Greedy Public Sector Unions in San Francisco demand Taxpayers pay them More

Posted by PITHOCRATES - July 7th, 2013

Week in Review

FDR was pro-union.  He was all for tearing businesses a new one when it came to collective bargaining.  For he didn’t like those royalists.  Greedy businessmen who put their profits ahead of their employees.  While making them work in horrible conditions.  For long hours.  For little pay.  The greedy little profit whores they were.  But FDR drew a line when it came to government workers.  Because taxpayers pay government workers.  And it just didn’t look right for government unions to call the taxpayers greedy little profit whores.  So FDR opposed unionizing government workers.  Because you just can’t have government workers tear the taxpayers a new one to enrich themselves at the taxpayers’ expense.  Something was just wrong with that.  But that was then.  This is now (see San Francisco Bart rail strike ends as contract extended posted 7/5/2013 on BBC News US and Canada).

San Francisco Bay’s transit rail service has resumed after two labour unions called off a strike.

The four-day walkout came to an end after both sides in the Bay Area Rapid Transit (Bart) dispute agreed to a one-month extension of the current contract while bargaining continues…

Talks between the two sides had resumed as early as Tuesday, but key sticking points include salaries, as well as employee costs for pensions and healthcare…

Bart has said workers from the two unions earn on average $71,000 (£47,500) in base salary and $11,000 in overtime annually…

The president of one of the striking unions, the Amalgamated Transit Union, struck a defiant tone.

“We’re not going to let them hijack us and the riding public,” Antonette Bryant said, as she apologised to commuters for the disruption.

So these union workers make $88,000 between base salary and overtime.  Being that train schedules are pretty fixed so must that overtime.  That’s well above the median household income of about $50,000.  Yet on top of that $88,000 they get pension and health care benefits.  And some pretty nice ones at that.  Which is why everyone wants to get into these unions.  While most Americans have to put something aside for their retirement from that median household income.  As well as pay a percentage of their health insurance premium.  Unlike public sector unions.  Who just have to go on strike to get the city to increase taxes on the taxpayers.  So the city can afford to pay those generous pay and benefit packages.

Hijack the riding public?  By opposing these union demands management is trying to prevent the unions from hijacking the riding public.  For when you add in the pension and health care benefits they’re already making about twice what the riding public is earning.  Making it difficult to call the taxpayers the greedy little profit whores here.  Yet they are because they won’t consent to pay more.  Which they can do by only having less in their personal lives.  Which certainly isn’t fair.  Especially considering that a lot of these people don’t even ride the damn trains.

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It Ain’t 1996 – Obama’s path to Reelection isn’t Quite the same Road Clinton Traveled

Posted by PITHOCRATES - January 24th, 2011

Obama Doesn’t have the Healthcare and Economic Edge Clinton Had

Clinton was lucky.  Hillarycare (Clinton’s attempt to ‘nationalize’ healthcare) was a disaster.  It crashed and burned.  So it was off the table come reelection time.  And he had a smoking hot economy.  He had both a real estate bubble and a dot-com bubble.  Now, strictly speaking, bubbles aren’t good things.  Because they burst.  And recessions follow the bursting.  But until they burst, you got a smoking hot economy with low unemployment numbers.  Just the kind of things that gets presidents reelected.  REDSTATE has a list of other things, but let’s focus on items 3 & 4 in their list (see Why 2012 Is Not 1996 by Dan McLaughlin posted 1/24/2011 on REDSTATE).

3: Obamacare passed; Hillarycare didn’t: As unpopular as the Clinton Administration’s health care plan was, it wasn’t a major issue in the 1996 campaign because it had failed and, with Republicans controlling both Houses of Congress, it wasn’t coming back…Not so Obamacare, which remains very much a live issue.

4: The Economy: The unemployment rate is the most obvious of numerous economic indicators showing the U.S. economy in bad shape in 2011: unemployment, as low as 4.3% when voters elected the Democrats to control Congress in November 2006, was 6.5% when Obama was elected and 8.5% when he was inaugurated, and he expended much political capital arguing that his “stimulus” package would fix this with federal spending on “shovel-ready” projects; instead it peaked at 10.6% in January 2010, and remains above 9% a year later. These are very high numbers historically; since 1960, the unemployment rate has been above 6% on election day five times, and the only time the party in power wasn’t booted was 1984, when the 7.2% rate was the lowest it had been since before President Reagan took office and had plunged more than three points in two years. By contrast, the unemployment rate in 1996 was 5.4%, down from 7.4% when Bill Clinton was elected. If Obama can’t make the argument that Presidents Reagan and Clinton made – that they were not only making major headway on unemployment but in better shape than they were when elected (in Reagan’s case, the slight drop in unemployment was accompanied by an enormous drop in interest rates and inflation and a stock market boom) – he’ll face an electorate that is much more suspicious of entrusting him with the economy for four more years.

Historically speaking, history will favor who is not Obama in 2012 on these two issues.  And they’re about the biggest issues you can have.  A recession that just keeps on keeping on.  And a massive explosion in new spending.  Which can’t possibly help anything economic.

