Category Archives: Economics & Financial Affairs

Both Sides are Right about the Tax Deal; and What that Portends

Since the passage of the “bipartisan” tax deal to extend the Bush tax cuts, the Republican Party has engaged in an argument with itself over the wisdom of what was enacted. Those on the more conservative side of the ledger argue that while the preservation of the current tax rates was absolutely imperative, the Republicans in Congress paid far too high a price to achieve that objective. They cite:

  • The plethora of liberal goodies that Obama extracted as the price – extension of unemployment benefits, continuation of various targeted tax cuts and credits that do little but enrich the coffers of Democratic supporters, and the seemingly worthwhile but actually temporary and phony stimulus of a reduction in the payroll tax.
  • The fact that the preservation of the Bush rates is again temporary – and at two years, ridiculously short – leaving continued uncertainty in the business community and the public in general about the future of tax policy in the nation.
  • And most seriously, the lack of any corresponding spending reductions that would help to pay for the legislation and more importantly set the government on the path to fiscal responsibility as demanded by the voters on November 2.

Moreover, say conservative critics of the deal, we could have secured far better legislation if we had waited until the new Congress was seated. In fact, given that Obama had already acceded to the argument that not extending the rates would have brought renewed calamity to the economy, he would have had no choice but to go along with whatever the new Congress proposed, regardless that it would have addressed some or all of the criticisms just enumerated. Conservative, i.e., Tea Party critics of the bipartisan deal complain that it represents a sellout by the Republican Party to the big government mentality that continues to govern the nation and reveals that the GOP has learned little from the fundamental lesson that the voters offered up in the last election.

The “establishment” wing of the Republican Party is having none of this. According to the Mitch McConnells of the GOP, this was a huge victory for Republicans and conservatives. According to their reading of November’s Tea leaves, the prime directive was to forestall any tax increase on any Americans. Therefore, they were determined to ensure that the current rates would be preserved for everyone. They claimed – correctly – that a tax increase on so-called wealthy Americans would impact a large percentage of America’s small business community and consequently inhibit job creation and prolong, if not exacerbate, the unemployment situation in the country. Virtually any price that Obama exacted to secure the continuation of the Bush rates, for however long, was a price worth paying. The liberals’ silly targeted tax credits, extension of unemployment benefits, etc. were small potatoes compared to the critical goal of extending the current tax rates for all.

Both arguments are logical, convincing and easily defended. Moreover, the underlying rationale for either argument emanates from the right side of the political spectrum. Demanding spending cuts and fiscal restraint is as conservative as it gets. But so is the plea for low taxes and job creation, as is the fight against progressive taxation. Thus in some sense, both sides are “right” in their arguments.

So should conservatives be celebrating the deal or ruing the day that it was struck? I believe the answer lies in what conservatives believe to be the current political and economic status of the country, how one measures the degree to which the ongoing progressive onslaught has altered our nation and how radical a course correction one believes is required in order to right the ship of state. Much has been written – from Codevilla’s The Ruling Class to DeMint’s Saving Freedom to Levin’s Liberty and Tyranny – arguing that the political and economic nature of our nation has been radically altered over the last century. According to those arguments, we are no longer a Constitutional republic whose fundamental values are based upon individual liberty, free enterprise, American exceptionalism and Judeo-Christian culture. We are now much closer to a Euro-style, social welfare state in which feasance to the Constitution has been replaced by dependency on big government to satisfy our needs and desires. If one accepts Codevila’s thesis that the Democratic Party is the engine that drives the transformation, abetted by a compliant Republican Party whose leaders aspire to no more than to be admitted to the board rooms of power that administer the social welfare state, then clearly the tax deal represents yet another step down the road to serfdom – even if only a halting and ambiguous baby step. But if one rejects that argument, and instead sees the political landscape comprising a true oscillation between conservative and liberal advances and retreats, not reflecting a persistent, overwhelming advance by progressives, then the tax deal is a small victory for conservatives and should be celebrated.

