Lessons From Europe, Is Anyone Listening?

While Washington is aswirl with all sorts of Congressional Committee investigations, important lessons are being taught in Europe.  I just wonder whether anyone is watching or listening?

If one plots economic growth and compares the US economy to that of Europe, one might be shocked to see that the US is and has been doing far better than our friends across the Atlantic.  While Germany is showing positive growth, that growth is still insignificant compared to the US.  What?  Why is Europe dragging?

The quick answer is that European countries have adopted an “austerity” budget which is throttling growth at the expense of getting borrowing and debt under control.  Keynesians point out that “if only Europe adopted stimulus” their economies could grow again.  Hmmm.

Memories sometimes are so short.

Recalling the 2000’s, Iceland, Ireland, Portugal, Spain, Italy, and of course, Greece followed Wall Street’s lead.  They borrowed and invested.  Their investments did lead to employment and for a few years, life was quite good.  Then the days of reckoning arrived.  It was time to pay back the bankers.

Sustained economic growth comes from wise investments coupled with wise expenditures.  In Europe, most of the countries who got in trouble poured billions into real estate development like new housing.  It offered everyone something.  Jobs all around and new digs for those who signed up.  Soon, however, the bubble burst.  European countries woke up to the unpleasant fact that there were too many homes compared to the number of people who could afford them.  Even worse, it turned out that many who could afford them were dependent upon government jobs.  When these home owners were laid off (due to austerity), even more homes flooded the market.

Free enterprise may be something like bulimia.  There is a naturally biased to over consume or over produce, and then vomit and act as if nothing has ever happened.  Free Enterprise advocates never see a bubble, and when it bursts, advise bankruptcy.  They believe markets will correct.  Most governments, while recognizing this, decide to “soften” the collapse just the same.  In the US we got “too big, to fail” for our bankers.  In Europe, bankers as well as certain large corporate employers received favorable treatment from their governments even when they have participated in some foolish business deals.

So what’s the lesson Europe is teaching?

• Don’t cut government expenditures to sharply.  Economies which have large segments of government spending must be weaned carefully or risk a sharp contraction overall.
• Government expenditures aimed at helping the economy must have “sound investment” characteristics.  In other words, the expenditures must anticipate a “pay back”.  The pay back must come in the form of greater tax revenues such as road or port fees, greater VAT from increased manufacture, or wage/income taxes from higher employment.  Most European countries (except Germany) seemed to overlook this.
• Public welfare payments (including unemployment, food stamps, housing assistance) while necessary for domestic peace must also have components that fosters less dependence in the future.

So now the really big question.

Do you think Congress is up to such a challenge?

When Words Are Not What Someone Says They Are

If there ever was a desire for fantasy, one could not get more of it than listening today as Congress holds one hearing after another over subjects in which the public has little interest.  The public silently suspects Congress doesn’t know or care what they are actually doing or saying.

Benghazi, the IRS 501(c)(3) process, and the Associated Press record collections are examples that seem for the moment to have taken prominence above Obamacare, the Deficit, and Jobs. I wonder why?  Hmmm.

Representative Darrell Issa is leading the Benghazi hearings.  His interest appears not about learning and preventing a repeat.  If he were, he could work to restore funding for our Diplomats security.  Issa’s interest appears, instead, more about finding some potentially politically embarrassing “after the fact” detail which once revealed will make the Administration look bad (and presumably hurt Democrats in the 2014 mid-terms.

The IRS situation is potential far more serious and what really happened and why must be established.  You might not guess that by early Congressional questioning.

The IRS extra investigation of certain groups seeking 501(c)(3) status crossed a line in traditional American fair play sensibility and that is a serious matter.  It is important to know whether political appointees in the IRS influenced this behavior.  But it is also possible and we should not be a surprise that these groups would draw extra attention.  The rules are murky.   The difference between “issue advocacy” and “political advocacy” can be wafer thin.

And the most fundamental question is why should either, issue or political advocacy receive any tax advantageous status?

Representative Dave Camp asked a number of reasonable questions and then landed on his conclusion… the entire tax code needs to be reformed.  Others Congress members took the opportunity to polish their “election is just around the corner” medals and asked strictly partisan questions.

The Associated Press issue on its own merits has little traction in Congress other than as a method for Republicans to impugn the reputation of Attorney General Holder.  But this issue has potentially more education value for the American public than both of the other issues.

The entire press establishment is up in arms over records of AP telephone communications, even though they were legally obtained.  The first Amendment flag has been raised and the public is being warned of the potential loss of our liberty if the news media can be so assaulted.  Hmmm.

