In the August 23, 2010, New York Times, Paul Krugman decries that if we don’t let the Bush Tax cuts expire and thus have a massive tax increase in the midst of a weak Obama recovery, it will be so unfair, so evil… 

First let’s look at how twisted the logic of the left has become.  Mr. Krugman says, “These same politicians are eager to cut checks averaging $3 million each to the richest 120,000 people in the country.” Er, not really, Paul, unless the richest 120,000 people are stupid enough, with all their financial advisors, to have that much tax withheld from their incomes.  You see, Paul, the only reason the government would have to cut them checks is if they paid too much in taxes during the year, and since the current rates are already in place it is unlikely that they would change their behavior to suddenly have an extra $3 million sent to Washington.  Here’s the problem with your thinking, Paul.  It is not your money, it is not my money, it is not the government’s money to begin with.  It belongs to the people who have earned it.  It is the people to provide revenue to the government.  It is not the government who gives money to those who produce.  Got it?

Like most on the left Mr. Krugman always associates tax cuts with a loss of revenue and tax increases with a gain in revenue, and ignores how people change their behavior with regard to these changes.

As this chart shows, at the end of the Clinton administration and the dot.com bubble the economy fell into recession.  The Bush tax cuts were implemented in 2001 and they were across the board tax cuts, not just for the wealthy.  A second set of tax cuts came in 2003.  As you can see revenues started to fall before the tax cuts, but bounced back sharply after the cuts in 2001 and 2003.  But Mr. Krugman would have you believe that if you cut taxes, revenues fall and if you leave them along or increase them, revenues increase.  You can also see that Clinton’s tax increase in 1993, didn’t have much effect in changing the rate of revenue growth, but when the Republicans took over Congress in 1994 and instituted tax cuts in 1997 you can see the slope of the curve bend upwards and it is even steeper with the Bush tax cuts.  So in the absence of the 2001 recession, revenues collected increased with tax cuts, not tax increases.

Let’s look at who is paying what share of the taxes.  The follow chart shows what percentage of the tax burden was paid by what percentile of the income earners by Adjusted Gross Income.

So even as the Bush tax cuts reduced tax rates across the board, the “evil” rich still ended up carrying a larger share of the overall tax burden than they did before the cuts.  So just what is Mr. Krugman’s beef? 

I argue that were are nearing a dangerous threshold politically, where the majority of voters may soon find they pay no taxes and the minority pays all.  If that tipping point is reached, what is to prevent this majority from voting for massive tax increases that will only affect the minority?  All Americans should carry some share of the cost of government.  It should not be a free ride for some and a minority pays the tab. 

To further emphasize the fairness issue look at the following chart from the IRS in 2004.  The brown bars show the share of the income that the percentile on the vertical axis earns.  The blue bar shows the share of the total income tax bill they pay. 

The problem folks is spending.  As the first chart makes pretty clear, we have not been suffering from a revenue problem, we have been suffering from a spending problem.  This administration and their instigators, like Mr. Krugman, have been urging reckless spending upon reckless spending and even decrying that the administration has not spent nearly enough.  Krugman is sloppy in making his case and tries to convince his readers that we will be carrying buckets of money to the wealthy when the truth is that he wants to open the spigot wider from those who produce in this country to the profligate government who can then spend it on more turtle crossings in Florida, and to prop up the unions, and bankrupt states.  Stop spending, cut taxes, shrink the federal beast, and we will be in good shape in short order.

As many people have said, “I never got a job from a poor man.”  In looking back at my own career, I have worked for several companies that were started by entrepreneurs and who became wealthy. Do I care if they were wealthy?  No.  Do I wish they were taxed to the eyeballs?  No.   If they were, those are jobs I would probably wouldn’t have had.  Opportunity is what made America the country where people around the world fight to get into, not bashing the successful.  All who stive to come here want to become those wealthy successful people and give the same opportunity to their children.

You don’t have to go too far to find a story about people suffering in these tough economic times, and your heart goes out to them.  Some have lost houses, are living in cars, really tough stuff.  But there is another story under the surface that reflects common attitudes developed growing up in the nanny state kicked into high gear by Franklin Delano Roosevelt.

In the midst of these tough economic times, instead of getting out of the way by cutting taxes and red tape, the Obama administration is focused on piling on more government programs.  Worthless stimulus packages, health care reform, and efforts to push cap and trade have not moved the unemployment needle a whit.  They extend unemployment benefits and keep whistling past the graveyard hoping they won’t get swallowed up.

Personal Responsibility

Since the Great Depression and the growth of the nanny state, more and more people have bought into the myth that the government can provide all, and our responsibility is to enjoy the ride.  An article in today’s New York Times writes about people benefitting from a government program to keep them in their houses if they face becoming homeless.  But there are some subtleties in the hard luck stories that give me pause.

