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Posts tagged “Budget

The Medicare Mess

Yesterday, I documented how the nation’s fixation with “soaking the rich” is not only bad economics but bad public policy. To recap briefly, those who are better off are already providing the federal treasury with far more than their share. The top 400 earners comprise less than 1% of the population, yet their taxes provide more than 2% of total take – while some 45% of Americans don’t pay any income tax. The best way to improve the revenue side of the fiscal equation is to get those 45% to start paying their taxes again.

Of course, we all know that we can’t tax our way out of the debt hole. It’s too deep and deepening every second; even if we close all the tax loopholes and get those 45% to ante up we still won’t close the projected budget deficits for any year over the next ten. Spending needs cutting, although liberals are typically offended by that notion. But it’s the 800 pound gorilla in the room and finally people are noticing.

While the Washingtonians had their fun earlier with whittling away at discretionary spending, the fact is that chopping away at 12% of the annual budget isn’t going to make enough of a difference. (And the reality is, they chopped very little – about $352 million according to CBO). To really tackle our deficit – which needs to be done before we get to paying down the debt – we have to tackle entitlements.

The President’s seriousness about tackling entitlement spending was summed up by this line from his April 13th speech:

“We don’t have to choose between a future of spiraling debt and one where we forfeit investments in our people and our country. To meet our fiscal challenge, we will need to make reforms. We will all need to make sacrifices. But we do not have to sacrifice the America we believe in. And as long as I’m President, we won’t.

Gee, Mr. President. Sure glad you reiterated for us your commitment to maintaining the status quo.

The small part of the speech he did dedicate to his Medicare reformation plan was filled with smoke and mirrors. There weren’t any concrete details, only a pledge to reduce Medicare costs by $500 billion over the next 12 years. In case you’re wondering, that is less than $45 billion per year – or less than the budget cuts enacted this year. Talk about fiddling while Rome burns! To accomplish that meager goal, the administration proposes to focus on cutting waste and fraud – laudable goals and an admission that the government is doing a terrible job at administering the program. If there is $45 billion in abuse, somebody needs to be fired. The rest is the smoke and mirrors part – relying on the IPAB to force reductions in payments. Grandma will certainly be happy when her doctor tells he can’t see her anymore because the government won’t pay him enough to make it worth his while.

The Republican plan put forth by Paul Ryan kicks the can down the road for another 10 years, then applies an indexed government co-payment to a private plan. While that does provide some cost certainty in the future, it does nothing to address the spiraling debt created today by the program. It also does absolutely nothing to address the cost inflation in health care. In short, it’s more smoke and mirrors accounting.

So if both plans are nothing more than speaking points and fall well short of actually tackling the problem of entitlements, where do we go from here?

The answer is to address the very idea of government entitlements. The very word “entitlement” means that a right to a specific benefit is granted by…somebody. What’s more, expectation of entitlements are often tied to narcissistic attitudes. If you don’t think the two are related, consider what your visceral reaction is to the idea that entitlements need to be cut: odds are that like most people in the Western world, you recoiled at the thought. What, take away my benefits?

The President danced around this very issue in his speech. Namely, what kind of society do we want to be and where do we to place our priorities? The President, along with most liberals, envision a society in which regardless of circumstance you will always be taken care of. To enable this vision, they propose that the productive members of society take care of the unproductive – the misfortunate, as the termed it. Most Republicans also think entitlements are just dandy, although they would prefer the private sector pony up to those responsibilities. In other words, they’re perfectly happy to let businesses handle society’s ills. Anyone who has ever read Dickens can tell you what kind of world that is.

It seems like a horrible quandary, doesn’t it? On the one hand, we’re faced with the prospect of a federal takeover of society; on the other, a return to Merry Olde England of the 1850’s. But there is another way – one that Americans throughout our history relied upon.

Tune in on Saturday to find out what that might be. J

Of Trains and Automobiles

Earlier this week, George Will published an opinion piece in which he argued that the reason the liberal wing of our democracy is in love with mass transit is…well…because they see it as a means of imposing a collective social order on Americans. Now, I normally like George, even if he can be a bit long-winded and leave me scrambling for a dictionary. I happen to think that most people who live in our urban metropolises understand the need for mass transit systems, regardless of political bent. I find it hard to believe that anyone who lives in New York or the immediate suburbs can imagine the city without the subway and extensive commuter rail systems. The same holds true for the citizens of Washington DC or Portland or Chicago or any of the other two dozen or so metro areas served by decent mass transit. It’s also hard to imagine that residents of densely crowded metro areas wouldn’t like alternatives (think Los Angeles and Atlanta). So, George probably is just a little off base with his premise. But I can understand where George (and frankly, many conservatives) get his premise: for too long, the discussions of trains and cars has been framed as an either/or proposition. But as any of us who live with both can tell you, the discussion needs to be far more nuanced than that.