If hearings do follow, the public may be surprised to learn how routine the flow of information is between government officials and the “press”.  Leaks and quotable comments are the life blood of the media.  We now frequently read quotes attributed to someone who asked to remain anonymous because he was not authorized to speak on the subject.  Hmmm.

What should words mean?

Benghazi has meaning in the greater context of how the US will conduct its foreign affairs in a new lawless world such as is emerging in the Middle East.  It also highlights the quandary surrounding budget reductions and the expectations of government.  How can the US carry the flag when there is no money (or too little) to protect it?

The IRS is important for both the need to keep politics out of IRS bowels, AND, the ridiculous nature of the current tax code.

The AP situation is far more nuanced.  The subpoenaed records were done legally (remember the Bush years and records were taken secretly without due process).  The real issue may not be about freedom of the press or the work of whistle blowers.  It is about the cottage industry which produces a steady flow of rumors and insider information to a hungry, waiting news media that live off this flow.  The AP situation is about “degrees” and not absolutes.  The cultivation of sources for the 7/24 news media is the issue that will almost assuredly not be investigated.

Hmmm.

 

Tone At The Top, Or Why Is Government Too Big

There are important lessons one can gleam from the business world.  The Boss’ attitudes and consistent expression of these attitudes directly influences the performance of subordinates.  If the Boss is intolerant or cheats, sooner or later, so will the subordinates.

We hear, from many in Congress, particularly conservatives, that government is too big.  They lament that if only government were pared back, life would be so much better,  Hmmm.

When asked what they mean, conservatives point to the $3.6 trillion in spending and say, “see there!”

That, of course, is their first step down the wrong path.  About half of the $3.6 trillion are disbursements for Social Security, Medicare, and Medicaid.  These expenditures are tied to the size of the population and have nothing to do with how big government may be.

The other half, however, is fair game for the charge that government is too big.  (It is also fair to claim Social Security, Medicare and Medicaid are too costly but this criticism should rest upon the merits of entitlements alone.)  Departments of Interior, Energy, Transportation, Education, etc should, however, all be open to scrutiny.

What purpose does the Department serve, what results does it produce, and is the bang worth the buck spent?

I am quite sure that any such Department by Department review would be a tough exercise.  Not only would agreement on purpose be difficult but purpose would be silently mixed in with political patronage.  Never the less, not having this discussion perpetuates the potential for ineffectiveness and high cost of government.

Just cutting a Department’s budget does not ensure effectiveness.  Without addressing effectiveness, cutting budgets usually makes the rest of the budget even less effective.

So what does “tone at the top” have to do with the size of government?

President Obama has rarely addressed the effectiveness of the executive branch.  The President has instead from time to time defended the role of government.  On occasion such as Hurricane Sandy, the President easily pointed to the value of FEMA.  But he has not dwelled upon how much better FEMA might be.

The President has authority over the executive branches of government.  He does not control Congress.  He can authorize all sorts of reviews and reorganizations within the executive branch, and can measure the effectiveness of these changes.  Yet none of this productivity improvement has taken place.  Why?

Beginning with the obvious, there is no immediate political value and depending upon the cuts, there are many political land mines.  But do you recall any President who has pledged to make government “run” better?  Instead what we have heard is to eliminate this or that department, or a spirited defense of head start or the need for border security.

The Obama “tone at the top” is about doing the right things.  In Washington, it is very difficult to see the right things being done.  Guantanamo is still open.   Afghanistan is still an active war.  ”Talking points” are messaged not for increased information but just the oppositve.

President Obama is not alone with an absence of “effectiveness” in his “tone at the top”.  But he’s the big dog now.

How Quickly We Forget

 

The current IRS scandal had excited a lot of Americans.  The IRS probably evokes more of the negative “big government” feeling than any other Federal Agency.  So revelations that certain IRS agents targeted right wing conservative groups seeking 501(c)(3) status only serves to reinforce their distrust.

Time may reveal that these investigations were prompted by political motives, that is the agents or their superiors were against the activities of these conservative groups.  Or it may turn out that the motivation stemmed from an honest suspicion that many groups seeking 501(c)(3) status were actually not qualified and would use their tax advantaged status to promote political goals.  Congress writes the tax code but the IRS develops rules to interpret the laws.  It will be hard to ultimately determine the motive.

What is not hard to recognize is that US custom is to treat everyone the same way unless there is probable cause.  Having a name Tea Party this or that, or Patriot this or that are not a suitable probable cause.

But over and above all this is the question “why do we have 501(c)(3) status in the first place”?  With the country’s huge deficits and the government having to reduce spending (as it should), why do we continue to look the other way when it comes to the tax code “spending” money with tax exemptions, reductions, and credits?