There is the case of Antonio Moore who lost his job as a mortgage consultant that paid him $75,000 per year.  He lost his 3-bedroom house with a Jacuzzi and his Lexus sedan.  He is now faced with eviction from his apartment.  The article doesn’t go into details, but in most cases you don’t lose your house and car if they are all paid for.  Again, it doesn’t say if Mr. Moore bought his car new or used, but when I think of a car like a Lexus I usually don’t think that fitting in the budget of someone making $75,000 living in the San Francisco Bay area.  Had Mr. Moore purchased a Toyota Corolla instead of the Lexus would he be in better shape?  Again, I don’t know the details.  I am just wondering.

Then there is the case of Dawn Martin.

Ms. Martin is mortified to be asking for help. She grew up wealthy, with vacations spent on Caribbean cruises. “I had everything I ever wanted,” she says.

She and her husband have a painting business that until 2008 was grossing $100,000 per year, but in this tough economy it dropped to $38,000.  That’s hard.  But then here is the between the lines story:

Her father has money to help if it really comes down to it, she acknowledges.

“I don’t see him letting his grandkids land on the street,” she says, “but he’d hold it over our heads for a long time. That would lower me to a level that I wouldn’t want to go.”

So she is here, at Samaritan House, filling out the paperwork for the homeless prevention program.

So because of her pride, she turns to your family and mine, through higher taxes to fund a government program, to help her through her rough spot before she will turn to her own family.  But don’t worry.  When our money is gone, she will turn to Dad.  The painting business is picking up so Ms. Martin is confident they will be able to sustain themselves.  She is able to take our money to tide her over and still maintain her pride. 

But what did Ms. Martin learn about money when “growing up wealthy”?  Is Dad responsible for not teaching her or was she a rebellious child who ignored him and perhaps that is why he would hold it over her head for a long time.  Will she do something different this time around or hope for another government program?

Perhaps I was a little torqued before reading this story by another in the Wall Street Journal that wrote about the homes underlying the Goldman Sachs fraud case.  This article talks about a Ms. Onyeukwu, a 43-year old nursing home assistant with pre-tax income of $9,000 per month.  She is having trouble paying her $688,000 mortgage at $5,000 per month which is 56% of her pre-tax income.  Her solution?  Refinance it with a $786,250 mortgage.  But hey, the interest rate is lower so her payments of $5,000 per month will stay the same.  What is she thinking?  I could be way off base here but I’ll bet she could get a nice apartment for significantly less than $5,000 per month.  Sell the house, live within your means.

Government as Savior or Government as Pusher?

This is a tale of two government programs and personal responsibility.  We had or still have a massive government program that uses threats, goals, and sleight of hand to help millions achieve the American dream of home ownership.  This is not through thrift, like our parents did it, but by the government threatening banks with charges of racism (there’s the race card again) if the banks didn’t lower their lending standards.  As the housing market took off, the feeding frenzy intensified and everyone was trying to buy houses or finance them with less and less money down.  The Community Reinvestment Act, HUD, Fannie Mae, Freddie Mac were all players in this debacle, but don’t expect our elected officials to wade into that swamp to see what happened.  No, they will pile the blame on the banks and Wall Street, while they take Wall Street’s massive donations and do nothing but pass meaningless “reform legislation”.  Now we need new government programs to keep these people hanging on.  How similar is this to the drug pusher who gives you your first hit for free to get you hooked and dependent on them forever.

What About Personal Responsibility?

Unlike the people in the articles, I believe I have responsibility first and foremost for my actions.  If I need help beyond myself I turn to my family and then the charity of my church.  I believe many conservatives share my views, which is why on average conservatives give 30% more to charities than liberals.  It is why I gave the moniker “Buck a Day Biden” to Vice President Joe Biden because in his financial disclosure forms he reported give only about $300 a year to charity.  Here is a man who has been drawing six figure salaries from the taxpayers for years, is a millionaire, but will not reach very deep into his own pocket to help his fellow man, but has no problem reaching into your pocket and mine to create some government program to give your tax dollars to someone else.

There is a man named Dave Ramsey, who was a millionaire in his mid-twenties but later lost it all and declared bankruptcy.  He now teaches others how to live without debt and take responsibility for their financial lives.  It is a lesson all of us should learn and if we do, I’ll have to find something else to write about that sets me off.  But in the mean time we have a lot of work to do.  First we have to stop the federal government’s runaway train.  Next, we have to shrink government.  Then we have to go back to being responsible for ourselves and wean ourselves off the government.

If I asked you a simple question, what government organization works well, what would you say?  Let’s take a look at two government organizations and compare their effectiveness and motivation.