The President, in announcing his high-speed rail initiative, failed miserably in seizing the chance to reframe the debate, succumbing to the decades-old “either/or” arguments. What’s more, he missed the opportunity to focus rail projects where they’re vitally needed. And he failed to propose a viable means of funding them.

First, the President envisions a country in which high-speed rail is an inter-city solution, rather than an intra-city one. That flies directly in competition with airlines (for long distances) or autos (for shorter distances). In terms of consumer cost, trains can’t compete. For instance, I can fly from New York to Boston for less than it costs to take the Acela. Round trip on the Acela, without 30 day advance booking, is approximately $290. Flying on a regional carrier costs about $250. Take away the federal subsidies for Amtrak, and rail becomes even less competitive. As for autos, I can drive to Philadelphia in about two hours. Total cost, including tolls and even the currently insane price of gas: around $35. Acela to Philadelphia, one-way: $118.

The second issue with this proposal is convenience. The President said something to the effect that he imagines being able to board a train in one place, and then debark at another within steps of your final destination. This is obviously the sign of somebody who doesn’t understand the way rail systems are designed. If I fly, 9 times of 10 I’ll need to rent a car in order to get to my final destination. That other 10% of the time, I’ll need to hire a taxi. If I take the train, 9 times of 10 I’ll need to rent a car to get to my final destination. That other 10%? I’ll need to hire a taxi. If I drive, I don’t need to worry about hiring a vehicle (and the additional costs that incurs). Once you take into account the time it takes to either find a cab or rent the car, driving my own vehicle often takes less time than taking either a train or plane. Another similarity between the rails and the skies is that you’re limited as the number and size of bags you’re allowed to carry-on, which in both cases is insanely inconvenient if taking a prolonged trip, or even a short trip with the whole family. When driving, of course, the only limitation I face is amount of luggage I can put in my car. One other note on the subject of convenience: the President’s vision also includes not having to pass through TSA checkpoints when boarding these high-speed rail cars. I’ll take that one with a grain of salt, as the TSA is already working on plans for “securing” the nation’s passenger rails.

Finally, the matter of funding comes into question. Building and maintaining railways is an expensive proposition. The reason there aren’t any private passenger rail companies today is they aren’t profitable – not even close. Amtrak lost $1.3 billion in 2010 and the American public will end up paying that from our taxes. The Acela service, which is the high-speed line between Washington and Boston, carried roughly 1/5 of Amtrak’s total passenger load of 27.2 million, yet it also lost money. The total ticket revenue from those 27+ million people was $1.6 billion, yet that barely covered ½ of the total operating expenses. That means we subsidized every passenger riding Amtrak to the tune of around $48 each. (If you’re interested, you can look all of this up on Amtrak’s financial statements.) The only hope that a high-speed rail system has for financial health is dramatically higher ridership than we’re currently seeing. The question is, will Americans prefer to travel by train? Over the last 70 years, the answer has been a resounding “No.” We simply prefer the convenience of the car to the train for intermediate distance travel and the speed of the airplane for long distance travel. Before you get on my about these being “high-speed” trains, picture the hullabaloo raised by folks who have a train barreling through their community at 300mph. And at 300mph (which is the current top speed for passenger service anywhere), you’re still traveling around 200mph slower than a plane.

In plain talk, trains can’t compete financially, technologically or convenience-wise, with the way we currently travel. Heck, even if gas went up to $10/gallon, that drive to Philly would still be cheaper and faster than taking the train!

So, refocus your attention where it’s needed, Mr. President. Improve light rail service in our cities. Improve connections between the suburbs and the downtown areas. Figure out a way to make those services profitable – or at least self-sustaining – then come back to us.

How Bret Schundler inadvertently saved NJ’s schools

All of the furor over the NJ Department of Education’s faux pas, the one that “lost” $400 million in federal education aid, overlooked an important fact. States that are eagerly lining up for the “Race to the Top” funds are simultaneously throwing away more of their discretion in how to educate their youngest citizens. You may be asking yourself how that could be true; after all, isn’t the “Race to the Top” about improving educational opportunity?

Nominally, the answer to that question is yes. But like most federal diktats, the “Race to the Top” became a maze of byzantine rules and regulations far more than a program funneling money to states with innovative ideas for promoting education. The reason New Jersey was denied acceptance into the program is bizarre, even in bureaucratic terms. The scoring criteria included a minimum per-pupil spending increase. Had state officials used budget data from 2008 and 2009, the increase would have been represented; because they used current budget data, the state’s reduction in per-pupil spending was presented.

Only in the bizarro world of Washington D.C. would the state that ranks third in per-pupil spending wind up penalized for getting its fiscal house in order. Yes, New Jersey cut per-pupil spending this year, but what of it? Integral programs to education are intact, despite the hew and cry raised by the NJEA during the long debate leading to the final budget (unless, that is, you consider ice dancing and lacrosse integral to education).