If the latter are right, we should expect little in the way of fundamental change in the next two plus years. Obama’s natural, hard left inclinations will be held in check to some extent and then who knows what will ensue in 2012? It depends on who is elected president. But the country will continue to bounce back and forth – indulging its equally strong impulses to conserve and liberalize, and while conservatives have the upper hand, they should achieve what they can.

But if Codevilla is right, and we do not initiate a Constitutional revolution in the nation, to wit:

  • drastically, broadly and permanently cut the size and scope of government;
  • overthrow the unholy alliance between the mainstream media, public sector unions, government bureaucrats, crony capitalists and multiculturalists that have and continue to push America to the left;
  • restore a Constitutional republic in which a limited government serves the interests of the people rather than rules them according to elitist ideals;

then we are doomed to complete the progressive trajectory to utopian socialism, second class status as a nation, enforced egalitarian poverty and loss of freedom.

Which side of the argument are you on?
This article also appeared in The Land of the Free at

It’s the Fiscal Uncertainty, Stupid

It is not easy to discern under the fog of misinformation disseminated by the Obama administration and its leftist allies in the Congress and the Federal bureaucracy, but these folks seem genuinely puzzled that their Keynesian/socialist policies have not brought the US economy roaring back to life. They said and, more to the point, apparently believed that: the nearly billion dollar stimulus program would provide the perfect jolt to the US job creation machine and cut the employment rate by at least 2%; Obamacare was exactly what the American consumer needed and wanted, and that it would eventually rescue the economy from the ravages of unchecked health care expenditures; the extension and expansion of unemployment benefits and other welfare programs would ease unemployment and cushion the effect that the economic contraction was having on poorer Americans; and finally, their misbegotten mortgage assistance program, cash for clunkers and other artificial, one-time statist interventions in the economy would save it from the severe harm inflicted by the evil policies of the Bush administration – policies which were strangely reminiscent of those of the current administration.

All of these suppositions are patent nonsense. But that this is so is completely beyond the ken of the vastly-experienced businessman whom the American people so foolishly installed in the White House. Obama utterly rejects the policies of Ronald Reagan that rescued the US economy from similar dire circumstances 30 years ago. Instead, he plows ahead with failed Keynesian economic policies and wonders why they don’t herald the economic revitalization that he believes they should. He is clueless as to why American businessmen and the American consumer don’t respond as he expects. It’s the fiscal uncertainty, stupid! The actions of Obama and his minions who, tragically, govern our fair land have created massive uncertainty about what will come next; and it is that uncertainty – as much as the already manifest deleterious effects of Obama’s policies – that is the cause for the continued stagnation in the American economy.

The notion that the uncertainty caused by Obama’s unwise fiscal policies is as damaging as the already perceived ill effects of those policies is not a new idea – although my phrasing of the concept in the title is hopefully novel. I would like to pursue the thought in two ways in this article. First, I will quickly review the nature of the uncertainties and the harmful consequences that follow. Second, I will consider two excellent, recently published books that analyze Obama’s fiscal policies: The Great Money Binge: Spending Our Way to Socialism, by George Melloan (Threshold Editions, 2009) and It’s Not as Bad as You Think: Why Capitalism Trumps Fear and the Economy Will Thrive, by Brian Wesbury (Wiley, 2010). I will discuss how these astute authors’ analyses of the nature of Obamanomics are almost exactly parallel, but how they come to diametrically opposed conclusions as to the consequences for the country and the economy. The point is that if these accomplished experts (both conservative, incidentally) are in complete disagreement about the fallout from Obamanomics, how great indeed must be the uncertainty it is producing in the business community, among investors and consumers and of course in the public at large.

The financial uncertainties that our nation faces are crippling as well as perplexing. But before we recite them, let us list a few of the certainties that have been established beyond doubt in the last 18 months:

·       Obama is a leftist ideologue who wants to transform the US from a society characterized by free markets, limited government, traditional culture and individual liberty into a government-controlled, Euro-style social welfare state.