The Military

Whether you support our troops on the battlefield or want them to always stay home in their barracks, most Americans will say the military does a pretty good job.  Why? That is, why are they effective, not just why do people think so?  Well, they put a lot of investment in training and technology.  They seem to have solved the problem of integration, being based on merit rather than racial prejudice.  These are all important things, but I don’ t they get to the core of the issue.  The key question is, what happens if they don’t do their job?  They die…they die, the guy beside them dies, their buddies die, and depending on the size of the conflict, their families and country may eventually die.  With that kind of motivation, race is not even secondary.  If the guy next to me has got my back and I have his, I don’t care what color he or she is.  We do it right, we live;  we don’t, we die.

The K-12 Teacher

K-12 education comes under fire in this country, and rightly so, for failing to produce an educated workforce.  In New York, for example we spend over $14,000 per student, per year on education, far above the national average of around $9,000.  Are students in New York 50% smarter than the country in general?  Hardly.  Is the nation as a whole turning out well educated students?  Sadly, no.

Our K-12 public schools are a government run monopoly.  So what happens to a K-12 teacher if they fail to do their job?  If they have been in the job long enough to get tenure, nothing.  They will get a raise like everyone else.  So what motivates them to turn out outstanding students?  I’ll wait.

Let me be clear that I don’t want to lump all teachers together.  They are many teachers who, by having what  I suppose is a strong moral streak,  do a great job because they want to teach.  Okay, so let’s look at the teaching profession where there is a group that does their best because they get satisfaction from doing a good job.  Now, some studies come out that say the way to improve results is smaller classroom size.  The teachers’ unions get behind it and eventually push it through.  So what does that mean?  If you cut the size of the class in half, you double the number of classes.  If you double the number of classes, you have to double the number of teachers and thus have to go deeper into the labor pool to find them.  Before you took this step, we can probably assume that all the self-motivated teachers were already on the job.  So the additional teachers are motivated by what?

Co -conspirators

That brings us back to the teachers’ unions.  When government’s come under pressure to cut educational expenses, the airwaves are soon flooded with the heart wrenching commercials pleading to restore the funding “for the children’s sake.”  What you don’t hear is the trailer that says, “This commercial paid for by the PTA,” or “This commercial paid for by the Association of Concerned Parents.”  No, what you typically hear is, “This commercial paid for by the X Teacher’s union, Joe Blow, President.”

Who do the unions really represent…really? The students? or the teachers?  They want the funds restored so that their membership is not hurt and their dues are not curtailed.  If their true concern was for the students, why not support school vouchers and charter schools?  They fight the former with a vengeance and the latter, if it is not union organized.

Let’s Not Pick on K-12 Education

Let’s look at other government areas.  Government is the only area where union membership is growing.  How many people relish going to their Department of Motor Vehicles?  How efficient is the Post Office?  Amtrak?  Fannie Mae and Freddie Mac have a bonus compensation plan, which is a step in the right direction unless it leads to cooking the books and making extremely risky loans that lead to the near collapse of our economy.  How can we get this under control?

Controlling the Uncontrollable

Our government is trying to install a massive health care program that will cost a trillion dollars.  At the same time, tens of billions of dollars are stolen from Medicare every year and they can’t stop it.  Early this year, the Obama Administration passed a $787 billion stimulus package, spent $18 million to build a website to track it, and put Joe Biden in the role of watch dog.  How is that working out?  A recent report from ABC News, of all places, found that credit for creating jobs was given on the web site to Congressional Districts that do not exist.  A $1,000 grant was purported to have created 50 jobs.  The New York Times investigated and found that the $1,000 went to purchase a lawn mower.  It took from the time of the founding of the Republic until about the mid 1990s to accumulate $6 trillion in debt.  It has doubled since then, and it is projected to go from $12 trillion to $14 trillion by next year!

It cannot be controlled.  It is impossible to control.  The only solution is to cut the federal government down to size.  Take out the Constitution and read what the true functions of government are supposed to be.  The military, absolutely;  the Post Office, yes it’s in there; coin money; establish patents and copyrights; establish the courts; control the District of Columbia; regulate interstate commerce; make treaties; give the State of the Union address.  That pretty much sums it up and everything else should be left to the states and local government or the people.

We should jettison all the rest and cut this government down to size and get out of debt.  Department of Labor–gone;  Department of Health and Human Services–gone; Department ment of Housing and Urban Development–gone; Department of Transportation–gone; Department of Energy–gone; Depatrment of Education–gone; Department of Veterans Affairs–gone, rolled into the Department of Defense;  Department of Homeland Security–gone, rolled into the Department of Defense; Department of the Interior–gone; Department of Agriculture–gone.