Bret Schundler wasn’t fired for a clerical error. He was fired for lying to the governor about the clerical error. In that respect, Governor Christie had no choice but to fire Schundler; no leader can have morally challenged people on their executive team. But somebody should award Schundler a “Best Mistake of the Year” award. By losing out on those funds, New Jersey is exempt from federal oversight of any “Race to the Top” program mandates. Is it that important? Yes, if you think that the federal Department of Education has yet to live up to the stated reason for its creation. (The unstated reason, of course, was President Carter’s tit-for-tat with the NEA during the 1976 campaign).

In 31 years of federal mandates, administrated by the ED, American children continue to fall further behind their contemporaries in other nations. “No Child Left Behind” has effectively left an entire generation of children behind, unprepared for entry to either college or the workforce. Recent studies consistently demonstrate that higher percentages of students require remediation upon entry to college today than 30 years ago. The Department of Education is meeting its stated mission of ensuring that all students receive the same level of education. Even if the level is well below what an actual education should be.

Due to a clerical error and Governor Christie’s returning power to local school boards, New Jersey is poised to surge to the top in primary education. Which seems a far better option than a Race to the Top.

Time for a New Consensus

One thing is becoming painfully obvious: the way we, as Americans, view economic opportunity is out of step with the way the world operates today. It is time that we recognize this and address it in a positive manner, without the political fire-bombing that is hurled daily on both the left and the right.

The left is stuck with an early 20th century Keyensian view of economics. I’d argue that particular view didn’t really work then and won’t work today. Massive infusions of government capital during the 1930’s into public works projects did build some marvelous edifices, such as the Hoover Dam, but did not absolutely nothing to end the Great Depression. America didn’t return to full employment until the advent of World War 2 – the result of increased war production and more than 10 million men entering military service. Once the war ended, the economy again returned to near-Depression era levels of unemployment. What finally proved the cure for the economic ills of the 1st half of the 20th century was that in the post-war period, only the US remained capable of providing the goods and services needed by the world. It was an export economy, fueled by international demand, which put America back to work.

The right seems permanently wed to supply-side economics. Strict adherence to that model might have worked, but we’ll never know. While government receipts during the supply-side era (1981-2008) outpaced inflation by (See fig. 1), government spending at all levels increased at an even more dramatic pace, leaving us with unsustainable levels of debt and continuing government deficits – and a seemingly insatiable public demand for services that we cannot afford.

Fig. 1

The current model being followed is a strange amalgam of the two diametrically opposed economic philosophies, with government interventions and expanded spending coupled with “targeted” tax breaks. In one sense, this new model has worked: businesses are sitting on a virtual mountain of cash. But in a much larger sense, these haven’t worked to stoke the economy – and for one simple reason, the demand needed by businesses to invest that capital doesn’t exist now. Employment data continues to remain bleak, representative of the fact that businesses are not investing in human capital. Part of the reason is undoubtedly tied to regulatory uncertainty, since anyone running a business needs to properly plan and account for the funds allocated for human resources. But that uncertainty alone cannot account for the downward pressure July’s economic data displayed on employment.

What is needed is recognition by both those on the right and the left that a new demand model is required for our current age. Modern technologies have made many labor-intensive occupations of the late 20th century redundant. Cloud computing and SaaS technology reduce the need for office and technical staffing, closing off two of the high-growth industries of the past 30 years. Manufacturing tasks that once required dozens of people can now be fully automated, with only one operator required. (Just last night I watched a documentary on Zippo lighters – the entire assembly line only needs 5 people to run it; a perfect example). Even many low-wage jobs have been replaced – the other day I went food shopping. No cashiers were available; the entire checkout line was self-service with two people running 20 checkout lanes.

In other words, there are two possibilities now facing the country:

  1. Current unemployment levels are now the “new normal” and a return to sub-5% unemployment is unlikely. In this event, the current social services are inadequate and need serious revamping. Unemployment insurance as currently exists needs to be discarded, replaced by a system that is more proactive in returning the unemployable to the workforce while ensuring that people are not discarded like yesterdays news. Such a program needs to be structured so that chronic unemployment and other abuses are not permitted. In short, in such a world, unemployment services should not be a state duty, they should very much be a federal-corporate symbiosis. It is impossible – and against a state’s interests – to train somebody for employment opportunities in another state, but it is in a company’s best interest to do so.
  2. Current unemployment levels are an aberration; a temporary result of career displacement due to a technology upheaval. Such upheavals have occurred before and the nation weathered those storms, most recently in the late-1970’s as the nation shifted from a manufacturing base to a services based economy. In this case, the government needn’t do much of anything, except make career retraining available and mandatory, in order to continue receiving unemployment insurance payments. Once, that is, the new employment needs are identified.

