Steve Jobs: Why I Never Owned Apple Stock

Just a few hours ago Steve Jobs resigned as CEO of Apple. I have never invested in Apple because of this reason (also the company hasn’t had a long history of paying out dividends). At any rate, tomorrow the market will decide how much this will affect the value of Apple through their stock price. Jobs is leaving a company that is worth $349 billion in market value. Time will tell whether this increases or not.

People are asking why Jobs is not running the day to day operations of the company and I think the answer is pretty obvious. Steve Jobs has had significant health issues over the years. Usually CEOs are very reluctant to give up the reigns of their company. One can only speculate the health issues Steve Jobs is going through. I honesty wonder how long Jobs will be alive given he has pancreatic cancer which is usually a death sentence.

I find it a little bizarre that people act as if Steve Jobs as some saint. If anyone did any type of research they would realize he heavily micromanages his employees and somewhat of an egomaniac. However despite this, I would say that we all have benefitted from this. Steve Jobs takes only $1 salary which is of course symbolic. If you look at the actual amount Steve Jobs makes in just stock options it is over $14 million which is well above the average of $8 million paid to a CEO of any S&P 500 company. Jobs also did get a $90 million Gulfstream V jet in 1999 as a bonus. So if you include all the perks and extra that jobs get it is well over $1. The problem I have is people actually might believe that Jobs is living off very little and not greedy. I don’t believe a CEO or owner of a company wakes up to just make money. The main reason I believe a CEO or owner gets up is to create something new, to solve problems, or to more importantly make progress. Money of course does give people an incentive. Steve Jobs has made many people better off including himself. However, people are now saying Jobs is the best CEO of all time. I enjoy when people make statements but have no data or evidence to back it up. If you look at the performance of Apple stock and compare it to Oracle or even Microsoft since the 1980s, Apple has underperformed both stocks. A CEO’s job is to create value. So Steve Jobs may have taken his $1 symbolic pay, but compared to other companies Steve Jobs is not increasing shareholder value at the same rate as other companies within the same industry.

Part of the reason I never owned Apple is because of Steve Jobs. If Steve Jobs ever left or walked away it would be hard and maybe even difficult to recreate what he brought to the company. Warren Buffet points out that you shouldn’t need a rock star to run a business. Only time will tell if Jobs leaving will make a large impact.

Economics of Alternative Energy

Whenever I hear people talking about “green jobs” I shake my head. Green jobs are primarily jobs that are in clean and alternative energy. Energy can be derived from solar, wind, or water. I am actually in favor of alternative energy as long as the government doesn’t fund any of it. People making energy more efficient and bringing down the cost of energy is great. In fact, I believe energy in 20 years will not only become cheaper but more plentiful.

The biggest argument for alternative energy seems to be that it will create jobs and reduce our carbon footprint. The New York Times ran a recent article called “Number of Green Jobs Fails to Live Up to Promises”. The gist of the article is that government officials promised x amount of green jobs but in reality there ended up being much fewer. California spent $93 million in order to create 538 full time jobs. This works out to be $172,000 per job. Not only did it create very few jobs it came from tax-payers money.

In December of 1974 Popular Science predicted that by 1986 the cost per watt would be 60 cents per watt in today’s dollars. In 2007, the price per watt of solar was $3.66. Clearly, this prediction was way off. I use to subscribe to Popular Science and remember getting them on Saturday afternoons. One problem I realized was that nearly everything they were writing about was basically in a research and development phase which meant most of the things they talked about never came to the market place. Experts keep predicting in x more years solar will be competitive, but the main reason why this never comes true is because the government offers generous subsidies, incentives, and tax credits for installing solar which distorts the true price of solar energy. If we got the government out of subsidizing solar and other alternatives the technology would get better and prices would drop faster than if the government was subsidizing it.