The amount of money saved would be enormous.  Selling all the real estate and buildings would bring in more money.  We could then cut taxes to jump start the economy and run a surplus to cut the debt.  The next step would be to make it illegal for unions to organize government workers without a referendum approved by all the voters.  Side benefits would be less campaign money because there would be less government to influence.  Government would be more accountable to the people because it would be closer to the people, that is, at the state level or local level.  We can do this proactively, or wait until the government is bankrupt and we have to sell off the parts to the Chinese.

Stock Market Leads the Way

As I write this the stock market is up nearly 200 points, and it has risen in each of the last three months.  Commodity prices are rising based on encouraging manufacturing data from abroad.  Personal incomes rose 0.5% in April.  Chrysler could exit bankruptcy as soon as Monday.  Citigroup and GM are removed from the Dow Jones Industrial Average, replaced by powerhouse Cisco and Travelers.  Ford motor’s shares rose 4.9% on news that it plans to expand production in the third quarter to try to gain market share from its rivals, and without government money.

The Stimulus Flop

Less than 10% of the $780 billion stimulus package has been spent.  President Obama told us we desperately needed or we may be mired in this recession/depression for years .  The free marketers said that this economy is strong enough to recover on its own, which the statists sneered at.  Government created this mess by their meddling in the housing market and how they mishandled interest rates and the money supply but we were told that “only government” can get us out of it.  More recently President Obama, who has been trying to spend every dime Congress will let him get his hands on has said we are out of money. Here’s a thought:  repeal the rest of the stimulus and get out of the way of the strongest economy on earth.

Things to Ponder

• Obama opposed bankruptcy for GM and Chrysler.  Free marketers said it should be allowed to happen.  That’s how the free market works.  After pouring billions of taxpayer dollars into these two, where are we?  Both are in bankruptcy.
• Bankruptcy for GM and Chrysler would be an extraordinarily long and drawn out process costing millions of jobs and killing the auto industry in the U.S.  Where are we?  Chrysler may emerge from bankruptcy as early as Monday, Ford is ramping up for the third quarter.
• Without the stimulus package, we were told the unemployment rate could hit 9% by 2Q2010, whereas with the stimulus it will peak at 8% at the 3Q2009.  Where are we?  It is now at 8.6% and we are in 2Q2009.  The stimulus passed, little has been spent and the administration has been wrong again.  The free marketers say that unemployment will likely rise quickly and if left alone, the recovery will happen more quickly.  If the government meddles and tinkers, we will likely see what happened in the 1930s where this drags on for years.
• President Obama says we’re out of money.  So stop spending.  Repeal the stimulus that is accomplishing nothing because the bulk of the spending isn’t due to happen for another year or more.
• Watching the Information Technology job boards, I see a big rise in the job postings for sales people.  When companies are confident that the economy is turning, they step on the gas for sales to beat the competition.  The operational folks will soon follow.

If the Obama administration is not careful and doesn’t reverse course before he bankrupts us, we may be faced with accelerating inflation and sky high interest rates.  Shall we get nostalgic for the days of Jimmy Carter?

Our once proud automobile industry

The government institutes regulations such as CAFE that force the automobile companies to build many cars they can’t sell at a profit for each car they can.  The unions negotiate contracts that pay people who have been let go 90% of their salary and give retirees extremely generous packages.  The automobile companies stagger under this load to the brink of bankruptcy and what happens?  The CEO of GM gets booted out and the government and the unions end up owning the car companies.  In the case of Chrysler the UAW will end up owning 55% of the company if the government’s plan is approved.

Had the automobile companies gone into bankruptcy before the bailout, as this author advocated, the union contracts could have been voided and a new workable deal struck.  But the government said bankruptcy was bad. The government said we had to give the car companies billions of our tax dollars.  The government said, if you automobiles companies don’t accept our deal, you will be forced into bankruptcy.  Huh?

So tell us again, Mr. Obama, how this is not socialism.

Can liberty be saved?  Is there a chance that we can rescue our country from the federal juggernaut that wants to reach down into the deepest recesses of your life and take control?  They spend your money with reckless abandon and say, “What Me Worry?”  Those in power would have indulged in the trappings of office, sated on money and power, and be long gone with their spoils while the crumpled bill lies on the floor for you and your children and your children’s children to pick up and pay.

They have invited many to the party, to eat, drink, and be merry with promises of “middle class” tax cuts that are the greatest April Fools joke of all time.  Don’t worry we’ll get the rich to pay for it all.  You know, those evil fat cats on Wall Street.  But the Republicans on Wall Street have long be replaced by Democrats.  That’s right, Gordon Gecko is a Democrat.  60% of Wall Street contributions went to Democrats vs. Republicans.  How long will the top 2% of earners keep shouldering the burden before they slow down, stop, or emigrate.  Who will pick up the pieces then?  Who will support the drunken revelers that Obama piled on the public dole?