I’m not going to pretend I’m smart enough to know which of the two scenarios is correct. What I do know is that until we begin to honestly discuss them, no action can be planned or undertaken. But as I mentioned at the top of this post, neither side seems ready to abandon decades-old dogma. I doubt either will over the next 90 days, as we begin a new national election cycle and both sides seem to only care about scoring political points by feeding raw meat to their adherents.

It’s up to the American people to put aside our natural inclination to fear in uncertain times and force our political leaders to engage in an honest discussion of the situation. And if they won’t?

Then it’s up to us to replace them this November with people who will.

Grading the Governor

It’s been barely four months since Chris Christie took the oath of office as Governor of the Great State of New Jersey. (Please hold the New Jersey jokes for later). For those of who do not reside in the Garden State, Christie was elected for three reasons: (1) to repair the state budget and get taxes under control (especially New Jersey’s insane property taxes); (2) revive the business climate and (3) because he ISN’T Jon Corzine. Well, on the last point, he’s succeeded – nobody will ever confuse Christie with his predecessor. The question is, how is he doing on the first two points?

That probably depends on who you talk to, but one thing is for sure: Christie isn’t only attacking the state budget with zeal, he’s also attacking municipal and school district budgets. In this regard he deserves some credit: he is the first governor since Brendan Byrne in the 1970’s to link all three in an unholy alliance. Of course, Byrne’s solution was to institute the state income tax – which, while it sounded great on paper has had the effect of only bloating the state budget. (We’ll chalk that one up to an “OOPSIES” moment.)

The crux of the issue, for the uninitiated, is this: most of New Jersey’s services are provided by local municipalities and school districts. These entities only have three sources of revenue: state disbursements, local property taxes and local fees. Where Christie has run afoul of both the municipalities and school districts is that he has either frozen or cut the state disbursements for numerous local programs. This has led to a particularly bitter fight with the NJEA, New Jersey preeminent teachers union. With most districts now receiving less in state subsidies, they are faced with the prospect of either raising property taxes to cover the reduction or reducing staff and programs. Of course, there’s also the often under-reported issue of how many districts have used the state’s largesse in the past; for instance, the Jersey City Schools District has put that money into a “rainy-day” fund. The reality is that JCSD could keep services exactly where they currently are without any state assistance whatsoever.

Of course, to hear the teachers union, this is tantamount to the classic line from “Ghostbusters:” Human sacrifice, dogs and cats living together… mass hysteria! Realizing that they aren’t likely to get the Governor to rescind his executive order, they’ve gone into full attack mode. And by full, I mean attacking on all fronts. It’s become almost amusing to pick up a copy of the Newark Star-Ledger or Bergen Record and see some of the things being said. Eventually, I’ll figure out if the Governor is simply “a fat pig” who obviously didn’t graduate from a public school “because he can’t add 2+2,” and if the state’s Education Commissioner, Brett Schundler, is really an “apostate from Hell.” (These are actually mild statements; in case you hadn’t heard, the NJEA also put a hit on the Governor and tried to contract the Almighty to do the deed). The rhetoric from the state house has turned equally vicious, in true Goodfella’s fashion. (Hey, I’m allowed. I live in the town where The Sopranos was filmed. SO…shuddayamouf). Christie has likened teachers to drug pushers, among other things. What makes this especially entertaining is that this highlights a diametric opposition of two incredibly powerful forces in state politics – the NJEA is the state’s largest union in what is a traditionally pro-union state and the Governor is, well..the Governor.

The real test comes today, when citizens across the state vote on their local school district budgets. Ordinarily, these elections are pretty tame affairs marked by low turnout and high margins of passage. but since Christie threw down a gauntlet earlier this month – challenging the state’s voters to not pass any budget that doesn’t include a wage freeze for teachers. How low and how high? In a typical year, voter turnout would be around 20% and over 90% of school budgets are passed. The all time low is 54% of school budgets being approved – a number that may well be surpassed this year, given that a Rasmussen poll finds 65% of New Jerseyans siding with the Governor.

So, will this be the year when New Jersey’s citizens finally stop saying “Enough with property taxes” and actually start doing something about it? Chris Christie is hoping so. He’s set this election up as the first real test of his political clout and chosen the State’s biggest union – and most powerful lobbying group – as his intended target. If he succeeds in getting voters to reject the proposed budgets in the 86% of districts seeking an increase, he will have won a significant victory and the odds go up that he will be able to ram through his proposed “Slim-Fast” budgets over the next three years. So, for now Christie gets an “incomplete” on this issue.

I’ll post an update here tomorrow and tackle the other main issue, reviving the NJ business climate. In the meantime, I’ve included two more links after the break for your reading enjoyment.

UPDATE: It looks as if the voters in this state have rejected 54% of the proposed school budgets, an all-time high. This round goes to the Governor. Grade, so far: B-