Right now the U.S. consumes a lot of crude oil. Last time I checked crude oil was more abundant and cheaper than any other resource. In order to get the same energy out of one gas station you would have to cover the city of Los Angeles in solar panels. Remember this is just the energy for one gas station. The U.S. has 21 billion barrels of proven reserves. Not only do we have these proven reserves we also have undiscovered oil (can’t drill due to regulations) of 134 billion barrels of oil. Not only do we have oil but if we ever ran out there are other countries around the world that could export it to us. I am always reminded of the words that we will never run out of any resource that is valuable. In the last twenty years we used crude oil more efficiently. Even the cell phone has increased crude oil efficiently since people can now communicate in real time so they aren’t wasting gas trying to figure out where other people are. Navigation and GPS systems have also made us more fuel efficient by getting us to where we want to go. No doubt we will become more fuel efficient and develop better ways to use crude oil.

Alternative energy could help just as long as it isn’t subsidized. This week Evergreen Solar a maker of solar panels announced they were going bankrupt. It seems as if the company made most of their money off government subsidies and credits offered to consumers. Data from the Energy Administration and Greeneconmetrics Research shows that solar energy in terms of cost per kilowatt hour is more than seven times that of oil.

My prediction is we will be using more solar energy in the future (hopefully without taxpayer money). The technology will improve slower than people expect because we keep subsiding it. Think of the computer industry in the 1980s and 1990s got subsidies. How much worse off would we have been?

Charles Koch Responds to Warren Buffett

Direct from Charles Koch...

“Much of what the government spends money on does more harm than good; this is particularly true over the past several years with the massive uncontrolled increase in government spending. I believe my business and non-profit investments are much more beneficial to societal well-being than sending more money to Washington". -Charles G. Koch, Chairman and CEO, Koch Industries, Inc.

I really wish Charles Koch would do more interviews to push back the frontiers of ignorance.

Matt Damon Is A Moron

Uncle Nevin, Benefits, and University of Miami Football Scandal

A recent investigation into the University of Miami football program showed that booster Nevin Shaprio tried to recruit players to play for the Miami Hurricanes by giving players: cash, trips, jewelry and other goodies. Shaprio provided gave an estimated $2 million in benefits to players to at least 72 players from 2002-2010. Not only were players getting benefits but coaches were also getting them as well. What is ironic is when Shaprio got into financial problems (he was running a Ponzi scheme) and asked players who had been drafted into the NFL for money they told him to take a hike. Looking at the record for University of Miami over the same time period as the scandal is looks as if the team did very well during the scandal winning over 70% of their games. No doubt the team could maybe not able to play for the season.

Paying athletes is not new for the University of Miami football program. Between 1986-1992 rapper Luther Campbell was paying players $500 to score a touchdown. However, it seems as if the scandal of today makes the past scandal seems look fairly simple. This scandal does resemble SMU’s payola scandal in the 1980s were players were given cars, cash, and all sorts of incentive to come play for SMU.

University of Miami has a history of scandals. From 1984-1994, an academic advisor helped 57 football players falsify Pell Grant applications in order to get more than $220,000. Also in 1994 nearly 1 out of every 7 football players had been arrested while playing on the team. It seems as if not only the athletic department of the University of Miami has problems but the whole school does. My personal feeling is that the president of the university, the administration, and even the athletic director looked the other way while all this was going on. The administration usually has compliance people making sure boosters and players try to keep their distance from one another. The NCAA is no angel here either.

The bigger issue however is why boosters are giving out all these benefits to college players. Really the boosters are part of an underground market with athletes. The only way to fix the problem is to allow players to get paid which would get rid of the scandals. Players are essentially saying, “Look I am underpaid because if I were properly compensated I wouldn’t have to take these cars, money, and other benefits”. Let the market decide what players are truly worth. I find it interesting that people think of this fairy tale of college athletes solely playing for the love of the game. True, some players love the game but if players just played because they loved the game how would you explain players taking goodies?

Warren Buffett: Higher Taxes Please

Warren Buffet in a New York Times op-ed yesterday said that rich people should pay more in taxes. Buffett points out that he paid 17.4% (or $6.9 million) in taxes last year. The reason Buffett is in a low tax bracket is because nearly all of his income comes from capital gains (buying and selling stock) which is taxed at a much lower rate than ordinary income (wages from a job). Warren Buffet claims he doesn’t mind paying higher taxes. Interesting that Buffett doesn’t voluntarily paying his highest marginal tax rate of 35%. In fact if Buffett felt really patriotic he could make a gift to the U.S. Treasury Department to pay down the United States national debt. I have a feeling Buffett isn’t going to be making a gift any time soon.

Our tax system is extremely progressive. The top 1% (people making $380,000 and up) pay an average tax rate of 23.3% this is higher than any other bracket. Meanwhile the average tax rate for the bottom 50% is a mere 2.6%. In addition to this, the top 1% of taxpayers are paying 40% of all income taxes. This percentage has only been increasing since 1980 not decreasing. The top marginal rates since 1980 have also decreased. If politicians wanted the top 1% to pay “more of their share” of income taxes all they would have to do is lower the marginal rates.

No doubt Buffett is probably one of the best investors of all time. However, I find it surprising that someone with an economics degree from Columbia doesn’t understand demand for anything slopes downward the higher it is priced including taxes. If Buffett was really serious about paying his fair share he would voluntarily pay more in taxes. Buffett can say how he wants to pay more in higher taxes, but until he voluntarily does so it’s all talk. Talk, rhetoric, and blame are all great tools for politicians. Blame in fact is an unlimited resource.

Postal Layoffs and Time to Privatize?

The U.S. Postal Service (USPS) announced plans to lay off 120,000 people. Even though USPS has been around since 1775 it only started to lay off people beginning in 2008. The Post Office is constantly burning through money and at this point they are trying to minimize loses. Next month the Post Office will become insolvent. This is actually positive if we are closer to privatizing the mail system. The number of mail items second through the post office has dropped over the years. The main reason for this is the internet which allows people to send electronic mail for a minimal price.

USPS is now trying to figure out how to remain solvent. Cancelling Saturday mail has already been discussed although I don’t that will do much to solve the major problems of: pensions, compensation, or accountability. In terms of pensions USPS in June of this year had to suspend employee contributions to try to save $800 million. USPS claims that they have been overcharged for pension obligations and are due $75 billion from the government. In 2009, an average postal worker made $79,000 in total compensation (wages + benefits). Economist James Sherk found that postal workers earn an extra 15%-20% per hour than workers in the private sector.

The Post Office employs around 560,000. This means the Post Office spends $28 billion a year on salaries. The total cost is more if you include providing benefits for workers. The Post Office until three years ago had never laid anyone off in their almost 240 year history. The Post Office has little to no accountability for its workers. Take the example in May of a mail carrier in Portland, Oregon who defecated in a yard while on his mail delivery route. The worker was put on unpaid leave but was transferred to a different route. If this happened at UPS or FedEx the worker would have been fired the day it happened.

Hopefully, more people and politicians will realize USPS can’t continue. In 2010, the Post Office had a loss of $8.5 billion. If we had FedEx and UPS delivering mail not only would we get rid of the deficit of the USPS, but more revenue would come into the government since FedEx and UPS would have to hire more workers who have to pay taxes. The idea is to create more productive use of assets and more tax payers.

Apple: Most Valuable Company?

As of today Apple is now the “most valuable company”. Apple now has a market capitalization of $337.2 billion surpassing ExxonMobil with a market cap of $330.8 billion. I put most valuable company is quotation markets because the market can misprice things. The technology bust of 1999-2000 and the financial crisis are just recent episodes of this. The sector weightings of both technology and financial companies during this period became very high. The weightings became high creating bubbles within certain sectors that eventually went bust.

Apple is known for producing computers and electronic devices that consumers use around the world. The iPhone I would say has been the biggest hit for Apple in recent years. The iPad also seems to be very popular as well. Even though Apple has had successes they have also had failures. One failure that sticks out in my mind is the Lisa computer that was developed in the early 1980’s. The computer would be over $21,000 in current dollars yet lacked the computing power of any modern day cell phone. Another flop I remember was the Apple Newton which is what use to be called a personal digital assistant (PDA). Basically the device allowed you to set your calendar and organize contact information.

One problem that I think few people realize about Apple’s success is solely based on Steve Jobs. The biggest worry is the health of Steve Jobs. In 2004, he had a rare form of pancreatic cancer. In 2009, he had a liver transplant. The five year survival rate for liver transplant is between 75-90%. I honestly would be shocked if Jobs lived a long live. Being CEO is hard on perfectly healthy people and would be even harder on people with health issues. Jobs seems to be the superstar for Apple and if he were to leave it would cause great uncertainty for Apple. Jobs himself has created over 230 patents.

What is perhaps the most interesting is how the media and even some people think of Jobs somewhat of a hip entrepreneur who is earth loving and kind. I don’t think people understand the type of personality Steve Jobs really has. Steve Jobs is intense and demanding. From what has been written about Jobs he is obsessed with making something people will enjoy. It wouldn’t be hard to classify Jobs as a perfectionist. There was a movie years about a decade ago called “Pirates of Silicon Valley” that shed light on the type of personality Jobs may have had during the early days of Apple. Whatever his personality may be Jobs has made everyone else better off including himself. Steve Jobs got rich by figuring out what consumers trying to perfect exactly what consumers wanted. As a result Jobs has a net worth today of $8.3 billion.

Jobs created a company that very consumer eccentric. Apple figures out what consumers really wanted. People complain that Apple products are more expensive, but there are always alternatives. Being paranoid and a perfectionist are not classified as desirable traits yet in the case of Steve Jobs millions of people have benefitted.

S&P Downgrade: Who Is to Blame?

With Standard and Poor’s (S&P) downgrading the United States debt there has been a lot of blame as to who is at fault. The S&P 500 reacted to the news by dropping 6.66% on Monday. Today the market was up almost 5%. David Axelrod senior advisor to President Barack Obama said that the downgrade was the credit downgrade was a “tea party downgrade”. Michael Moore wanted to arrest S&P officials (which is what Italy tried to do when S&P downgraded them only Italy wanted documents as well). Rick Santelli the man I would credit most with creating the tea party said that if it weren’t for the tea party the U.S. would be BBB.

Let’s sort out some facts first. Standard and Poor’s is in the business of reporting the credit rating of companies and sovereign nations. Moody’s and Fitch which are two other credit rating agencies kept their AAA credit rating for the United States. Standard and Poor’s did not err in their decision. In 2010, the United States took in $2.38 trillion. The very same year the United States spent $3.55 trillion. So in essence we are spending $1.17 trillion more than we take in yet we have the highest possible credit rating. If individuals overspent this much they wouldn’t even be credit worthy. Not only are we spending more than we are taking in but we have more than $14 trillion in debt. With all these facts the United States should have perhaps even a lower credit rating then S&P gave us.

Another interesting idea is why people are blaming credit rating agencies for the downgrade when it is really the fault of the people for electing people that take money from one person and promise it to someone else. The United States got the downgrade because of political instability and unclear and murky recommendations from the recent legislation. It would be as if a person called someone overweight (when they are) and the overweight person said, “I am not overweight you just don’t know what overweight is”. The parallel is yesterday when the President claimed at a press conference the other day that we truly are AAA even though we are told that is not true. People seem to blame the credit rating agencies for the downgrade and the 2008 financial crisis. In the 2008, financial crisis people were claiming S&P was too loose with its credit rating agencies. Now they claim people that S&P is being too harsh. I think the credit rating agencies realized after 2008 they had to make their criteria more stringent, but even with that said the United States should have been downgraded.

Credit Ratings Of Nations Around the World

Death of Arcades

In my younger days I was much more interested in video games than I am today. Most people who are now in college or just recently graduated from college can remember an era where kids pumped arcade games full of coins, played games like Teenage Mutant Ninja Turtles, X-Men, and Street Fighter. Today, very few arcades exist. My question is why have arcades seemed to have vanished?

To this day I can remember in virtually every mall in Houston there was some form of an arcade. I can even remember Sam Houston Racetrack having a mini arcade. I would imagine it allowed parents to drop their kid off somewhere while parents did their shopping. The main arcade I remember was a place called Exhilarama which was located in Memorial City Mall. Exilarama was not only an arcade but had food, a playground, and go carts. I remember in the 1990s this place on the weekend would be packed full of kids. By 2000 the company was defunct and a new arcade came in called Tilt. Tilt was only around for a few years and then went out of business. Discovery Zone which was a place people usually had their birthdays also went out of business in 1996 due to filing for bankruptcy. The bankrupt stores where bought by Chuck E. Cheese which is still in business today. The only other large chain arcade I can think of is Dave and Buster’s which is targeted to adults. According to Play Meter a magazine that covers the arcade industry in 2010 there were only 2,700 arcades which decreased from 4,000 in 2006. As of 2004, Konami stopped making arcade games however Sega and Namco still do. In the 1980’s the amount of video game arcades peaked at 13,000. I remember arcades in places like Cici’s Pizza and Mr. Gatti’s.

So the question is what caused the decline of arcades? The main reason is that video games that consumers could play at home over time became more powerful and allowed people to play some of the exact same games as they were in the arcade. Street Fighter 2 was one of these games. Mortal Kombat was another game that many people played on arcade in the 1990s then became widely available on video consoles. Also the internet had a large effect on how people played games. Today, people can play games online with others from around the world. Back in the day you could only usually play against whoever showed up to the arcade. During the 1990’s we had the introduction of Playstation 1 and 2, NES, SNES, Sega Genesis, Sega Dreamcast there was little reason to go the arcades. Instead of spending an afternoon pushing quarters into a machine people could have unlimited play at home. Also computers also became much cheaper during the 1990s. There was always demand for playing games on the PC however, during the 1990s the graphics, computing power, and hard drive space for computers increased dramatically.

Technology over time improves and becomes cheaper for the masses. The arcade/video game industry is one example of this. Creative destruction is the process of letting bad ideas fail and only the best ideas stick around in the market place. I would argue that today more people have access to video games than ever before at a cheaper than any other time in history.

Regulations Costing Over $100 Million

Standard & Poor's Downgrade, Economy, and Solutions

Early this evening Standard and Poor’s (S&P) downgraded the United States credit rating from AAA (highest) to AA+. S&P cited political instability, a high debt/GDP ratio, and growth of government spending. S&P got this call right. The 2011 budget for the United States predicts a $1.65 trillion deficit. Note this is just an estimate and can be even more than predicted. What I find interesting is that we are predicted to bring in $2.17 trillion in revenue. The budget is divided into mandatory spending and non-discretionary spending. In 2010, over $2 trillion was spent on “mandatory” things like Social Security, Medicare, and Medicaid. Discretionary spending was a little over $1 trillion. My point would be that all spending is discretionary. No doubt the downgrade will have implications for the economy. The most noticeable difference will be a rise in interest rates charged to consumers. When Spain and Portugal faced similar downgrades the interest rates rose between .2-.4 percentage points. This seems small but when you look at how many homes, cars, and other expensive items are financed with interest rates it would have a large impact on the economy as a whole. The entity that will pay the most will be the United States government which will see higher interest payments on the debt.

This week the debt ceiling was raised yet I have a feeling pretty soon the Treasury will find itself in a bind and try to figure out how to pay their bills. The debt ceiling claimed there would be cuts; however I would question what base lines were used to determine if any true cuts were made. It would be like going into a store and learning they are having a sale on everything for 30% yet raised the prices 50% before they lowered them.

The jobs report today showed that 117,000 jobs were added making the unemployment rate 9.1%. However, if you look at the percentage of people in the labor force it was fallen to 58% which is the worst it has been in more than a decade. This I believe is a better measure of unemployment since the way unemployment is calculated is somewhat of an art. People who have stopped looking for the past month for a job are not counted as being unemployed.

The only real way for our country to avoid going down the tubes is to initiate some free market reforms. The government should first go through all regulations and figure out which ones have the highest cost and provide the least amount of benefit. Also taking money from hard working people and transferring it to others is not only wrong it’s immoral. If 47% of people don’t pay any federal income taxes why should they care if income taxes are raised? People claim that other countries in Europe are better because they provide free health care, free education, and other free social benefits that are “more fair”, help them live longer, and make them happier. I would argue our standard of living and purchasing power is much higher in the United States than in nearly any other country. The reason why people in our country don’t live as long is not because of health care, but what we choose to do with our bodies. Everyone could in America could have the best healthcare and best insurance, however if we eat too much, drink too much, or smoke too much statistically we will live lower lives. Also the United States has higher murder and suicide rates than other countries which would decrease our life expectancies.

We are at a turning point for our nation. I hope politicians embrace not only free markets but choice and liberty. If not we will be left with no choice but to succeed.

Pfizer and Over The Counter Lipitor

I read an article in today’s Wall Street Journal that discussed Pfizer trying to get the FDA to approve Lipitor for over the counter use. The patent for Lipitor expires by the end of this year and Pfizer wants to make sure that people are still aware of the drug. Drugs get a patent for a decade. After a decade the drug company loses the patent to make the drug and a generic substitute comes onto the market. People often say the generic is exactly like the original drug however this is a little misleading. The original drug can have a better quality delivery system, higher self life, and more effective even though the molecules for the original drug and the generic are the same.

Pfizer being very aware that Lipitor is going to become a generic drug wants to allow consumers to purchase the drug without the prescription (known as over the counter). I have always wondered why the FDA has not made more drugs over the counter. Many drugs that you need a prescription for are not very dangerous. Plus, if consumers really wanted to do harm they could just up the dose on over the counter prescriptions already.

There are benefits to putting prescription drugs on the market. The first if the drugs were allowed to be sold over the counter more people would have access to it. Drug stores and regular stores would have to compete on drugs which would reduce the price of drugs. Also another benefit would be since people are sometimes reluctant to go to the doctor you would provide them with the opportunity to take particular medicines.

The FDA worries about people taking the wrong dose or possible drug interactions which is understandable. People care more about their risk tolerance profiles than any bureaucrat. Plus, no doctor has perfect knowledge of any individual patient. Patients when they are in need seek information. I really don’t find the argument of “people don’t know what’s good for them” very compelling. Today, we have more information than leading doctors did 20 years ago. I would be more sympathetic to this argument if it were made decades ago.

Allowing people to take drugs without a doctor’s prescription would not only increase quality of life but lead to better information. Doctors could run their own trials with patients and measure the effects of the drugs on people. I don’t see why a drug should have to go through the FDA again for non-prescription use after the FDA approves it.

The Poor: Better Off Than People 20, 30, and 100 Years Ago

Inside Pfizer: The Downfall of Jeff Kindler

 

Fortune came out with a great article (one of the best I have read in a while) about the inner workings of Pfizer. The article is the cover on Fortune magazine and entitled “Inside Pfizer’s palace coup”. What is really interesting is Fortune spent 4 months and interviewed 102 people who worked at Pfizer. The story starts off with Jeff Kindler the former CEO of Pfizer trying to convince the board of directors for Pfizer to retain his job. Kindler was CEO from 2006-2010.

During Kindler’s tenure the stock price of Pfizer went from $49 to $17 a share. The article talks about how smart Kindler is graduating with high honors from Harvard Law School and all of his prestigious positions before joining Pfizer. Kindler’s management style was aggressive and blunt. He often left angry voicemails late at night to other employees. From reading the article you get the sense that Kindler really didn’t trust anyone at Pfizer except himself. The HR department at Pfizer also seems dysfunctional. Mary McLeod was the head of human resources and was fired from Schwab for trying to remove rivals and claiming she had had the CEO under her thumb. She no longer works at Pfizer and due to poor rankings from her subordinates.

When Kindler took over there were two promising drugs Pfizer had. One drug was intended to increase good cholesterol, but this flopped when there was an increase in deaths compared to the control group. Another drug was Exubera which would allow diabetes patients to inhale their insulin through an inhaler. Between these two drugs Pfizer spent over $2 billion dollars and many years developing drugs that didn’t pan out. The average cost per drug approved for Pfizer between 2000 and 2008 was $6.7 billion. I really don’t blame Pfizer for this since the FDA puts burdensome regulations on drugs companies. Kindler tried to drastically cut research and development costs, however two people on the board who were doctors told him no. A drug CEO trying to cut research and development doesn’t make any sense since that is where nearly all their profit comes from.

Before Kindler took over the CEO was Henry McKinnell who ran Pfizer from 2001-2006. McKinnell had a strategy of putting more funding into research and development since drug companies are in the business of innovating. One problem with McKinnell is he was not in the office much. He was off funding charities in Africa and wrote a book about health care reform. McKinnell was ultimately fired because the stock price for Pfizer was down 46% since he had taken over. I am surprised McKinnell couldn’t create shareholder value considering he had a PhD in finance from Stanford.

At the end of the day the CEO takes responsibility for the performance of the company. However, I would argue though that the FDA has more control over the profitability of drug companies than any CEO. The FDA can reject a drug or ask for more clinical data which makes the company either write off their research and development costs or spend more on clinical research to try to get the drug approved.

I am becoming more skeptical that IQ, background, or educational credentials really tells you much about whether someone can run a business. Some people can be very bright but not practical or have business sense. People in business are paid for what they can bring to the future of the company not what they have done in the past.

Real World GDP Since 1969-2010

Looks like world GDP has continued to grow since 1969 in real terms. Despite what people say it looks like the whole world is adding $50 trillion of value every year.

Debt Ceiling Debacle

Recently, the House of Representatives passed a deal a day before the August 2nd deadline to raise the debt ceiling. The debt ceiling will cut $2.1 trillion over a 10 year period. Only $210 billion per year but that still is something. I am suspicious of what “cuts really mean”. Looking at the deal it looks like most of the “cuts” are smoke and mirrors and are do not start any time soon. The debt ceiling would be increase immediately by $400 billion. The problem is that the money is spent right away however the cuts don’t come until years later.

Discretionary programs (includes defense spending) would be cut by $741 billion. The discretionary cuts for 2012 would decrease by $21 billion and $42 billion in 2013. Yes, these numbers do seem large however in the context of $14 trillion in debt they would be just chairs on the Titanic. In addition to this, $156 billion would be saved in interest because the United States would have a lower interest rate. This is where I am a little lost because unless the government can refinance its debt I don’t understand how they will save money. Standards & Poor’s and Moody’s I would imagine are on the verge of downgrading the United States credit rating to AA or possibly lower. If the credit rating of the United States were downgraded it would increase the cost of interest not save money. Another problem is how spending cuts are defined. An important question is what is the baseline for the cut? If politicians are saying we get cuts from things we were already were cutting to begin with or used overstated figures to begin with it could look like there is a cut when in reality nothing really happened.

One of the biggest problems we have is not discretionary spending but non discretionary spending. This includes programs like Medicare, Social Security, and Medicaid. In 2010 the United States government spent $3.45 trillion on payments to individuals. People can get paid through Social Security, Medicare, unemployment benefits, and federal assistance programs. The GDP for the United States was around $14 trillion in 2011. This would say that close to a quarter of all of GDP is just the government sending checks to individuals. In fact, payments to individuals were 2/3 of all spending for 2010. In 1952, payments to individuals were under 20% of all federal spending.

The government holds over $1 trillion assets in building and equipment. In addition to this there is around $919 billion of assets in land. Also the government owns $392 billion of mineral rights. These assets consume even more government resources since they have associated maintenance and replacement costs. The assets could be sold off to private investors who would pay taxes on them, create jobs, and increase productivity. One great idea is for the government to trade people government owned assets for Social Security benefits. The Social Security beneficiaries would have assets that they could use or sell if they wanted to and the government would be putting wasting assets to better use. Another idea for Social Security is to allow people to opt out of it. The idea would be to phase out Social Security over time since it takes money from the young to pay for the old. Privatizing or changing the age people can retire will prolong the solvency of Social Security a few years but the solution to solving Social Security is to phase it out.

Around 7.54 million people are on unemployment benefits. I would be interested to see what would happen if unemployment benefits were cut 10% or even 20% to see how people would respond. It would be wiser to set up the unemployment benefits would be to pay 100% of the benefits for a few months and then start lowering the percentage of benefits by 15% or so every month so people didn’t become dependent on it. I would much rather spend the unemployment benefit money on training out of work people than just paying people to do nothing.

I unfortunately I don’t see a brighter future on the horizon in the United States unless politicians take serious steps in order to get our fiscal house in order. I am really surprised neither party talked about this during the debt talks. Politicians talk about raising revenue. This could easily be accomplished by getting rid of the arcane and complex tax code we have and replacing it with a flat tax that would tax everyone at the same rate without deductions. Doing this would save everyone time and money and bring in more revenue since people wouldn’t be trying to shift income or assets to avoid paying taxes. Time will only tell our destiny though.