from my mind to yours...

June 2005
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On Social Security Reform
Filed under: Politics and Economics
Posted by: site admin @ 5:26 am

I am deeply concerned about current discussions about Social Security reform. From what I understand, the President’s focus is on converting some portion of Social Security from a guaranteed benefit to a guaranteed contribution program – similar to what is being done with most private pensions. According to the outline of the President’s plan on,

“Any proposal will include limitations on the risk of investments permitted in personal accounts and will include low-risk, low-cost options like broad index funds similar to those currently available to Federal employees. “

This plan, as I understand it, is the same plan I used to advocate 20 years ago – note the emphasis on “used to advocate”. I’ve recently been doing some thinking on this subject and believe something important is being missed here. No one seems to be discussing why Social Security came into existence in the first place.

If I remember my history correctly, Social Security came into existence because of a collapse in the “ownership society” of the 1920’s. We learned that it is possible for MANY in our society to end up on the losing end of investments. We learned that without a safety net, this can lead to grinding poverty (and social unrest).

I am concerned that the “reforms” proposed by the President will put us at risk of repeating that experience. This is because “low-risk” is not the same as “no-risk”. If there is any risk at all, then we know that some percentage of the population will come out on the losing end of the risk equation. When that happens, those people will clamor for some type of relief and we will be back to pressures that led to the creation of Social Security in the first place. If we assume that the distribution of successful investors will remain essentially the same under these changes to Social Security as it is now for other forms of investing, we may find that size of the group clamoring for a defined benefit plan in the future to be quite large. Only this time around, we will have the additional problem of having created a class war between those who successfully invest and those who don’t. Consequently, I do not believe that any change to the Social Security program that causes its beneficiaries to shoulder ANY risk of loss will be successful in the long run.

This is not to say that changes cannot be made. It seems to me that by simply creating accounts for recipients that include only guaranteed investments such as Federal bonds can be done easily. Investing in Federal bonds should be particularly easy – since that is essentially what the current Social Security system purports to do anyway. Further, these accounts can be directly administered by the Social Security Administration, eliminating the “low-cost” referred to in the President’s plan. If those bonds are actually allocated on an individual basis, with actual ownership transferred to those accounts, it would eliminate the possibility of dipping into the Social Security Trust Fund (as Congress currently does), as well as provide long term ownership for the beneficiaries (who could then pass them down as an inheritance).

I believe that some changes need to be made. I also believe that those changes must be tempered with the knowledge of what originally led to the creation of Social Security. Those who do not learn from the past are doomed to repeat it.

Addendum: The current attempt to privatize Social Security is an attempt to move away from a defined benefit plan towards a defined contribution plan for retirement. This is the equivalent to what employers have done by switching to 401Ks, etc. The fundamental flaw here is that the Federal government simply doesn’t have the same level of impunity from the masses that employers do. Employers can do pretty much anything they want to their employees that isn’t illegal until they start driving so many employees away that they can no longer do business. The Federal government, on the other hand, can’t avoid voters. It simply won’t fly for that reason - regardless of whether or not it’s fiscally responsible.

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On Government Spending
Filed under: Politics and Economics
Posted by: site admin @ 7:19 pm

Spending by governments, either federal, state or local, has two purposes. The first is, of course, to obtain for the purchasing agency a desired good or service. The second, first emphasized in the New Deal, is employment.

We are entering an era where we need a new New Deal. Not that we need more government spending - we’ve probably got more of that than we can afford. Rather, what we need is an open admission that a significant reason for all government spending is employment, and concommitant laws and regulations to implement such a policy.

The reason why is simple: rapid changes in technology make it possible to move much more work out of the country than ever before. Businesses, because they must always work to minimize costs, will always pursue low wage resources, even if the advantage is temporary or illusory. This is resulting in major, rapid, and relentless restructuring of the US economy. Rapid change like this can result in social upheaval, as well as the permanent loss of technological and intellectual advantages that have enabled our high standard of living.