The idea that corporations can donate large amounts of money (for any purpose) and do so anonymously seems ridiculous, both to the share holder and to the public.

There is an important “tone at the top” message that needs communication within the IRS.  All tax payers must be treated the same.

There is also a wonderful opportunity for Congress to change the tax code even if only for this one paragraph.

Black, White, and Gray

President Obama has managed to take the wind out of the Benghazi sails, but probably not the way he would have preferred.  The President has two more investigations on his hands.  And from what I can see, he deserves both.

The two new “scandals” involve the IRS and the Justice Department.  The IRS made the list by singling out and investigating certain conservative groups filing for 501 (C) (3) status.  The Justice Department got the nod by using secret subpoena power to collect a huge number of Associated Press reporters’ telephone numbers and records, all in pursuit of a government leaker.  Hmmm.

Both of these events seem fundamentally dumb in their execution, but not necessarily in their assumed purpose.   The 501(c)(3) status transforms an organization into “tax exempt” classification,  This can convert corporation money into “issues” based free speech expression.  It can also hide the identity of those backing the organization’s public positions.  The specific targets were right wing, conservative groups advocating strongly anti-Democrat, anti-Obama positions.  The tax code, however, does not allow 501(c)(3)organizations to express support or criticism for specific party or candidates.  Hmmm.

The AP situation is a bit more nuanced.  The Bush Administration as well as the Obama Administration “leak” information whenever they feel it appropriate.  Yet both Administrations cried “foul” when someone within government leaded information unauthorized.  Hmmm.

Investigating specific groups, especially political ones, in a targeted manner is quite simply dumb and amateurish.  Why not ask the same of all organizations applying for 501(c)(3) status?  If that requirement would not pass public acceptance, then narrowing it to some small, targeted group would be unlikely to also.

Any Administration should be cautious about restricting or attempting to restrict the first Amendment.  And each Administration could help its own case by not engaging in self initiated leaks.  But the press does not have or deserve a “free pass”.  They are obligated to use discretion in what they print.  For sure that makes the release of classified information a tough call, but that’s responsible journalism.  Using a hammer (the size of this AP subpoena) to go after a gnat is prima facia dumb.

So why has this all happened?

It is too soon to know but there are some usual suspects.

• (1) The Obama Administration has been a “reactive” one.  Team Obama tends to monitor and then react.  While this can be effective in not creating a problem through ill conceived initiatives, it sets the rest of the Administration up to handle problems that do arise without a clear “tone at the top”.
• (2) These are complicated times.  There should be no doubt that all special interest groups see tax exempt status as an advantages.  They can attract money and provide anonymity to the donors.  Where exactly do these groups cross the line from issues to political statements is an important question?
• (3) The deeds of ambitious people are always difficult to control.  Ambitious people are also the ones who get things done.  And in the bureaucratic maizes known as the IRS or the Justice Department, how do aspiring workers get recognized and promoted?  Cutting corners and skirting edges often gives one an advantage and leads to results.

Resolution of these two new problems will probably look like this.  First, the IRS will promise never to do it again and ceremonially fire several agents.  Second, Attorney General Holder will admit that while legal, the subpoenas were probably over reach.  He will return the records and promise to be more careful in the future.  Third, groups like the Tea Party and the Associated Press will proudly declare victory and proclaim their allegiance to the Constitution.

And then if nothing else arise, it will be Benghazi time again.

 

Retirement, What’s That?

John Bogle, founder of Vanguard, speaks of three “retirement” legs, Social Security, Defined Pension Plans, and Defined Contribution Plans.  The first two are broken but fixable.  The third is wounded and with continued misuse, won’t help either.  Boogle, however, remains optimistic.

Hmmm.

So what is retirement?  Normally, many of us think of the “golden years” when we can put our feet up and relax.  Or move to Florida and sit in the sun… or take that cruise we always heard about but never got around to taking.

Retirement is also that time when our employer tells us we no longer fit in the company’s future.  So sometimes the next move is becoming a Walmart greeter or finding an open park bench.  But what does one live on?

Social Security, a pension, and savings are the three Bogle is thinking about.   But is that enough for everyone?

Social Security is heading for the junk yard unless some modifications are made.  Tax revenue must be increased or payments must be reduced if Social Security is to remain solvent.  Increasing the earnings subject to Social Security withholding and changing the inflation formula have been proposed as easy fixes.  No fixes, big future problems.

Pensions are even a bigger problem.  In the past pension were the defined benefit type.  Each employee was promised a certain amount of money when he/she retired.  This promise was based upon the employer putting aside a certain amount of money and investing this money at say 8% per year.  Financially this approach would produce the promised retirement benefit.  So what is wrong?