·       Nationalized health care, cap and trade, massive deficit spending, punitive taxation – especially on the ‘rich,’ extensive government regulation, re-unionization of the American work force and demonization of American business are the main mechanisms he intends to deploy to bring about his radical transformation. He has succeeded in a few of these areas and he continues to press the others.

·       Despite the fact that his agenda was evident for all who cared to look during the 2008 campaign, the American people were blinded by his charisma and apparent pragmatism, by the cover provided to him by the media, and by the populace’s desire to put the nation’s dismal racial legacy to a final rest by elevating a black man to the Presidency. But now a significant portion of the electorate has awoken to the horrendous mistake that was made and is determined to correct said blunder at the earliest opportunity.

These things we know. We see what Obama has done and he is now largely transparent about what he still intends to do. Now what don’t we know?

·       We are unsure of the level of taxation awaiting us. Obama wants to raise income taxes, capital gains taxes, taxes on dividends, FICA earnings limits, estate taxes and all manner of corporate taxes. Will he succeed? To what extent?

·       Do we have inflation waiting just around the corner? perhaps hyperinflation? or will it be deflation? or just stagnation?

·       Will the economy dip back into recession?

·       What surprises await consumers, businessmen and investors in the two multi-thousand page bills that Congress passed in the last four months? What effect will they have on consumer spending or saving, entrepreneurship, the housing industry, the medical profession, Wall Street, Main Street and your street?

·       How much more of Obama’s destructive agenda will be enacted before he stands for re-election? cap and trade? card check? more campaign finance ‘reform’? more education ‘reform’? amnesty for illegal aliens?

·       How deep is the resistance to the threat he poses? Are the Tea Party people representative of not just deep-seated resentment but of a more widespread disappointment at Barack’s plans? Is the Republican Party more RINO than Tea? How will all of this be manifested in the Congressional elections this fall? What effect will that election have on the progress of Obama’s radical agenda? Can any of it be rolled back?

Because of these uncertainties: businesses are loath to invest in new ventures or hire new workers; consumers are reluctant to buy homes; the stock market is subject to wild gyrations; other countries lose faith in the soundness of the dollar; parents worry about their children being able to live as well as the parents do; we remain paralyzed and unable to address the entitlement calamity that is bearing down upon us; public morale is damaged by the enormous debt we are piling up; and our pride in our nation is weakened. Incidentally, this litany doesn’t even touch upon the people’s fear for the country’s security occasioned by Obama’s foreign policy of ‘soft power,’ appeasement, obsequious groveling to tyrants, disarmament and multilateralism.

I doubt there is anything that I have said here with which the two afore-mentioned authors would not agree. In their books, they each come down very hard on Obama along the lines that I have laid out in this piece. The similarities in their analyses of Obamanomics are highlighted by the facts that both books have Forwards written by the same person (Amity Shlaes) and both authors have deep connections to the Wall Street Journal. Yet, Melloan strikes a very pessimistic note, whereas Wesbury remains optimistic.

Melloan: Now, with the crash of 2008, our new president and government appear committed to ignoring the lessons of the past. With multibillion dollar ‘stimulus packages’ becoming the norm, and a multitrillion-dollar national debt that will keep growing so long as present policies are continued, America can look forward to a very grim future indeed.

Wesbury: There is clear evidence that panics and depressions happened with some regularity back in the 1800s and early 1900s, and it is also true that government was small back then, but … Government experimented with two different national banks, often changed the price of gold or silver, issued debt, and regularly interfered with the banking system. … The key is that the United States made it through all of that and has averaged a little more than 3 percent real GDP growth per year for the past … 200 years. This history of free market capitalism is a huge hurdle for anyone who wants to say that it was built on sand to overcome. The United States has created so much wealth and built such a robust system that taking it down is much more difficult than anyone thinks. In the end the economy is built on a rock. … Capitalism has not failed. And it’s not time to give up—on free markets or a better tomorrow. History has shown that every time the economy was thought to be done, worn out, finished, it bounced back. …[It will do so again.] It’s not as bad as you think.