AIG Outrage

All of the outrage by Congressional and Administration leadership over the AIG bonuses is the epitome of hubris.  AIG contributed $104,000 to each Barack Obama and Christopher Dodd, during the recent election cycle.  Do you remember the brouhaha over language in the stimulus bill that had a loophole that allowed the AIG bonuses to be paid?  Dodd said he didn’t include the loophole.  Later he said he did include it but at the insistence of the Obama administration.  Now is it just me or does anyone else see a quid pro quo here?  Then they come out red-faced professing that the bonuses are an outrage.  Senator Schumer, who is threatening to unconstitutionally tax the bonuses into oblivion, took $112,000 in contributions from AIG.

Lessons from Hugo Chavez?

More recently President Obama effectively fired the CEO of General Motors and now speaks of bankruptcy.  I, among many others, said they should have filed for bankruptcy long before taxpayers bailed them out.  So now after we have sunk taxpayer money into GM and Chrysler, Obama steps in and effectively runs the company on “our behalf” as owners of 80% of the company and now says bankruptcy is a good idea!  When will the amateur hour come to an end?  But watch carefully, because Obama will assiduously avoid offending the auto workers union, despite the fact that the union contracts put US auto makers at a $2000 per car disadvantage against the competition.  GM (Government Motors) will now be forced to make cars that satisfy Obama’s left wing supporters but that Americans don’t want to buy.  It will be interesting to see how the government forces us to buy them.

What Do the Europeans Think?

For years we have been told by the left that we must listen to what the Europeans are saying.  They say we have to consider foreign laws in weighing Supreme Court cases.  They decried Bush’s policies as alienating our European friends.  So what do the Europeans think of Obama now?

The president of the European Union on Wednesday ripped the Obama administration’s economic policies, calling its deficit spending and bank bailouts “a road to hell.” — Washington Post, March 25

A Very Dangerous Path

In March of 1933 Adolf Hitler, proclaiming a national emergency of a potential communist revolution asked the German legislature, the Reichstag, to grant him emergency powers to deal with the situation.  Such a proposal required two-thirds approval by that body.  The final vote was 441 in favor, 84 opposed.  From that point on, Hitler was dictator. 

 Rahm Emmanuel likes to say, “You never want a serious crisis to go to waste.”  President Obama is taking the current financial crisis to ram through a massive power grab.  The legislation is being rammed through with such force and urgency that no one has a chance to read it.  What ticking time bomb could be tucked in those pages that get voted on and passed without scrutiny?  Just look at the AIG fiasco for the answer.  No one seemed to know or admit it was in there.  If we allow this to continue, we may find some other provision included in the dead of night that will destroy our country forever.

Be on your guard.

Two Doctors Operating. A Lawyer, A Bureaucrat, and An Insurance Agent Oversee the Procedure

In the category, be careful what you wish for, Ted Kennedy should be careful about pushing through Universal Health Care reform.  It has been reported that this effort has taken on a sense of urgency because of Mr. Kennedy’s brain cancer.  But what if we already had national health care?

Would Kennedy Receive Treatment?

Ted Kennedy will be 77 on Sunday.  I wish him well.  However in an opinion piece by Betsy McCaughey, she quotes Tom Daschle, who nearly became the architect of health care reform before his tax problems derailed his nomination.

Daschle says health-care reform “will not be pain free.” Seniors should be more accepting of the conditions that come with age instead of treating them. That means the elderly will bear the brunt.

In other words, sorry Ted, since any treatment is not likely to significantly prolong your life such that the expense would be justified, no treatment will be paid for.  You will just have to pay it yourself or die.  I guess the good news is that Senator Kennedy, like Senator Dascle, and most of the ruling class who pass these commandments down from Mount Capital Hill, are rich enough to pay for private treatment, if it is allowed by law.  If not, they are rich enough to take a “vacation” to, say, India and while on vacation wander into a facility their for treatment by American trained Indian doctors.

But what about you and me?  Oh dear, you better get your affairs in order.

Health Care Reform You Can Believe In

As long as the treatment received by a patient is paid for by someone other than the patient, the patient really doesn’t care what it costs.  The liberal solution is to have the government take it over, and a bunch of bureaucrats will “act on your/our behalf” and make those decisions.  The outcome of which is that you better stay healthy.  Because if you don’t, you may not get treatment until you wait a very long time for your turn, or you may not get treated at all, if the bureaucrats rule the resultant quality of life is just not worth it.