The writing of the Constitution makes it clear that two of the core tenets of government policy are to “promote the general welfare” and “insure domestic tranquility”. The best way to do this is to make sure that people are employed, preferably at jobs they deem worth having.

The New Deal worked because it put money in the hands of the people. Back then, that money stayed in this country mostly, recirculating multiple times, probably generating more in taxes that the original outlay. That doesn’t necessarily happen with government spending anymore. Because so many “domestic” corporations have foreign offices, subsidiaries, and suppliers, government money can quickly flow out of this country.

While it might seem on the surface that this is ok, because government should get the best value for its money, it fails to recognize the employment purpose of government spending. Government spending that goes out of the country without recirculating actually makes the our country poorer. It makes us poorer by taking our tax dollars and shipping them overseas. We don’t get the trickle down that results in multiple jobs, and we don’t get the tax revenue that those jobs would generate to pay off the spending.

Given this, what are we to do? If we are to have a new New Deal, we don’t need more spending. Rather, we need a different approach to spending. What we need to do is simply enforce a 100% domestic content rule for all government purchases. In this scenario, no good or service could be purchased by the government unless it could be certified that ALL the labor, parts and tools used to build it have 100% domestic content. Futher, the labor, raw material and tools used to create the parts and tools should also have 100% domestic content. And so on. The only exception to this would be raw materials that simply do not exist in this country - but only in raw form - all processing would be required to have 100% domestic content.

While this might result in a rise in the cost of government goods and services, any rise should be offset by the recirculation effect on the US economy. Further, there are enough people in this country motivated by money that competition will keep prices from rising very much if at all. Juxtaposed of this one potential negative is the creation of jobs and the creation of domestic markets for all sorts of goods and services. And it is the creation of both of these that is the primary benefit resulting from that spending.

These benefits are critical because they enable and sustain the creation of Centers of Excellence. It is well known in economics that nearly every industry tends to focus in a few key locations. The companies are there because the skilled workers are there. The skilled workers are there because the jobs are there. This positive feedback loop causes these Centers of Excellence to continually widen their lead over their rivals. Further, the higher the barriers to entry in a given field, the fewer Centers of Excellence there will be worldwide for that field.

States know this well and often provide seed funding to foster CoE’s in fields they view as growth industries. Until recently, States only had to compete with each other. Changes in communications technology have now made that competition worldwide. Given this, any seed funding an individual State could provide is inconsequential when compared to the funding that other national governments give to selected industries. And if corporations help to move technologies to other countries (whether in search of cheaper labor, foreign markets, or any other reason), they contribute to creating CoE’s in other countries. And these foreign CoE’s compete not just against current American jobs - but future ones as well.

The long term impact of this is that the brain gain that the US had experienced prior to 9/11 could easily turn into a brain drain, making it increasingly difficult for US based companies to keep up with rapid innovation going on in other countries. Once the balance tips in favor of foreign CoE’s, it could easily become a death spiral for American innovation.

And that not a deal that’s good for US.

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On Gay Marriage
Filed under: Politics and Economics
Posted by: site admin @ 1:47 pm

The issue of the definition of marriage has been in the news a lot because of President Bush. The following article is the best description of an argument in favor of the traditional definition of marriage that I’ve seen:

Having referenced that article, I believe that there are things the article doesn’t address. While a male and female parent in a stable, loving relationship provide the best foundation for modeling behavior for children, many children will simply never experience that. Given the choice between having a male and female and a stable, loving relationship, I personally would side with the stable, loving relationship as the better foundation for raising emotionally stable children. I knew a mentally ill girl once - 5 minutes after I met her heterosexual parents I knew why she was mentally ill. I also know a lesbian couple who have adopted 5 young children out of the foster care system. These kids come from severe abuse backgrounds and, thus, are not of interest to typical DINKs who view kids as trophies, hobbies, or a chance to relive their own youth. Had it not been for this couple, these kids would have suffered in a foster care system that, no matter how well intentioned, is a far cry from the stable environment kids need to grow.

For me, there are several issues here. 1) Is the “marriage” label important? 2) Is the legal status of “marriage” important? 3) What really matters for the kids affected?

The fact is that stable relationships exist all around us regardless of how they are labelled or recognized. Some follow bloodlines, some follow legal arrangements, and some are simply the evolution of personal decisions between individuals. My wife and I do not have a marriage license - we saw no need to involve the state in our marriage. We have a common law marriage, backed up by a filed declaration of such at the Tarrant County Courthouse in Ft Worth, TX. We don’t let the lack of a “marriage license” stop us from referring to our relationship as a “marriage”. I frankly don’t believe that anyone else can be stopped from making such references either, regardless of what others think.

Net result: While I don’t think labelling matters, I also don’t believe you can prevent people from labelling things the way they see fit, even if you don’t agree with their labels.

The issue of the legal status of marriage is different. This becomes an issue because of the legal standing of each partner in relation to each other, common or shared assets, and common or shared responsibilities (like children). Much of the legal standing that comes automatically with “marriage” can be had from boilerplate legal documents that spell out rights and responsibilities for the affected parties. There could easily be a thriving legal business providing these documents for partners who want them. The fact that neither side in this debate talks about this says to me that they either don’t know this (which is hard to believe) or don’t perceive this as being the primary reason for the debate, despite what they say publicly (which is VERY easy to believe).

These kinds of legal documents won’t completely level the playing field because some of the issues involve 3rd party contracts - and who can force the 3rd party to agree? An obvious example of this is Social Security Survivor Benefits. The SSA would have to be a 3rd party to any legal arrangement between partners in order for Survivor Benefits to be issued to the surviving partner. Similarly for company sponsored health plans. In fact, I suspect that nearly all of the 3rd party contracts that matter involve money. While governments often decide policy based on the voice of the people, businesses base their policies on what makes sense for them. They have to balance the costs (in money and controversy) of any choice to provide domestic partner benefits to each kind of partner relationship with the benefits.

Net result: Many legal status issues can be resolved with no change in existing law. Some can be resolved because of evolving attitudes towards domestic partner arrangements. Those involving government policy will most likely involve changes in the law. The changes most loudly debated will be those involving a change in the distribution of money.

What really matters for the kids affected? Kids (hopefully) don’t worry about the monetary side of things. They do worry about safe/ stable environments. Safe/ stable environments help kids grow. While a heterosexual couple might be the best model for growing kids, a stable parenting model is better than an unstable/ unsafe one.

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On Securing Pensions
Filed under: Politics and Economics
Posted by: site admin @ 1:34 pm

A lot of talk has been given lately to the Pension Guaranty Benefit Corporation’s potential bankruptcy due to underfunded defined benefit plans in companies that go bankrupt. Many CEO’s of companies not yet bankrupt (some airlines come to mind) have said that they cannot fully fund their pensions now, and that it could take 10 years or more to reach that point. They say it’s just impossible to do so and remain solvent.

I suggest that failing to fully fund a pension, particularly if due to inaccurate assumptions about rate of returns on funds set aside for them, is the same as the behavior of Enron and Worldcom. It amounts to accounting fraud of the highest degree. As such, companies that knowlingly produce financial statements that underrepresent the underfunded liabilities that their pensions represent are guilty of violating Sarbanes-Oxley, and should be prosecuted as such.

I suspect that CEO’s that can’t think of a way to fund those pensions will get a lot more creative about solving the problem when faced with potential prison terms.

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On the Trade Deficit
Filed under: Politics and Economics
Posted by: site admin @ 6:55 am

I ran across an interesting article by Warren Buffet regarding the trade deficit and how to deal with it a while back. Check it out:

This seems to be a very creative way to solve our problem without relying on the cooperation of other governments whose interests lie elsewhere.

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