Melloan concedes that America’s economic goose is cooked, while Wesbury attempts to convince the reader that the American economy can take Obama’s best punch and still come back strong. As a stockbroker acquaintance says: ‘The market factored in Social Security, then it factored in Medicare; it will likewise factor in Obamacare.’ But there is no more factor room counters Melloan. Are we hopelessly far down the road to ruin or will America’s unbelievable history of resilience rescue us? I wish I knew which of these two gentlemen was correct. How could they come to such vastly different conclusions based on the same evidence and based on essentially the same evaluation of the evidence? I think the answer can be found in the notion of a tipping point. The idea, which I believe originates with Thomas Sowell, is that there is a point in the transformation of America from a Constitutional Republic to a Euro welfare state beyond which – if we reach it – it will be impossible to reverse course. Actually, in a previous post in this blog, in which I discuss this idea at length, I described three tipping points – one political, another economic and a third cultural. Melloan and Wesbury are concerned exclusively with the second. The answer to the puzzle I posed is that Melloan believes that we have passed the economic tipping point, whereas Wesbury does not. I sure hope that Wesbury is right.

This article also appeared in The Intellectual Conservative on Aug 3, 2010 at:

Free Markets vs. Efficient Markets: Free People vs. ‘Equal’ People

Many broad explanations have been offered for the economic collapse of 2008, including corporate greed, government incompetence and personal irresponsibility. Specific causes have also been put forward, for example: Fannie and Freddie bankrolled insolvent mortgages; unsound derivative investments toppled the mortgage industry in particular and the credit markets in general; aggressive promotion of the Community Reinvestment Act encouraged unwarranted borrowing by persons incapable of repayment; or artificially low interest rates fueled unsustainable borrowing. A novel thesis that in some sense incorporates both general and specific explanations for the crash has been put forth in a new book Panic: The Betrayal of Capitalism by Wall Street and Washington by Andrew Redleaf and Richard Vigilante. Broadly stated, the authors’ explanation asserts that those responsible for our economy (the business community that creates it, the government that regulates it and the consumers and investors who sustain it) all abandoned free markets in favor of efficient markets. The book explains why the folly of replacing the unpredictable, turmoil-filled and at times chaotic environment of free markets by the supposed safety, predictability and manageability of ‘efficient markets’ was both the proximate and ultimate cause of the crash.

The context of the book is almost exclusively economic, to some extent social, and nearly completely apolitical. In this article I will identify five main themes in the book, all of which are socio-economic. I will show how each has a political analog and that the consequences of the pursuit of these analogs (which has occurred) has been just as devastating to our polity as the pursuit of the authors’ five was to our economy.

Replacing free markets by efficient markets. Redleaf and Vigilante contend that our financial gurus, having grown weary of the unpredictable nature of free markets, developed a new system of rational or efficient markets. There are many components to this system change but the main principle can be summarized in the following quote from the book’s dust jacket:

‘This ‘ideology of modern finance’ replaced the capitalist’s appreciation for free markets as a context for human creativity with the worship of efficient markets as substitutes for that creativity. The capitalist understands free markets as an arena for the contending judgments of free men. The ideologues of modern finance dreamed of efficient markets as a replacement for that judgment and almost a replacement for the men.

Under the influence of contemporary financial theory, bankers and regulators abandoned basic tools of financial analysis and judgment for elaborate, statistically based insurance schemes and a blind faith in the efficiency of modern securities markets.

The result: it became impossible for either executives or regulators to fully understand the financial condition of any great modern bank. Believing that financial systems could transcend the need for human judgment the bankers and regulators combined to create financial institutions with balance sheets no one could judge.’

The main thrust of the book is an explanation of why this strategy backfired.