Here’s what we should really look at doing:

• Get the consumer of health care actively involved. How?  It’s being done today with high deductible health care plans coupled with a Health Savings Accounts.  The insurance company negotiates lower treatment costs and pays them only after a hefty deductible has been paid that year.  The patient is then in a position of shopping for the best health care and deciding on what treatments and tests, in conjunction with their doctor they will or will not have.  The Health Savings Account is where the patient can put funds, pre-tax, and then use those funds to pay the expenses not covered by the insurance.
• Tort Reforms.  Get the Lawyers out of the Examining Room. Too many doctors, in my opinion, are practicing defensive medicine.  They think of every possible test so that if something does not go perfectly with the treatment they won’t get sued for the test they didn’t perform.  Let’s follow the British System — fixed fees for the attorneys instead of a percentage of the settlement, and loser pays.  There are too many cases of people getting a $12 million settlement or judgment for something stupid (think of the woman at McDonalds who spilled coffee in her crotch and sued McDonalds because the coffee was too hot).  In these cases the lawyers typically ask for no money unless they get a settlement and when they do they get 1/3 ($4 million in this example).  It’s like buying a lottery ticket.  Who wouldn’t take a free lottery ticket on a jackpot of millions?  But who really pays for all these law suits and settlements?  That’s right you and me in insurance premiums we cannot afford now.
• Increased Insurance Competition. Right now most insurance is regulated by the states and in many cases policies available in one state are not available in others.  Let’s open up the competition.  If we have more insurance companies competing for our business, we are likely to get better and more creative policy choices.
• More Tailored Insurance Policies If my wife and I are beyond the point of having children, then let me buy a policy that does not cover childbearing, birth control, well baby care.  If I am young and starting out and I want those things, there are other coverages that pertain to older people that I may not want at this stage in my life.  Let’s allowed tailored policies that reflect my actual insurance needs.
• Immigration Control.  The same people who are pushing socialized medicine are, for the most part, the same people who favor open borders.  However, where do all the illegals go for the health care needs including having babies (new citizens)?  They go to the only health care provider they know, the local emergency room.  This is also probably the most expensive form of health care delivery and since they are illegal, they’re not paying for it, the rest of us are.  I think immigrants built this great country and almost each and everyone of us can point to our forebears who came here as immigrants.  I am in favor of immigration now and in the future.  I believe these are hard working and basically good people.  BUT, they have to come here legally and follow the process.  If they are not here legally, they should be deported.
• Medicare Reform.  You probably want to sit down for this one, but shocking as it may seem this massive government programs loses billions upon billions of dollars every year to fraud.  Who pays?  Right!  You and me.  In higher payroll taxes, and in higher health care costs as doctors and hospitals have to make up the shortfall somewhere else to stay in business.

More Liberty Under Fire

The government in proposing universal health care wants to mandate that everyone must have health care coverage.  You will not have the liberty to choose.  The government demands that you comply:

“comprehensive health care legislation should include a requirement that every American carry insurance.”

That’s the requirement, now comes the heavy hand of government:

“The ideas discussed include a proposal to penalize people who fail to comply with the “individual obligation” to have insurance.”

You must obey!  The government has spoken!

Here’s a novel idea.  How about implementing the above points first and fix the broken system that we have before we throw it out and install another new, massive, government program.  After all we can always go to the government solution in the end, confident in the knowledge that these programs work extremely well and efficiently. (e.g., Fannie Mae {bankrupt}, Freddie Mac{bankrupt} , Social Security {bankrupt}, Medicare {bankrupt}, US Postal Service {$6 billion deficit, while CEO get $850,00 salary}).

What Would the Founding Fathers Say?

A Constitution of Government once changed from Freedom, can never be restored.  Liberty, once lost, is lost forever. – John Adams

With Citibank caving in on the subject of cramdowns, we are all about to take it in the neck.  What the cramdown is, is where a bankruptcy judge can re-write the terms of a mortgage, including lowering the principal on the loan, in effect, “cramming” the loss down the banks throats.

Now I’m no fan of the banks making loans to people who shouldn’t have gotten them, but it has been a long standing principle that in a foreclosure, the bank gets the house, if you can’t pay.  If the loan is structured right, that is, a good down payment then this presents good security for the bank.  In return, banks have traditionally been able to offer lower rates on mortgages than on many other kinds of loans.  However, if you change the rules of the game, such that banks no longer have that kind of security, what is any rational banker going to do?  That’s right, raise the interest rates.

So any banker writing a mortgage in the future, will have to weigh that some day in the future his security could be taken away at the stroke of some legislator’s pen.  While it is true that, Sen. Schumer’s proposed deal is only on loans in place at the time of the legislation and only if the bank and the consumer tried and were unable to negotiate different terms, it still hangs over the mortgage industry.  A banker today, will have to consider that in the next thirty years of the mortgage I am about to write, there may be another serious economic downturn, and in that downturn, some legislator may decide to do this again.  Therefore, I’ll add 1/4% or 1/2% to the rate to cover it, on every mortgage I write from this day forward.

Let’s recap.  Government programs (Fannie, Freddie, Community Reinvestment Act, Clinton’s Justice Department, HUD) push very hard on banks to make loans to marginal lenders.  The housing bubble bursts causing financial crisis and government rides to the rescue so that we can pay more for mortgages forever.

And we keep electing these people.

The battle lines are being drawn and the factions are jockeying for position.

• The UAW is standing firm that they are not contributing anything more (but the taxpayers should)
• Rick Wagoner, CEO of GM, says they are not even planning for bankruptcy (but recently news has come out that the board is now considering it, if they can’t get the taxpayers to step up)
• Congress wants a plan from the automakers before showing the money (they want to make sure that the auto companies adopt a green agenda and build a lot more cars that they can’t sell at a profit, and palm it off on the taxpayers)
• Some pundits are claiming that 3 million jobs will be lost if we don’t bail them out (but fail to finish the thought and tell us who is going to build the cars that the market demands but GM, Ford, and Chrysler won’t be building if they completely shut down as some predict)

The louder the hue and cry against bankruptcy and the need to empty my wallet, the more confident I feel that bankruptcy is the right thing to do.  Without fundamental management change, union change, and structural change, no amount of taxpayer funding and bailout upon bailout, will enable the Big Three to crawl off their death bed and once again be giants of American Industry.  Bankruptcy is bitter medicine, but without wrenching change that bankruptcy protection can provide, with a trustee making hard decisions and getting concessions from all sides, this patient on life support will die.

A Sad but True Parody

I came across this excellent joke on Evolving Excellence that was making the rounds a few years ago, but seems sadly relevant today.  As I said it is a few years old, so don’t look too closely at the financials:

A Modern Parable.

A Japanese company ( Toyota ) and an American company (Ford Motors) decided to have a canoe race on the Missouri River Both teams practiced long and hard to reach their peak performance before the race.

On the big day, the Japanese won by a mile.

The Americans, very discouraged and depressed, decided to investigate the reason for the crushing defeat. A management team made up of senior management was formed to investigate and recommend appropriate action.

Their conclusion was the Japanese had 8 people rowing and 1 person steering, while the American team had 7 people steering and 2 people rowing.

Feeling a deeper study was in order; American management hired a consulting company and paid them a large amount of money for a second opinion.

They advised, of course, that too many people were steering the boat, while not enough people were rowing.

Not sure of how to utilize that information, but wanting to prevent another loss to the Japanese, the rowing team’s management structure was totally reorganized to 4 steering supervisors, 2 area steering superintendents and 1 assistant superintendent steering manager.

They also implemented a new performance system that would give the 2 people rowing the boat greater incentive to work harder. It was called the ‘Rowing Team Quality First Program,’ with meetings, dinners and free pens for the rowers. There was discussion of getting new paddles, canoes and other equipment, extra vacation days for practices and bonuses. The pension program was trimmed to ‘equal the competition’ and some of the resultant savings were channeled into morale boosting programs and teamwork posters.

The next year the Japanese won by two miles.

Humiliated, the American management laid-off one rower, halted development of a new canoe, sold all the paddles, and canceled all capital investments for new equipment. The money saved was distributed to the Senior Executives as bonuses.

The next year, try as he might, the lone designated rower was unable to even finish the race (having no paddles,) so he was laid off for unacceptable performance, all canoe equipment was sold and the next year’s racing team was out-sourced to India.

Sadly, the End.

Here’s something else to think about: Ford has spent the last thirty years moving all its factories out of the US , claiming they can’t make money paying American wages. TOYOTA has spent the last thirty years building more than a dozen plants inside the US. The last quarter’s results:

TOYOTA makes 4 billion in profits while Ford racked up 9 billion in losses.

Ford folks are still scratching their heads, and collecting bonuses…

IF THIS WEREN’T SO TRUE IT MIGHT BE FUNNY

It will be interesting to see when the auto executives go back to Washington, will they fly in three separate corporate jets? will they “jetpool”? will they fly first class?  will they fly coach? or will they drive one of their excellent products to ask for a bailout?  How much trunk space do you need to carry $25 billion?  Remember that’s 25,000 million.

A Modest Proposal

About every three years when the labor contracts between the unions and the auto companies come up for renewal, a target company, Ford, GM or Chrysler is typically chosen.  The purpose is to threaten a strike on that company while allowing UAW members to keep working at the other two (and still pay union dues), rather than striking against all three.

