pet projects isn't going to get us where we need to go. Yes, some small portion of it will really help, and some of the psychological shock and awe may help get things going. Other than that, meh.

Fixing the economy is a bit complicated, since it's hard to agree on exactly what's broken. For example, for years we had economists up in arms at our dwindling personal saving rate. In 2005 the average American spent more than he made. It was an outrage, bankrupting the next generation by leaving them no inheritance.

Fast forward four years to 2009. People are changing their spending habits, and have begun once again to save money. The economists (one would hope not really the same ones) are up in arms about how we need to spend money to stimulate the economy, and are outraged that people would be so thoughtless as to save their money in these dire times.

Now, about defining the term "fix." Do we really want to put the economy back where it was in 2006 and 2007? That's like rebuilding a car that flew off a cliff, but putting it back on the top of the cliff with the accelerator held to the floor. No, we don't want to put things back the way they were, or we will end up right back where we are.

The government is currently trying to keep companies from collapsing by subsidising, supporting, and in some cases buying them. Is this necessary? Sime of that help could very well be necessary to get the economy going quickly because of the large part some of those companies play. But the big question is whether it is sufficient. There we get a resounding "no."

Let's take a look at the environment that these companies need to survive. Unemployment is up. Pay is down. Spending is down, with part of that loss in spending going to savings.

Now, just like following puppet strings back to the puppet master, you can follow the money to see what's really going to happen here if we don't jump in.

Is saved money being taken out of the economy? Um, no. Not unless it's going under the mattress. Okay then, where does it go by and large? It goes to banks, credit unions, and brokerage accounts.

What do banks and credit unions do with their money? I mean under normal circumstances. They loan it back out to people and businesses, which is a way of them investing it. Currently they are too scared to loan money like they did in the past. This is good. The government is pumping billions of dollars in, and it's not really helping much. Why? Because they only want to invest where there's a chance of getting their money back! Duh!

They're looking at billions of dollars of losses due to loans they were encouraged to make so everyone could have their own roof over their head. Guess what? Some people are incapable of paying for their own roof, and some of them were speculators that got suckered into buying at a bad time. Not giving them loans is an improvement. So what happens if you stop giving loans to those incapable of making their payments in the long run? More money becomes available to those who have managed their finances properly. I bet those with credit scores over 750 have a lot less problem getting loans, so long as they continue their trend of only buying what they know they can actually pay for. That's how they got the score in the first place.

So now we have lots of people who are losing their houses. Everyone's sad about that. What do we do to "save the children" and feel good about ourselves? Do we put them right back into another mortgage and set them up to fail again like last time? NO! Wrong answer! How about this. Let them rent a place from the guy with the 750+ credit score, who has been out buying up foreclosed properties at discount prices, pulling bad debt from the banks.

Let's summarize so far. We have the foreclosed properties being bought up at a reasonable price by financially responsible people. We have the folks who got foreclosed being housed in rentals or mom's basement until they can get back on their feet. We have banks and credit unions slowly building up their cash reserves. The savings that isn't going into low interest accounts goes into the stock market or other investments where it will have a stablizing effect.

Unfortunately the car companies are in for a hard stretch. The've become used to selling luxury, such as the third or fourth car in a two-driver family, or selling the Hummer when a Civic will do. Americans have tightened the belt and been forced to face reality on personal budgets. That means people will make due with what they're driving for a lot longer, and consider buying from the glut of used cars rather than going for something new as a first choice. But you know what happens when people make their cars last longer without upgrading, and don't have a 2nd or 3rd spare? Maintenance and repairs go up as the cars age. It's not a cure-all, but I'd think seriously about investing in that service department.

Jobs are still missing from my list, so I'll pontificate on that subject next. Did you know that India has begun pricing themselves out of the outsourcing market? It turns out that they caught the entrepreneureal bug in a big way, saw a huge opportunity, bid really low, then discovered they were in competition with each other. Prices increased due to competition, pay increased as they fought for the most qualified employees, and we're now to a point where it's not as economical to hire foreigners to answer your phones or write your software.

So with foreign labor costs higher, there's more incentive to hire locally. Unemployment will go back down. Still, those jobs won't pay as much since labor costs go down whenever unemployment has gone up. Still, since we're going to be paying less for rent and mortgages, and other prices have held reasonably steady (other than gasoline and its whipsaw ride), people can get by on a little less. As they gain experience and seniority, pay goes up gradually over time.

So there are several of the major facets of our current economic crisis. The goal here is that when we put the rebuilt economic car back on the mountain, we point it along the road that goes up the hill and set it up to start out in first gear, rather than perching on the cliff zooming along at full speed.

So, allow me to summarize on how to fix the economy in five easy steps.

1. Continue to save money and increase your savings rate wherever possible by reducing unnecessary expenses. Trimming the fat goes for both companies and people.
2. Invest savings in good deals, such as discounted real estate or let the bank invest it for you.
3. Borrow only when it is responsible to do so.
4. Accept reduced-cost labor as a part of the cycle.
5. Wait and watch as we rebuild based on good principles rather than unrealistic expectations.

I'll even throw in another item, although it won't apply to most. It's another one of those 750+ credit score kinds of things. If you're able, now is the best time in recent history to start a business because that will make you the one that is doing the lending, hiring the reduced cost labor, and building up to reap the long term rewards of success through responsibility.

Sorry for such a simple answer. I feel like the doctor telling the fat guy that the answer to all his problems is diet and exercise. It's always easy to say, but hard to do.

Being Fiscally Conservative

There's a lot of talk about liberal vs. conservative ideals and attitudes these days, but it seems that nearly all of our representatives in the US House and Senate have forgotten the meaning of being fiscally conservative. There's plenty of blame to go around.

President Obama stated in his address to Congress tonight (2/23/09) that one of his goals is to cut the budget deficit in half. That's a wonderful goal, but it's like saying he wants to sink half as fast as we are currently sinking. Bill Clinton and George W Bush and their associated congressional delegations both saw a budget surplus, so it's been possible in the past irrespective of political party. World circumstances are partly to blame for that surplus window being very small, so I'll grant that it's not just greed and corruption driving the deficit. Still, Old Hickory managed to pay off the entire national debt once so it's been possible in the past.

Given that we want to move toward a balanced budget, I like to compare small scale and large scale to identify principles. For instance, what happens if I as a consumer try to spend my way out of my financial problems? Assuming I can get infinite loans, it doesn't look so bad at first. I get my necessities taken care of, along with whatever I can convince myself looks like a necessity, along with a few things that are just too cool to pass up.

But what happens if my source of money shuts off and begins to come due? Not only do I have to suddenly balance my budget, but part of that budget n0w has to go to pay off both principle and interest to cover my spending spree. The national equivalent of this thought experiment is that in 2008 8% of our taxes went to interest payments. The deficit goes toward increasing the principle each year. I think it would be a bit high if 8% of my income went to interest payments, but some people are well above that percentage on their personal budgets.

Every time we run a deficit, that percentage goes up. Guess what happens if we keep running deficits every year? Pretty soon, we end up with so much of the budget going to debt that we can't pay for anything else. Could you survive with 25% of your budget going to interest? How about 75%? What's the drop dead value where you can't meet requirements for survival? What's our national drop dead point where we can't defend and support ourselves as a country?

If it helps, think of this Saturday Night Live skit, and apply it to governmental spending.

We have lots of options to choose from.

1. Balance budgets now voluntarily. It hurts for a while, but it's like being vaccinated against stupidity.
2. Gradually cut back on expenses as the percentage of debt service goes up, and put off the choice.
3. Pay off debt later when we are forced to do so by an overwhelming burden of debt.
4. Ignore it until we have uncontrolled inflation, and can use $100 bills as kindling.
5. Call it quits and see what form of government comes out from the far side of the chaos.

Well, it turns out to not be much of a choice after all.