Now politically, the United States has made an equivalent swap. We have traded the fundamental principle of a free people for that of ‘equal’ people; that is, the ultimate goal of liberty in American society has been superseded by the drive for equality. Allowing the people to freely pursue their dreams under the rubric of God-given rights, which grant them the liberty to chase those dreams – as long as they don’t impede similar pursuits by their neighbors, often leads to messy and unpredictable outcomes. Those who would alter the system to have government decide which dreams are compatible with the ‘greatest good’ for society, who shall pursue which and how they should be pursued, those people believe deeply that such a ‘progressive’ system would result in a fairer, more equitable, orderly and just society.

Redleaf and Vigilante show how the abandonment of free markets for efficient markets led to arrogance concerning our ability to tame market forces and the unintended consequence of financial structures for which we were totally unable to value their worth. In the same way, our surrender of liberty for equality has resulted in a society in which we are unable to distinguish good from evil, morally appropriate behavior from degeneracy, knowledge from trivia, justice from perversion or tradition from fad.

Replace entrepreneurs by experts. Free markets are driven by entrepreneurs – those whose vision and drive are so powerful that they are motivated to found businesses, develop new industries and raise capital in order to produce new products. The problem is that, although such drive frequently leads to innovation and prosperity, more often than not the entrepreneur’s vision is misdirected. Too many mistakes are made and too many people get hurt in the process. Therefore, progressives conclude, we should rely on government bureaucrats working in tandem with industrial experts to chart our course through the shoals of free enterprise in order to lead us to the safer waters of a managed economy.

Redleaf and Vigilante refute this conclusion by showing that ‘experts’ are no more adept at picking economic winners and losers than are private entrepreneurs. Moreover, since neither the sweat of their brow nor the green of their wallet is invested in the enterprise, bureaucrats and experts are far more likely to fail than is the entrepreneur at identifying a priori the most profitable business ventures and products.

Politically, the country is making the exact same philosophical mistake. Instead of entrusting the key decisions of our social, cultural and political lives to the ones closet to the action – parents, relatives, clergy, civic leaders, we have surrendered the authority to structure our lives to distant government regulators, judges, bureaucrats and other ‘experts’ who micromanage – and mismanage – our schools, communities, farms, factories, laboratories and our nation as a whole. Instead of trusting our instincts, traditions and experience, we rely on government’s big brothers to decide for us how to live our lives. As in the economy, individual initiative is stifled in favor of government-inspired uniformity and predictability.

Replace morals by systems. Redleaf and Vigilante explain how the success of business correlates positively with the morals of the people involved – including producers, laborers and consumers. In picking winners and losers, the market relies on the good sense of millions of individuals who make choices in the complicated processes of starting and managing a business, marketing and distributing its products and of course also in the evaluation and purchase (or not) of said products. Success or failure is governed by people’s sense of what is the value to them, their families and communities, and to the nation in general. Since producers must satisfy their customers in order for their business to succeed, excellent morals among the latter guarantees that the former will behave scrupulously. But, say progressives, morals are judgmental. So, as the authors explain, we replaced them with systems. The objective is to scientifically design processes and mechanisms, grounded in logic and dispassionate evaluation, which would maximize the chance of success of new products. Of course, it does not work. The systems developed on Wall Street and in Washington were opaque, needlessly complicated and flawed in design. Can you say Fannie and Freddie, Lehman Brothers or AIG?

Once again, the same type of flawed substitution manifests itself in the socio-political milieu. We replace a reliance on the good moral behavior of the people by a reliance on multiculturalism, tolerance, non-judgmental attitudes and diversity. What a fool’s quest! The effect has been to replace the shared values of our traditional culture – i.e., a Calvinist work ethic, rugged individualism, American exceptionalism, Judeo-Christian Western Civilization, and a devotion to free markets, limited government and individual liberty – by a falsely uniform soup of mushy ideals that no one except diehard progressives believes in. We have diluted the character of the American people and separated ourselves from our history, traditions and our national purpose.