Businesses as well as public service employers (States and Localities) unfortunately do not always grow and stay healthy.  Sometimes they suffer losses and choose to defer payments into the retirement fund.  Even more deadly, public and private employers cannot find 8% investment opportunities or the ones they find are deemed too risky.  So, less contributions and lower interest (more like 3-5%) make the formula for defined pension unworkable.

Define contribution plans were originally tax advantaged savings plans.  Employees save and often employers contribute too.  Defined contribution plans (401Ks) are now becoming the primary pension plan vehicle.  These plans are not only subject to the market return but are also tied to how much employees actual decide to save and whether they decide to “borrow” against their 401K.  How much will be there at retirement is an unknown.

Hmmm.  Worried?

Consider this.  The US average earnings is about $50,000 per year.  Lets say this person saves 10% each year ($5,000) and his 401K averages 3% return each year.  At retirement, the 401K will have grown to $245,000.  Investing that at 3% will deliver about $7,000 each year.  So retirement looks like social security plus $7,000 for the year.

Keep in mind that most Americans save far less than 10% per year, and most employee sponsored 401Ks have some employer contribution.  Therefore, the “average” person might accumulate retirement savings of about $250,000.  (hmmm, I wonder about their children’s college education and any wedding expense…)    Social Security payments of about $1,000 per month are reasonable estimates.  That equates to a monthly income upon retirement of about $1,600 a month.

Hmmm.

This example applies to the average.  It looks even bleaker for those earning less.  Playing with the numbers, one can see that a comfortable retirement means much higher income than the average of $50,000 per year.

So what’s the point of all this.

The US is a large country.  With over 300 million residents, there are a lot of people who will be looking at difficult circumstances in retirement.  Why then do we have a Congress that does not seem to see its role in engendering conditions where the average income can grow, and where rules governing the financial sector are enacted to ensure a fair shake for those dependent upon long term growth?

It is not Congress’ job to manage human behavior.  If people do not choose to save, this lies beyond the proper role of government.  What does not lie beyond, is the widening gap (as well as outright stagnation) of middle class income and that of the top 2%.  What also does not lie beyond Congress’ scope are sound Social Security and Pension systems.

This is not a left-right, democrat-republican, progressive-conservative issue.  For Congress, until America’s largest growing segment (the retired), are adequately protected from financial ruin, all other issues pale in comparison.

Benghazi Lessons

The Benghazi Tragedy seems to be an event that keeps on giving.  While the GOP’s interest in holding one select Congressional committee meeting after another seems disingenuous, the behind the scenes details of the Obama Administration leadership is equally sad.  The whole event seems more an attempt to convince Americans that government (read big government) is better when it is small or not at all.

Yesterday’s release of the “talking points evolution” revealed an absolutely useless roll for government.  Middle level managers once again proved why they are middle level.

There was not one revision that had to do with incorrect or inaccurate substance.  The revisions had everything to do with potential interpretations by persons with no direct involvement in government operations.

Apparently this practice of “not breaking into jail” is routinely done in all Administrations.  Sometimes we call it “spin”, other times we are hypnotized by the verbiage and don’t even recognize we have just been spoon fed a dose of nothing (zero content information).

Such is life.

The lesson from my vantage point are (1) either these middle managers are spending too little time on their principle duties since they have time to guild these lillies, or (2) they are simply not needed at all.  Reviewing talking points for accuracy or the inadvertent release of truly classified information is, of course, necessary.  But when work such as the talking points revisions occurs, a line has been crossed and almost always nothing good will come of it.  The outcome appears more consistent with seeking to embellish ones own importance or inserting raw political calculations into important government messages for a similar purpose.

Bureaucracies tend to be the same whether in private business or public government.  Work expands to fit the resources available.  I guess it is human nature.    With Benghazi, it was simply naive and totally unnecessary to avoid mentioning terrorists.  Sooner or later the truth would be known, so initial denial was an unnecessary risk.

What is shame, shame on the GOP is that even if President Obama himself had ordered the removal of any mention of terrorists (which there is no evidence that he did), revelation would not change anything on the ground nor would it be supportive of getting involved in Syria.

Libya was the wild west.  Lawless.  And so will be Syria.

It may turn out that the US is moved to enter the Syrian conflict in some manner.  And it may turn out that this involvement escalates.  And it may come to pass that Americans lose their lives.  How could the GOP have supported this?

The fact is that all the inquiries into Benghazi will not have informed us sufficiently well to avoid the natural consequences of a lawless world.  If you are worried, don’t go there.  I just wonder what the next middle level managers will write then?