Old People and Jobs:  One Unpleasant Tradeoff

And there you have the ultimate showdown.  Obamacare versus the economy.  More spending and even more taxes.  Or less spending, less taxes and more jobs.  On one side you have emotional tugs of the heartstring (we have to help those poor uninsured people).  The other you have reality (we can’t raise taxes or borrow anymore without ending up like Greece).   

Obama may go Clinton.  And Clinton scored some big points with Welfare reform.  Obama has a chance to reform Medicare.  It is, after all, a part of Obamacare.  Gutting Medicare.  But Medicare is not welfare.  Those old people are a powerful voting bloc.  Will anyone, especially a Democrat, throw himself onto that ‘third rail’ (see Health care and the contest of credibility by Michael Gerson posted 1/25/2011 on The Washington Post)?

With Jack Lew and Gene Sperling in charge of its economic policy, the administration’s Clintonian direction is clear. It will seek higher revenue, cuts in defense, spending caps and more aggressive health-care price controls. When measuring deficit reduction, the last is the most important. It is the combination of cost inflation, an aging population and expansive health entitlements that push America toward the fate of Greece. Unless this problem is addressed, no tax increase or cut in discretionary spending will cause federal outlays to flatten at a sustainable percentage of the economy.

Higher revenue means higher taxes.  This is why Obamacare ‘reduces’ the deficit.  It has more new taxes than new spending in it.  But it’s a poor way to reduce the deficit.  If you have a problem because you’ve spent too much on your credit cards, what’s the easiest way to fix that problem?  Increase your revenue (i.e., your salary)?  Or cut your spending?  Of the two, you have far more power over spending cuts than you do on increasing your revenue.  So the smart money always goes on spending cuts to cut any deficit.  If you’re spending too much you just stop spending so much.  Pretty simple and straight forward.

But the 800 pound gorilla in the room is spending on old people (Medicare and Social Security).  We’re spending a fortune on increasing the life of the old so they can keep on collecting social security.  You’d have to be an idiot to not see the problem with that in an ‘entitlement-based’ government.

“The fact is,” says Yuval Levin of the Ethics and Public Policy Center, “Medicare is going to crush the government, and if Republicans leave it unreformed then the debt picture is very, very ugly. They might never – literally never – show the budget reaching balance. Not in the 10-year window and not if they take their graphs out a hundred years. Obama could probably show balance just past the budget window in the middle of the next decade because of the massive Medicare cuts he proposes, even if in practice they will never actually happen.”

Incidentally, those “massive Medicare cuts” he proposed was how he got CBO to favorably score Obamacare.  Without those cuts Obamacare would never have gotten any traction because of the massive cost.  Even with the massive tax increases.

So you see the grim picture? 

The Democratic approach to Medicare cuts would give doctors and providers less and less money while expecting them to cover the same services. “In reality,” says Levin, “providers won’t just provide the same care for less money – some will stop taking Medicare patients, some will go out of business, and some will reduce the level of care or amenities. That’s what we see in every system that takes this approach to cost control: waiting lines, dirty, unsafe hospitals with horrible food and amenities.”

And this is nationalized healthcare.  Healthcare for everyone.  All at an equally horrible standard.  Unless you’re in the government, of course.  Or are affluent enough to fly somewhere where there still is quality healthcare.

Pity the Poor Democrat son of a bitch Running in 2016

Obamacare benefits don’t really kick in until after the 2012 elections.  So when rationing kicks in and the ‘death panels’ start thinning the herd, it will be after the 2012 elections.  This may help.  The quality of our healthcare (Medicare and Obamacare) won’t really really suck until later.  However, taxes, regulations and mandates (and waivers) are kicking in before the benefits.  So the economy will still be in the toilet.  There might still be some tricks in the election bag to pull off reelection.  Who knows?  But one thing for sure.  Pity the poor Democrat son of a bitch running in 2016.  Because he or she will have to answer for the unprecedented mess their predecessor gave us.  Perpetual recession.  And horrible healthcare.

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Obamacare and H.R. 2 – The Perfect Match

Posted by PITHOCRATES - January 19th, 2011

When Healthcare Insurance becomes Welfare

Well, the Republican controlled House passed H.R. 2 (Repealing the Job-Killing Health Care Law Act).  But the Democrat controlled Senate is vowing to defy public opinion.  Harry Reid won’t even bring it up to a vote.  Probably because he’s afraid some of his Democrat colleagues worried about reelection in 2012 may vote to repeal it. 

So they’re rolling out the usual sob stories.  Repealing the bill will kill kids.  Plunge the country into a depression worse than FDR’s Great Depression.  You know, the usual stuff (see House votes on repeal of healthcare law by Michael A. Memoli, Washington Bureau, posted 1/19/2010 on the LA Times).

The move by House Republicans has spurred a vigorous defense of the law by many Democrats and the Obama administration, even as they were reluctant to do so in the fall campaign. They cited emotional stories of constituents who are benefitting from the law — particularly children who can no longer be denied insurance coverage for preexisting conditions.

Repeal, Democrats said, could cause more than 5 million Americans with preexisting conditions to be denied coverage, and add $230 billion to the deficit in the next 10 years.