Eliminate risk. Free market capitalism is inherently risky – very risky. Historically, Americans were prepared to incur the risks for the promise of success and prosperity. Individuals might suffer, but on average the population grows richer. However, in recent decades, our society in general and our financial moguls in particular became increasingly risk averse. New systems (see the previous item) accommodated that sea change. But of course, it did not work. Some risks were averted, but the system did not anticipate other risks caused by the irresponsible promotion of the Community Reinvestment Act, corruption and duplicity at Fannie and Freddie, and artificially low interest rates. These were sufficient to bring down the house of cards.

The desire to eliminate risk is even more prevalent in our culture and politics than in our economy. We want the government to insure our health, our houses, our businesses, our credit arrangements, not to mention our bank accounts. The government can only do so by putting us in the straight jacket of high taxes, excessive regulation, bloated spending and oppressive nanny state rules. We have traded freedom for security and in the end we obtained neither.

Capitalism without capitalists. Redleaf and Vigilante again:

Capitalists are owners. Capitalism rests on strong ownership. Being an owner means more than having the right to the income from an asset. Ownership implies both the legal right and the practical capacity to make judgments about the care and use of the asset. Judgment and ownership are inseparable. Both the mortgage crisis and the crash are best understood as the result of government policies that pushed trillions of dollars in assets out of the hands of relatively strong owners and into the hands of weak owners….

The driving force behind this massive shift from strong ownership to weak ownership was the ideology of modern finance. Replacing the notion of free markets as an essential context for capitalist creativity was the worship of supposedly efficient markets as substitutes for capitalists themselves.’

In a parallel fashion, we increasingly have a ‘free country’ without free people. We pay lip service to our founding documents and we take pride in calling ourselves ‘the land of the free.’ But we surrender more and more of our freedoms to a coercive Federal Government in exchange for security and an oppressive equality of outcome. We mistakenly declare our economic system to be capitalistic whereas in fact it is at best a mixed free market/managed economy that is dangerously close to being a Euro-style social welfare state. Similarly, we declare ourselves to be a Constitutional Republic of limited government, federalism and individual liberty whereas we have evolved into a soft tyranny managed by a central government of elites and false experts.

In 2008 the US experienced a severe economic crisis caused by a change in our fundamental economic axioms. We have also altered our basic political axioms in an essential way. It is therefore likely that a severe political crisis lies in our near future.
This article also appeared in The Intellectual Conservative at:

The Stock Market is Making Me Dizzy

One week the Dow is down 500 points. The next week it is up 500 points. The volatility is driving me nuts. I retired this year and soon I will be taking distributions from my 401(k) to supplement my retirement pension income. A hefty chunk of that 401(k) is still invested in stocks and mutual funds. And as expected, those assets grew nicely over the years – although much more erratically, if at all, during the decade just completed than during the preceding two decades. Well, if I am going to depend on those funds in the very near future, I need to decide whether to convert most or all of them to the relative safety of bonds and bond funds or the ‘complete safety’ of cash. Either way I would be sacrificing potential growth for asset preservation. It would be an easy decision if I knew what the stock market is going to do over the coming decade. Ha! I don’t know what it is going to do in the next five minutes, much less the next five years.

Being a rational creature, I look to history as a guide. Of course history never repeats itself exactly, but perhaps an examination of past analogs could be useful in guessing what is coming. The Dow today is below where it was a decade ago. During that decade it has been both 40% higher and 35% lower than where it is today. So the volatility has been with us for a while. Still, the fact that we have been at best treading water – and more correctly, sinking, if you take inflation into account – causes me to look for analogous decades in the past in order to consider what followed them.

Two obvious candidates come to mind: 1940 and 1980. In both of those years, the economy had just completed a miserable decade: high unemployment, recession or depression, flat or declining stock market, no consumer/investor confidence and massive government interference in the economy with deleterious consequences. What happened next? In the former, WWII; in the latter, Ronald Reagan. The history is well-known, so I won’t elaborate. The point is that anyone who failed to invest or reinvest in the stock market in 1940 or 1980 missed a fast-moving train that yielded enormous dividends over the next 20 years for those who got aboard.