Here’s my proposal.  Since GM seems to be in the worst shape, they should go Chapter 11 right away.  Let Ford and Chrysler stand back and watch the result.  If it works and GM successfully restructures, you can bet Ford and Chrysler will be scrambling to go Chapter 11 to get their houses in order.  If it is a bust, then one of three things can happen.  One, they can learn what GM did wrong in the process and perhaps craft a better and maybe even “prepackaged” Chapter 11 filing.  Two, they can go back to Washington and try again, but at least they would have a stronger case for why bankruptcy is a bad idea.  Three, they can wake up and get all the parties together including management, unions, retirees, suppliers, banks, bondholders, local governments, Congress and make the changes voluntarily that would otherwise be made under a bankruptcy.

What do you think?

It’s not over yet folks, although your voice is being heard.  The big sticking point seems to be whether the bailout money should be taken out of our left pocket ($700 billion TARP bailout package) or our right pocket ($25 billion fund to provide re-tooling for green production).  The only people talking about going Chapter 11 are people on the right such as Mitt Romney, who actually knows something about it having watched his father, George Romney, try to save American Motors, as CEO.

Politics Trumps Problem Solving

Barney Frank has weighed in to make sure the class warfare card is played.  He compared the bailout of AIG with the bailout of the auto companies as White Collar (AIG) vs. Blue Collar (GM). A blog by dbeale points this out very well.  This begs the question:  where does it all end?  Where do you draw the line?  If you bail out AIG, you have to bail out GM because they have blue collar workers.  If you bail out GM you have to bail out (fill in the company name) because they have (fill in special interest group).

But if you read the post carefully you can see the true political objectives of the Democrats and their supporters:

1. Give the auto companies a bailout
2. Fire most of senior management for mismanagement
3. Threaten bankruptcy but don’t do it
4. If the auto companies don’t reinvent themselves (which they can’t do without bankruptcy), nationalize them.  Don’t call it nationalization, call it a “quasi government takeover”
5. Make sure the focus is on building high mileage cars, and whatever else the green program demands.  Anyone who gets in the way of that goal should be fired. To quote dbeale, “every one involved in undermining gas efficiency standards must go.”
6. Appoint a automobile czar (don’t call it nationalization) to oversee the companies to make sure that the management isn’t paid too much, that union contracts are reinforced, the “right” kind of cars are built.
7. Bailout with more government money every 3 years, because the root cause the problem is never addressed.

A Workable Solution

The root of the problem is that the auto companies as they are today, are not competitive.  Here is my proposal

1. Eliminate the CAFE standards.  The CAFE standards were introduced 1975 in response to the energy crisis.  At least that was the stated objective.  The real objective was to curtail the importation of foreign cars, particularly Japanese cars, which could already meet the standards.  If you wanted to buy a car that got good gas mileage, you could.  This was a attempt by government to force U.S. car companies to make cars of similar economy.  However, their cost structure would not allow them to compete with the imports at the low end of the market.  G.M., Ford, and Chrysler don’t seem to have a problem making a profit on the luxury end of the market, on SUVs, and light trucks.  But if, for example the standard is 27 MPG, and your Cadillac only got 20 MPG.  You would have to sell eight compact cars that get 28 MPG for each Cadillac to comply with the standard.  However, it is estimated that GM is at a cost disadvantage of $2000 per vehicle.  At the luxury end there is enough margin to cover that.  At the low end there isn’t.  So, GM as a direct result of government policy has to sell eight cars at a loss to allow them to sell one car at a profit.  Why not let them sell as many cars at a profit as they can, sell no cars at a loss and let the market decide?  If need a high mileage car to save on gas for your long commute, buy a foreign car.
2. File bankruptcy.  Reorganize and get rid of those things that are killing you.  That’s what the bankruptcy laws are for.  Yes, shareholders may get wiped out, union contracts will have to be renegotiated, commitments to continue paying revenue bonds for plants that are no longer needed can be renegotiated or voided, pension commitments revisited, etc.
3. Slim down, come out of bankruptcy, and get competitive again.  The Big three made about 17 million vehicles in 2007.  Does any rational person believe that if the Big Three go into bankruptcy that the people and companies that bought that many vehicles will no longer need cars?  If they still need cars, someone has to build them.  That can either be the foreign makes, the slimmed down Lean Three, or new companies that are formed to take advantage of this huge demand for 17 million vehicles that no one, or not enough are stepping up to the plate to meet it.  People will be re-hired, sub-contractors will have new subcontracts, and the auto industry can actually thrive and not just limp along from bailout to bailout.

The key to this working is to get government out of the mix.  We are facing a plethora of problems and most of them can be traced to government intervention in the market place.  The financial crisis is a direct result of government programs such as Fannie Mae, Freddie Mac, the Community Reinvestment Act, the strong arm tactics of the Clinton Justice Department and HUD to demand more sub-prime lending, and the resistance of Barney Frank and Chris Dodd for more oversight.

The tragedy is that we have problems created by the government and we think that more government is going to fix them.  Keep up the fight.  Let your representatives and senators know, NO BAILOUT