Think for a minute why insurance companies exclude preexisting conditions.  Better yet, let’s say you own an insurance company.  You make money by collecting insurance premiums.  You pay claims out of those paid premiums.  Now, the key for this to work is that more people have to pay premiums than collect claims.  If not, you will run out of money and go out of business.  See?  It’s business.  Your income (paid premiums) has to be greater than your costs (claims).  Ergo the exemption of preexisting conditions.  If you didn’t exclude them, people would only buy insurance when they’re sick and need benefits.  Costs (claims) would be greater than your income (premiums).  And your insurance company would go out of business.

Allowing preexisting conditions.  It sounds nice.  In a touchy feely caring kind of a way.  But it will kill the insurance industry.  Then the government will have to step in and make healthcare insurance welfare.  Supported by an ever growing tax burden.  Like in every other nation with nationalized health care.  So they’re being a bit disingenuous by pulling on the old heartstrings.  Then they just flat out lie.

“Democrats have made a firm commitment that we would judge every proposal that comes to the floor by whether it creates jobs, strengthens the middle class, and reduces the deficit. The repeal of patients’ rights fails on all three counts,” House Minority Leader Nancy Pelosi (D-San Francisco) said before the vote.

The Economically Challenged:  Nancy Pelosi and her Constituents

What they call deficit reduction is a huge tax increase and a gutting of Medicare.  But raising taxes doesn’t create jobs.  If it did we would never cut them during bad economic times.  We cut them because lowering taxes creates jobs.  Even Obama admitted this in the big compromise to extend the Bush tax cuts.

When you kill jobs you crate unemployment.  With fewer people working there are fewer people paying taxes.  This is one of the reasons why we have record deficits now.  We have record unemployment rates that just go on and on and on with no end in sight.  (The other is the explosive government spending corresponding with this fall in tax revenue).  Making this problem worse will add to the deficit, not reduce it.

Higher taxes and unemployment and a reduction of Medicare benefits is not going to help anyone in the middle class.  It’s going to make their lives that much harder.  So Pelosi is wrong on all three counts.  Of course, it’s hard to blame her.  It must be the water in her district.  Makes people economically challenged.  For her constituents all think like she does.  At least the 80% or so that keeps voting for her.  No, passing H.R. 2 will be the best thing to happen to the middle class since the 2010 midterm elections.

Obamacare is so Good that it Insured the Uninsured – Even before it was Passed

And the lies keep coming.  This from Karen G. Mills, administrator of the Small Business Administration, on January 18, 2011.

Every day America’s entrepreneurs and small-business owners are finding more ways to access affordable health care insurance because of the Affordable Care Act. We have some very important data recently, which is that after years of dropping coverage, the number of small businesses offering health insurance to their workers is actually going up. This is according to the Kaiser Family Foundation: nine percent more small businesses with less than 200 employees provided coverage in 2010 compared with 2009, and for those with less than 10 employees, the expansion in coverage was even bigger. It was 13 percent.

Funny.  Because small business (and unions) have been asking for Mini-Med plan waivers.  Because the cost to comply with Obamacare would otherwise force some 1.5 million people off of their current health care plans.  So how does Ms. Mills reconcile this fact with the rosy statement above?  Why, you lie about polling results (see Small business and the health care repeal by Glenn Kessler posted 1/19/2011 on The Washington Post).

Mills, to her credit, cited her source, the Kaiser Family Foundation 2010 annual survey of Employer Health Benefits. And her statistics are correct. It’s just that they have nothing to do with the new health care law.

First, the survey was taken between January and May of last year, so much of the data was collected before the law even passed… Second, the Kaiser report specifically says the analysts were puzzled by the shift in small business figures, but were pretty sure it did not mean more firms were signing up to provide health insurance to their employees… “A possible explanation is that non-offering firms were more likely to fail during the past year, and the attrition of non-offering firms led to a higher offer rate among surviving firms.”… A third problem is that the data set for small firms is too small to be significant.

So the administrator of the Small Business Administration, Karen G. Mills, is making less than honest statements.  She’s saying that polling data shows Obamacare is already having a positive impact on small business.  With the poll numbers taken before the passage of Obamacare, this is just impossible.  It would appear that Ms. Mills, the Small Business Administration, is not a friend of small business.  Because she lied about the poll results.  Put the two together and one must conclude that Obamacare is not good for small business.  If not, why would she lie?

Yes, Nancy, Let’s Pass H.R. 2 to Find out what’s in It

Remember how they passed Obamacare.  Quickly.  With backroom deals (the Louisiana Purchase, the Corn Husker kickback, etc.).  And, of course, without reading it.  Nancy Pelosi said they’d have to pass it to learn what was in it.  Why?  Because they were afraid that if people knew what was in it the people would pressure their representatives and senators to not pass it.  What other reason could there be?

But in the new spirit of civility, let’s extend an olive branch to Nancy Pelosi.  Let’s follow her advice.  Let’s pass H.R. 2.  Then let’s see what will happen.  If the recession turns into depression, if the deficit continues to grow, then we’ll concede that she was right.  Then we can reinstate Obamacare.  Increase taxes.  Gut Medicare.  Ration health care.  And make this nation the liberal paradise they so long for.  But first let us pass H.R. 2 to see what’s in it.

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Estate Taxes and Social Security – are the Dead People or Cash Piñatas?

Posted by PITHOCRATES - December 18th, 2010

The Lord Taketh Away.  And the Lord Giveth.

I sat in some construction meetings for a small church building a new nave.  I learned a few things about churches.  And construction.  First of all, church projects have a lot of alternates in their bid proposals.  Because they always want more than their budgets can pay for.  But they’re ever hopeful.  When they pass that basket around.  To add some of those alternates.  Even ask for donations during construction.  From the contractors building their new nave.  But the biggest thing I learned was the value of dead people.

This church had grandiose plans.  A pipe organ.  A light dimming system.  A sound system.  And some really nice (and expensive) chandeliers (they install some plain-Jane lights until they could afford the more spectacular lighting).  But, alas, they did not raise enough money to include all of these things.  And to make matters worse, they ran into some unexpected costs.  They had to make cuts.  Even some of the things that they had already approved.  The owner’s representative was not a happy camper.  He had to sit in a lot of meetings to reach a consensus on what to cut from the project.  But there was never any consensus.  Then, one day, he came to the construction meeting with a big smile on his face.

Someone had died.  And he was a parishioner.  A well-to-do parishioner.  The owner’s rep got a heads up on what the dead guy had bequeathed to the church.  And it was enough to not only keep the approved alternates.  But big enough to add a few other things.  And he smiled.

Death and Taxes – A Liberal’s Favorite Things

In all fairness to the church, they did a lot of charitable work in their community.  But there are other people who smile when old people die.  And they’re not helping the community as much as stuffing their pockets and the pockets of their friends.

Social Security is a great cash piñata for the government.  That’s why they are dead set against privatizing Social Security.  You see, it’s a numbers game.  Or racket.  Working people pay into a ‘retirement fund’ while they work.  Then when they retire, they get ‘benefit payments’.  And if you die the day after retiring, the government gets a big smile on their face.  Why?  Because they get to keep your ‘retirement fund’.  And that just wouldn’t happen if you had your retirement in a 401(k).

Private retirement investments (IRA, 401(k), insurance policy, etc.) are private property.  If you die before using those benefits, they go to your spouse, kids or other next of kin.  It’s your money.  And it stays in your family.  Well, some of it, at least.

When people use other investments other than the federal government, the government has other ways of getting your money when you die.  It’s called the estate tax.  The government sees the death tax as a statement of their generosity.  Instead of a 100% tax rate upon your death like with Social Security, it’s closer to 50% (depending on the current tax code).  Like George Harrison sang in Taxman, the government is basically telling us that we should just be thankful they’re not taking it all.

The Final Solution for Efficiency’s Sake

Liberal Democrats are obsessed with death.  To them it’s convenience and efficiency.  They like euthanasia.  They talk a lot about dignity at the end of life, but it’s also a great money saver.  As some sick and dying people can take a long time to die.  And Medicare and Medicaid pay for a lot them while they’re taking their time to die.  But euthanasia can change that.  And has.  In some of the more ‘bluer’ (i.e., liberal) states.

They like abortion, too.  They talk about it empowering women.  But is also a great money saver.  When unmarried teens get pregnant and they carry their baby to term, that baby will consume a lot of government benefits.  Of course, this is a double-edge sword.  The use of abortion (and birth control) has reduced the birthrate.  At a time the size of government has been expanding.  Which means there will be fewer taxpayers down the road to pay for that expanding government.

Of course, Obamacare brings it all home for the liberal Democrat.  The government will make healthcare a model of efficiency.  By deciding who should get treatment.  And who should get a pill to help them manage their pain.  Until they die.

Scary, isn’t it?  They deny it.  And they don’t use the word ‘death panels’ in the Obamacare legislation, but there are boards.  Who make healthcare decisions.  Based on cost.  And the only way to make healthcare more efficient is to spend less.  And you spend less when more sick and old people die.  And when it comes down to it, what is an old person?  Someone who is no longer a useful taxpayer.  But, instead, is a tax consumer.

And keeping them alive is just bad business when you’re in the business of life and death.

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Look Out – Here Comes the Public Option

Posted by PITHOCRATES - September 24th, 2010

Insurance or Welfare?

People must think insurance companies can crap money.  The truth is, though, they can’t.  They take a little bit of money from the many so they can make big payments to the few.  That’s insurance.  You pay a little to protect yourself from big, unexpected medical costs.  Like an accident.  Or a disease.

Years ago I worked in a small company.  One of my duties was managing our healthcare.  The older employees (especially those with children) always did the responsible thing.  They enrolled.  The young single men didn’t.  Employees contributed to the plan.  And, well, a young man had better uses for that money.  But when one knocked up his girlfriend and saw the pregnancy costs, he came a running to enroll. 

Insurance doesn’t work when you only buy the policy when you have a known expense coming.  If we all did that look at what would happen.  Everyone paying a premium will be collecting a benefit far greater than their premium.  And it just can’t work that way.  I mean, where is the insurance company going to get the money to keep paying benefits that exceed the amount they collect in premiums?  There’s only one way.  Jack up premiums.  Or decline coverage.  Well, two ways.  To stay in business, insurance companies, as well as every other business in the world, gotta have revenues that exceed their costs.  If they don’t, they go belly up.

We’re Not Stupid

Obamacare’s mandates began to kick in this week.  On Thursday (9/23/2010), insurers must wave pre-existing conditions for children.  Also, they can no longer limit the amount of health care a person receives per year or in their lifetime.  (See Insurers Dropping Some Coverage For Children by Matthew Sturdevant on the Insurance Capital blog.)  This means you don’t have to buy insurance for your kid anymore.  If he or she gets sick or is hurt in an accident, THEN you visit your friendly insurance agent and enroll your kid into a plan.  And the open-ended benefit limit?  Yeah, you try to work something like that in your household budget.  House payment, property insurance, car payment, car insurance, utilities, groceries, cable and sundry expenses…$3,500 per month.  And the unknown, open-ended, potentially catastrophic expense…$25,000 per month.  Hmmm.  Maybe we should drop the cable.

Now you don’t need to be particularly sharp with numbers to draw the obvious conclusion.  Insurance companies can NOT stay in business under Obamacare.  Even those in Washington know this.  Unless those in Congress are extremely stupid.   So why, then?  Why would they do this when they’ve said all along that we’ll be able to keep our current plans?  Think about it.  It’ll come to you.  Why would they do something that would do exactly what they said it wouldn’t do?  Because it’s what they wanted all along.  To put the private insurance companies out of business. 

‘No’ Means ‘No’.  Unless You’re the Federal Government

The people said ‘no’ to nationalizing our health care.  They said ‘no’ to the watered down version of nationalized health care.  The public option.  But the Obama administration wanted this.  It’s the Holy Grail of Big Government.  So what to do when the people say “no?”  You screw the people and find a way around them.  And you make it look like the insurance companies’ fault.  Make them look greedy.  By writing laws that will put them out of business UNLESS they make huge rate increases.  Threaten and bully them when they do.  Exclude them from the pool because they did.  Then you step in with the public option.  Then, Bob’s your uncle, you got what you wanted.  Control of one seventh of the U.S. economy.

Lying or stupid.  You pick.  Either way it’s a sad commentary on our elected ‘representatives’.

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FUNDAMENTAL TRUTH #27: “Yes, it’s the economy, but the economy is not JUST monetary policy, stupid.” -Old Pithy

Posted by PITHOCRATES - August 17th, 2010

DURING UNCERTAIN ECONOMIC times, people act differently.  If business is down where you work, your company may start laying off people.  Your friends and co-workers.  Even you.  If there is a round of layoffs and you survive, you should feel good but don’t.  Because it could have been you.  And very well can be you.  Next time.  Within a year.  In the next few months.  Any time.  You just don’t know.  And it isn’t a good feeling.

So, should this be you, what do you do?  Run up those credit cards?  By a new car?  Go on a vacation?  Take out a home equity loan to pay for new windows?  To remodel the kitchen?  Buy a hot tub?  Or do you cut back on your spending and start hoarding cash?  Just in case.  Because those unemployment payments may not be enough to pay for your house payment, your property taxes, your car payment, your insurances, your utilities, your groceries, your cable bill, etc.  And another loan payment won’t help.  So, no.  You don’t run up those credit cards.  Buy that car.  You don’t go on vacation.  And you don’t take that home equity loan.  Instead, you hunker down.  Sacrifice.  Ride it out.  Prepare for the worse.  Hoard your cash.  Enough to carry you through a few months of unemployment.  And shred those pre-approved credit card offers.  Even at those ridiculously low, introductory interest rates.

To help hammer home this point, you think of your friends who lost their jobs.  Who are behind on their mortgages.  Who are in foreclosure.  Whose financial hardships are stressing them out to no ends.  Suffering depression.  Harassed by collection agencies.  Feeling helpless.  Not knowing what to do because their financial problems are just so great.  About to lose everything they’ve worked for.  No.  You will not be in their position.  If you can help it.  If it’s not already too late.

AND SO IT is with businesses.  People who run businesses are, after all, people.  Just like you.  During uncertain economic times, they, too, hunker down.  When sales go down, they have less cash to pay for the cost of those sales.  As well as the overhead.  And their customers are having the same problems.  So they pay their bills slower.  Trying to hoard cash.  Receivables grow from 30 to 45 to 90 days.  So you delay paying as many of your bills as possible.  Trying to hoard cash.  But try as you might, your working capital is rapidly disappearing.  Manufacturers see their inventories swell.  And storing and protecting these inventories costs money.  Soon they must cut back on production.  Lay off people.  Idle machinery.  Most of which was financed by debt.  Which you still have to service.  Or you sell some of those now nonproductive assets.  So you can retire some of that debt.  But cost cutting can only take you so far.  And if you cut too much, what are you going to do when the economy turns around?  If it turns around?

You can borrow money.  But what good is that going to do?  Add debt, for one.  Which won’t help much.  You might be able to pay some bills, but you still have to pay back that borrowed money.  And you need sales revenue for that.  If you think this is only a momentary downturn and sales will return, you could borrow and feel somewhat confidant that you’ll be able to repay your loan.  But you don’t have the sales now.  And the future doesn’t look bright.  Your customers are all going through what you’re going through.  Not a confidence builder.  So you’re reluctant to borrow.  Unless you really, really have to.  And if you really, really have to, it’s probably because you’re in some really, really bad financial trouble.  Just what a banker wants to see in a prospective borrower.

Well, not really.  In fact, it’s the exact opposite.  A banker will want to avoid you as if you had the plague.  Besides, the banks are in the same economy as you are.  They have their finger on the pulse of the economy.  They know how bad things really are.  Some of their customers are paying slowly.  A bad omen of things to come.  Which is making them really, really nervous.  And really, really reluctant to make new loans.  They, too, want to hoard cash.  Because in bad economic times, people default on loans.  Enough of them default and the bank will have to scramble to sell securities, recall loans and/or borrow money themselves to meet the demands of their depositors.  And if their timing is off, if the depositors demand more of their money then they have on hand, the bank will fail.  And all the money they created via fractional reserve banking will disappear.  Making money even scarcer and harder to borrow.  You see, banking people are, after all, just people.  And like you, and the business people they serve, they, too, hunker down during bad economic times.  Hoping to ride out the bad times.  And to survive.  With a minimum of carnage. 

For these reasons, businesses and bankers hoard cash during uncertain economic times.  For if there is one thing that spooks businesses and banks more than too much debt it’s uncertainty.  Uncertainty about when a recession will end.  Uncertainty about the cost of healthcare.  Uncertainty about changes to the tax code.  Uncertainty about new government regulations.  Uncertainty about new government mandates.  Uncertainty about retroactive tax changes.  Uncertainty about previous tax cuts that they may repeal.  Uncertainty about monetary policy.  Uncertainty about fiscal policy.  All these uncertainties can result with large, unexpected cash expenditures at some time in the not so distant future.  Or severely reduce the purchasing power of their customers.  When this uncertainty is high during bad economic times, businesses typically circle the wagons.  Hoard more cash.  Go into survival mode.  Hold the line.  And one thing they do NOT do is add additional debt.

DEBT IS A funny thing.  You can lay off people.  You can cut benefits.  You can sell assets for cash.  You can sell assets and lease them back (to get rid of the debt while keeping the use of the asset).  You can factor your receivables (sell your receivables at a discount to a 3rd party to collect).  You can do a lot of things with your assets and costs.  But that debt is still there.  As are those interest payments.  Until you pay it off.  Or file bankruptcy.  And if you default on that debt, good luck.  Because you’ll need it.  You may be dependent on profitable operations for the indefinite future as few will want to loan to a debt defaulter.

Profitable operations.  Yes, that’s the key to success.  So how do you get it?  Profitable operations?  From sales revenue.  Sales are everything.  Have enough of them and there’s no problem you can’t solve.  Cash may be king, but sales are the life blood pumping through the king’s body.  Sales give business life.  Cash is important but it is finite.  You spend it and it’s gone.  If you don’t replenish it, you can’t spend anymore.  And that’s what sales do.  It gets you profitable operations.  Which replenishes your cash.  Which lets you pay your bills.  And service your debt.

And this is what government doesn’t understand.  When it comes to business and the economy, they think it’s all about the cash.  That it doesn’t have anything to do with the horrible things they’re doing with fiscal policy.  The tax and spend stuff.  When they kill an economy with their oppressive tax and regulatory policies, they think “Hmmm.  Interest rates must be too high.”  Because their tax and spending sure couldn’t have crashed the economy.  That stuff is stimulative.  Because their god said so.  And that god is, of course, John Maynard Keynes.  And his demand-side Keynesian economic policies.  If it were possible, those in government would have sex with these economic policies.  Why?   Because they empower government.  It gives government control over the economy.  And us.

And that control extends to monetary policy.  Control of the money supply and interest rates.  The theory goes that you stimulate economic activity by making money easier to borrow.  So businesses borrow more.  Create more jobs.  Which creates more tax receipts.  Which the government can spend.  It’s like a magical elixir.  Interest rates.  Cheap money.  Just keep interest rates low and money cheap and plentiful and business will do what it is that they do.  They don’t understand that part.  And they don’t care.  They just know that it brings in more tax money for them to spend.  And they really like that part.  The spending.  Sure, it can be inflationary, but what’s a little inflation in the quest for ‘full employment’?  Especially when it gives you money and power?  And a permanent underclass who is now dependent on your spending.  Whose vote you can always count on.  And when the economy tanks a little, all you need is a little more of that magical elixir.  And it will make everything all better.  So you can spend some more.

But it doesn’t work in practice.  At least, it hasn’t yet.  Because the economy is more than monetary policy.  Yes, cash is important.  But making money cheaper to borrow doesn’t mean people will borrow money.  Homeowners may borrow ‘cheap’ money to refinance higher-interest mortgages, but they aren’t going to take on additional debt to spend more.  Not until they feel secure in their jobs.  Likewise, businesses may borrow ‘cheap’ money to refinance higher-interest debt.  But they are not going to add additional debt to expand production.  Not until they see some stability in the market and stronger sales.  A more favorable tax and regulatory environment.  That is, a favorable business climate.  And until they do, they won’t create new jobs.  No matter how cheap money is to borrow.  They’ll dig in.  Hold the line.  And try to survive until better times.

NOT ONLY WILL people and businesses be reluctant to borrow, so will banks be reluctant to lend.  Especially with a lot of businesses out there looking a little ‘iffy’ who may still default on their loans.  Instead, they’ll beef up their reserves.  Instead of lending, they’ll buy liquid financial assets.  Sit on cash.  Earn less.  Just in case.  Dig in.  Hold the line.  And try to survive until better times.

Of course, the Keynesians don’t factor these things into their little formulae and models.  They just stamp their feet and pout.  They’ve done their part.  Now it’s up to the greedy bankers and businessmen to do theirs.  To engage in lending.  To create jobs.  To build things.  That no one is buying.  Because no one is confident in keeping their job.  Because the business climate is still poor.  Despite there being cheap money to borrow.

The problem with Keynesians, of course, is that they don’t understand business.  They’re macroeconomists.  They trade in theory.  Not reality.  When their theory fails, it’s not the theory.  It’s the application of the theory.  Or a greedy businessman.  Or banker.  It’s never their own stupidity.  No matter how many times they get it wrong.

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LESSONS LEARNED #13: “If you were to live under the socialist maxim ‘from each according to his ability to each according to his need’ you would find yourself surrounded by needy people with no ability.” -Old Pithy

Posted by PITHOCRATES - May 13th, 2010

KEY TO CIVILIZATION growth is the food supply.  Food surpluses in particular.  Before dependable food surpluses, life was short, harsh and miserable.  Especially for women.  When they weren’t working in the fields they were giving birth and raising children.  High infant mortality rates, though, inhibited population growth.  Most of the children women gave birth to didn’t survive to adulthood.  So there was a constant state of child rearing.  But few children survived to help with the business of family life.

Malnutrition and famine were common.  Feudalism provided a precarious balance between life and death.  For centuries the common people (i.e., peasants) eked out survival on their landlord’s manor.  The lord owned the land.  The peasants worked it.  Most of the bounty went to their lord.  But they kept what they grew on a small strip of land for themselves.  Just enough for subsistence.

But England changed all that.  By 1750, her agricultural output was second to none.  Private property.  Free market economy.  Capitalism.  Increased productivity.  Specialization.  These all combined to provide incentive.  Incentive produced food surpluses.  Food surpluses produced profits.  Reinvested profits improved farm yields.  This produced more profit.  And the cycle continued.  In less than a century feudalism would disappear from England.  There, you either worked land you owned or were paid wages to work land owned by others.  People began to live longer and healthier lives. 

The British Empire ruled the civilized world in the 19th century.  Representative government.  Abolition of slavery.  Free trade.  The Industrial Revolution.  These things, and others, gave them wealth, power and moral authority.  A lot of good came from this island kingdom.  Including the United States.  They weren’t perfect.  There was a learning curve.  But the modern capitalistic economy which they gave us liberated the masses.  It let us do what we wanted to do, not just what we had to do.  In particular, women, who could do more than just raise families and work in the fields.  One day, she could even become prime minister of Great Britain.

FOOD SURPLUSES BEGET industrialization.  Food surpluses beget everything, really.  Food surpluses release human capital to do everything else we do besides farming.  England was at the van of this modernization.  Others followed.  In time. 

Russia abolished serfdom (i.e., feudalism) in 1861.  Industrially backwards at the time, this liberty awakened a dormant human capital.  They followed the English model.  In time, with the advent of steamship and rail transportation, Russian grain competed with other European producers.

Joseph Stalin, looking to jump ahead in the industrialization process, implemented collective farming in the late 1920s.  He turned away from the English model.  The government became land owners.  It was feudalism on a grand scale.  Large collective farms would produce vast food surpluses that could feed industrial cities.  And there would still be surpluses left over to export to raise capital to build these industrial cities.  At least, that was the plan.

With less incentive came less productivity.  What land the former serfs had come to own was lost to the state.  The state took so much of the harvest that there was little food left for those who labored to grow it.  And the price the state paid for their crops was less than it was before collectivization.  The ‘free’ serfs were earning less and working more.  They didn’t like it.  And chose not to participate.  Collectivization became forced collectivization. 

Deportations, terror, murder and famine followed.  Perhaps more than 5 million starved to death during the famine of 1931 and 1932.  Others were to follow.

Forced collective farming produced famines elsewhere.  In China, during Mao Zedong’s Great Leap Forward, forced collectivization produced even greater famine deaths.  Historians estimate that 20-30 million, maybe more, starved to death in the famine of 1959–62.  Though hard numbers aren’t available, North Korea suffered a devastating famine in the late 1990s that claimed millions.  But in the West, in the 20th century, famine was unheard of.  When the United States suffered during the great Dust Bowl of the 1930s, there was no corresponding famine despite the loss of productive farmland.

WITH INDIVIDUAL LIBERTY comes incentive.  With incentive comes productivity.  A small island nation of free land owners could produce grain to feed themselves with surplus left over for export.  Nations with great fertile tracts farmed by forced collectivization led to famine.  Slaves have little incentive other than to subsist.  The collective good means little to them when they are starving.  They continue to sacrifice.  And continue to suffer.  Even if they do produce a few more bushels of grain.  So if the suffering is the same, what is the incentive to work harder?

As individual liberty declines, those in power tend to exploit those they rule.  In the name of the state.  Or the common good.  This is easy to see when it results in famine or revolution.  Not easy to hide those things.  But it is a little more difficult to see when the results are more benign.  Longer unemployment benefits, for example.  I mean, those are pretty nice.  Hard to see the downside in them.  As it is in other benefits these rulers give us.  So we are seduced as they whisper these sweet nothings in our ears.  And soon we willingly cede our liberty.  A little at a time.

WITH THE RISE of individual liberty, there was a corresponding decline in the ruling elite thanks to representative government.  Great Britain gave this gift to us and the United States took it to incredible heights.  The oppressed everywhere immigrated to the United States to feed a growing industrial demand.  Being new, we did not know all the affects of industrialization.  When the bad things came to light, we addressed them.  Great Britain, for example, was one of the first to protect women and children from the worse of industrial society.  Still, working conditions could be harsh.  As could life in the industrial cities.  Poverty.  Filth.  Disease.  And it was the wretched state of life in these slums that gave birth to a new school of thought on industrialization. 

In 1844 Friedrich Engels wrote The Condition of the English Working-Class to expose life in these slums.  He would collaborate 4 years later with Karl Marx on a treatise called The Communist Manifesto.  And from this Marxism, Communism, socialism, collectivism, etc., would follow.  As economic systems go, these would all prove to be failures.  But the essence of them lives on.  State planning.

You see, it was capitalism that gave us the industrial slums.  And that was good propaganda for a ruling elite looking to rule again.  So they whispered sweet nothings into our ears.  They talked about a Social Utopia.  From each according to his ability to each according to his need.  Fair taxation (i.e., only the ‘rich’ pay taxes).  Social safety nets (paid for by taxes of the rich).  Shorter workdays.  Longer paid vacations.  More government benefits.  A burgeoning welfare state.  Free stuff for everyone.  Again, paid for by taxing the rich who have exploited the working class.

What evolved was the elimination of the middle class.  You had the evil rich (and the middle class were, for all intents and purposes, rich because they didn’t need government help) whose wealth the government taxed away.  And the poor.  The poor who the government would now take care of.  If elected.  And they were.  They seduced a great many people with their utopian vision.  Even in the West. 

Great Britain and the United States would fall to this seductress, too, thanks to the Great Depression.  It was capitalism that gave us the Great Depression, after all.  The greed of the money people.  And so these great nations declined from greatness.  They became welfare states, too.  They had short respites during the 1980s.  Margaret Thatcher helped rejuvenate Great Britain.  Ronald Reagan, the United States.  But the ruling elite whispered more sweet nothings in our ears and the decline continues.

In 2010, our appetite for state benefits appears to be insatiable.  And we may have run out of wealth to tax away to pay for it.  California is on the brink of bankruptcy.  New Jersey elected a governor who proposed draconian spending cuts to stave off bankruptcy.  Other ‘blue’ states (i.e., states who vote Democrat) are also in trouble.  Underfunded pension obligations.  Demands of teacher unions.  Of government worker unions.  Everyone is there with their hand out.  None of them are willing to sacrifice for the common good.  No, they expect others to do the sacrificing.

THE OBAMA ADMINISTRATION has increased federal spending to such record levels that Communist China is concerned about our fiscal/monetary policies.  As they should be; they hold a lot of our debt.  The federal government has ‘bailed out’ private industry and taken de facto control.  They have created a healthcare entitlement that will cost more than a trillion dollars.  More spending is coming.  And it is all for the greater good.  They are vilifying those who are not poor, taxing away what wealth they can from them and giving it to the poor.  When about half the electorate doesn’t pay any income taxes, there is little opposition to raising taxes on those who do.  For if the ‘rich’ complain, the government vilifies them.

Where will it all end?  It is difficult to say.  How will it end?  Badly.  We can look at Europe who we seem to be emulating.  They’re further down The Road to Serfdom than we are.  With the excessive government spending, there will have to be greater government revenue (i.e., taxes).  Previous methods of taxation may prove insufficient.  Hello value added tax (VAT).  It’s all the rage in Europe.  It’s a multiple tax.  At every stage of production, government is there.  Taxing.  From the raw materials to the final assembly, government is there at every stage.  Taxing.  VATs will increase government revenue.  But they will also make every day life more expensive.  VATs increase the sales price of everything you buy.  And you pay it again at checkout.  It’s everywhere.  Everything will cost more.  From manicures to lattes to toilet paper to tampons.  And this is a tax everyone pays.  Even the poor.  It is a regressive tax.  The rich will pay more, but the poor will feel it more.  This hidden tax will take a larger portion of what little the poor has.

But how bad can it really get?  In 2010, I guess the answer would be to look at Greece to see what happens when a country can no longer sustain her welfare state.  And the people aren’t all that keen on losing the government benefits they’ve grown accustomed to.  It isn’t pretty.  But when you start down that road (from each according to his ability to each according to his need), the taking and giving always get bigger.  It never gets smaller.  And when you reach a critical point, government just can’t sustain it any longer.  And it crashes.  Like in Greece.

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