So are we in an analogous position today? Should we be loading up on stocks and growth investments in anticipation of a boom decade following the lethargic decade just concluded? Alas, I fear not. Indeed, I suspect that we are not about to replicate the booms of the 40s and 50s or 80s and 90s. I worry that the correct analog for 2010 is not 1940, not 1980, but rather 1930, or more accurately 1932. Bush is Hoover and Obama is FDR. In exactly the way that Hoover used the Stock Market Crash of 1929 as an excuse to institute unwise, big government policies that undermined the roaring 20s prosperity of Harding/Coolidge, Bush used the panic of 2008 (although he had been at it long before that) to undermine supply side economics and 25 years of prosperity inaugurated by Reagan. Moreover, in the same way that Hoover was succeeded by FDR who doubled down on Hoover’s unwise policies, thereby subverting any chance of recovery and sentencing the US to a decade of depression, unemployment and economic stagnation, we have Bush followed by the even more misguided Obama who makes no secret of his aspiration to be another FDR.

I don’t know why the stock market is oscillating rather than just falling. True, the Dow is off nearly 1000 points from its April high. But I worry that the April high reflected more wishful thinking than a hard assessment of reality. Our President and the Democratic leaders of Congress are hard-left ideologues who are determined to crush entrepreneurs, promote crony capitalism and nationalize as much of our economy as they can. Their model is beyond FDR’s 1935 USA; rather they aspire to Atlee’s 1948 Britain, or Trudeau’s 1975 Canada or Mitterrand’s 1982 France. (Actually, in my darker moments, I think it’s really Castro’s 1965 Cuba or Chavez’ Venezuela today, which they really seek to emulate.)

Our only hope is that 2010 will be a repeat of 1994 and not 1934. In 1934 and 1936, the American people remained blind to FDR’s true intentions and ratified his progressive agenda. In 1994, the American people rebelled against Hillarycare and Clinton’s attempt to steer hard left. (Clinton then tacked right and saved himself in 1996.) Let us hope that the American people can awake from their mad reverie of 2008 and throw the rascals out this fall and in 2012. While I wait – and pray – for that, I have to figure out what to do about my 401(k).
This post also appeared in The American Thinker Blog at:

My Shaky Government Pensions: Fixing Social Security

On July 1, 2010 I retired from a major East Coast State University after more than 40 years on the Mathematics faculty. When I was hired in the late 1960s, I enrolled in the State’s Teacher Pension Plan, a defined benefit plan. Over the years I worked very hard in my disparate roles as teacher, researcher and administrator. I climbed the academic ladder and I retired with a reasonably good salary. Ergo, I earned an ample annual stipend to be paid to me during all the years of my retirement.

When I enrolled originally, the State agency that administers the plan sent me glossy brochures assuring me that my contributions – as well as those of the State – would be invested wisely and that these investments would easily generate sufficient revenue in the future to fund my stipend. The accompanying charts and schedules that they sent seemed quite convincing and so I did not doubt the accuracy of the projection. In fact, the plan was typical of others offered by many State governments as well as the Federal Government at the time.

But then the severe inflation of the 1970s struck. The State plan called for annual cost of living adjustments pegged to national indicators without constraint. State legislators decided that the Pension System would not be able to sustain its commitments in that environment and so they made two fundamental changes. First, participants were forced to make a one-time irrevocable choice between substantially increasing contributions in order to keep the same benefit (i.e., no cap on COLAs in retirement) or leaving one’s contribution unchanged in return for a 5% cap on COLAs. I figured that the country would make whatever adjustment was required to reign in inflation (it did: Reagan for Carter) and so I chose the cap. For 30 years I’ve looked like a genius. I used the extra money that I would have paid in increased contributions to fund a 401(k) that did quite nicely over the years – at least until the decade just concluded. Of course, if Obama’s insane fiscal policies cause the severe inflation that most expect, then my genius status will be open to doubt.

The other adjustment the State made (30 years ago) was that it discontinued the plan for all new employees from that point forth. It replaced my plan with one that required smaller contributions by participants but also paid drastically curtailed benefits upon retirement. However, as the years passed, the State became one of the most profligate spenders in the nation – to the point that it now has a multi-billion dollar structural deficit. That puts the State in virtually the same shape as the Federal Government. Its entitlement programs – of which the Pension System is a prime component – have made financial commitments for the future for which there is no reasonable chance that the State will obtain the requisite revenue to pay the expenses.

The State cannot print money like Uncle Sam can. Therefore, it has only two choices: raise taxes and/or cut spending. It has already done the former, with the predictable ill effect on the local economy. There are many ways it can do the latter, but one option not really available to it is to cut my retirement benefit. That would be a clear and blatant violation of the sanctity of the legal agreement that the State made with me more than four decades ago. I don’t think it is going to happen, but I would be lying if I said that I wasn’t worried about the prospect.

Now I have argued, in this blog and elsewhere, that the role of the government in our society has grown far beyond what was intended by our Founders. I believe that the Federal Government’s intervention in and control of the economy and culture of our nation is a grave threat to our freedom and the traditional American way of life. State governments are not nearly as threatening, but they too have gone, in many ways, substantially beyond their assigned role and, like the Federal Government, they interfere with individual liberties more than they protect them. A prime example of both types of governments overstepping their bounds is entitlement programs. Through these programs, governments, both national and local, control our health care and our retirement. But they also increasingly control the education of children, our energy, financial institutions, automobile manufacturers, housing and much more. It was not supposed to be this way. Moreover, I believe it should stop.

And yet, here I am getting a monthly check from both the State and the Feds (my pension and also Social Security). My very sustenance during my retirement arrives via the government, acting in a role that I believe is improper. Ughh!

Am I going to refuse either check? Not on your life! First of all, I earned every penny of the check from the State. I entered into a binding financial deal with the State 40 years ago. I kept my end of the bargain. Now it is time for the State to do likewise. Besides, supposedly the State has been using my contributed funds properly all these years in order to enable it to live up to its obligation to me. I view Social Security somewhat differently. The Feds have been spending every nickel I sent to them lo these 40 years. There was never any pretext otherwise. My financial contributions to the State were an investment. My Social Security contributions were purely taxes paid. Nevertheless, I am not returning my Social Security check either. The Feds would just send it to someone else. Instead, I’ll use it to fund needy people of my own choosing.

It is ironic that I, a staunch opponent of unlimited government, should be ‘dependent’ on two governments to fulfill the legal obligations they took on to bankroll my retirement. Of course, I am not alone. But the situation is more than ironic; it is, as we all know, unsustainable. We need to get the government out of the retirement business. How are we going to do that? Well, since I am part of the problem, it is reasonable that I propose a solution.

In the future, an individual’s relation to Social Security will be as follows. (The choice of the ages is negotiable; the underlying principle is not.)

·       If you are 55 or older, you continue in the current Social Security system.

·       If you are between 40 and 55, you have a choice of remaining or bailing out.

·       If you are under 40, your only choice is to bail.

·       If you bail (either mandatory or optional), you receive from the Feds all the contributions you have made previously to Social Security, augmented by a modest but compounded interest rate. It is now incumbent upon you to provide for your own retirement.

·       If you remain in Social Security, the rules stay as they are (except that the retirement age might increase). Social Security will cease to exist in 50 years. Those few 40 year olds who opt to stay in and survive until 90 will have to be dealt with on an individual basis.

This scheme will still be expensive for the Feds to implement. But it will not be open-ended and just that fact alone will cause a great change in the long-term fiscal health of the nation, as well as provide a start down the road of returning the government to its proper role.

Similar principles can be employed to phase out Medicare, Medicaid and many other government programs. The hard part will be summoning the political will over an extended period to prevent future law makers from reneging on the deal.
This article also appeared in The American Thnker at: