The City of Detroit Bankruptcy

Posted by PITHOCRATES - July 22nd, 2013

Economics 101

There is nothing more Dangerous to a City’s Finances than a Shrinking Tax Base

The federal debt is at record levels.  Because federal spending is at record levels.  But those on the left say there’s nothing to worry about.  And try to expand federal spending further.  With more government benefits to hand out to the people.  And an ever growing federal bureaucracy.  Full of new jobs with generous pay and benefits.  All funded by the taxpayer.

Businesses in the private sector cannot operate like this.  Because businesses have to pay their costs with the things and/or services they sell.  That people willingly buy.  So there is a limit on the costs a business can incur.  But not so with government.  For the government has the power to tax.  To forcibly take more money from the people against their will.  Something businesses just can’t do.  And when that fails they can borrow money by issuing bonds.  Which are generally easy to sell.  Because governments have the power to tax.  All but guaranteeing that they will repay those bonds.  And when that’s not enough the federal government has one other benefit businesses don’t have.  They can print money.  Further guaranteeing that they will be able to redeem their bonds.  Making them that much easier to sell.

Government below the federal level, though, doesn’t have that last option.  So when they want to spend more money than they have they have no choice but to borrow.  And hope that their tax base doesn’t erode over time.  For there is nothing more dangerous to a city’s finances than a shrinking tax base.  Especially when the city has a huge and growing public sector.  Enjoying generous pay and benefits.  Especially pension and health care benefits for retirees.  Where promises made must be kept decades into the future.  During which time a lot of things can happen.  Such as that tax base shrinking.

Detroit’s Tax Base plummeted while the Size of the Public Sector did not for Government Never grows Smaller

This is the problem the City of Detroit has.  And it is why they filed the largest municipal bankruptcy in U.S. history.  Thanks to the automotive industry and World War II destroying most of the industrial economies of the world, Detroit became an economic power house.  And one of America’s grandest cities in the 1950s.  Paris of the Midwest they called Detroit.  Automotive capital of the world.  The Motor City.  The mecca of American manufacturing.  Having one of the richest middle class.  And one of the largest black middle classes.  Everyone was doing well in Detroit.  So the City of Detroit did the only rational thing a city could do with a swelling tax base.  They exploded the public sector.  All paid for with higher taxes.  Including a new city income tax.

But that growing public sector soon turned Detroit into a business unfriendly city.  With more red tape, regulatory costs and a corporate income tax.  And rising union demands during contract negotiations made it even less business friendly.  So businesses started leaving the city.  Taking their jobs with them.  And people followed.  Then the race riots hit in 1967.  Five days of unprecedented violence.  Thus beginning the great white flight from the city.  And the great population decline of the City of Detroit.  Culminating in the nation’s largest municipal bankruptcy in history.

At Detroit’s peak her population topped out at about 1.8 million people.  Today there are but 680,000 people remaining.  A loss of 1.12 million people.  About 62% of her peak population.  So Detroit’s tax base plummeted.  But the size of the public sector didn’t.  For government never grows smaller.  So Detroit continued on with the overhead expenses of a city with a population of 1.8 million people.  With the tax revenue of a city with a population of 680,000 people.  Making bankruptcy inevitable.

The Problems of the City of Detroit are the Problems of the Nation Writ Large

At the height of Detroit’s industrial might there were approximately 300,000 automotive or manufacturing jobs in the city.  Today there are a mere 27,000.  That’s a loss of 273,000 jobs.  That’s 273,000 breadwinners whose families are no longer in the city.  If each of them had on average 2.5 children who remained in the city with their parents that would have added about 1.2 million to the city’s population.  Which corresponds pretty closely to the 1.12 million the city actually lost.  So we can see how the loss of the jobs devastated the population.  But we can also see what it did to the city’s finances.

Let’s assume these breadwinners had their children when they were in their 20s.  So the breadwinner was still in the workforce when their children were 20 and had entered the workforce.  Let’s say this happened over a 40-year period.  So, on average during that 40-year period, there were an additional 136,500 jobs per year.  Let’s say they each owned a house and paid property tax of $750.  Over 40 years that’s about $4.1 billion in lost property tax revenue.  If each of these workers earned $35,000 on average over those 40 years and paid a 3% city income tax that’s about $9.8 billion in lost personal income tax revenue.  Finally, if we figure a 50-50 split between labor and material, a 15% overhead and a 2% net profit we can extrapolate that $35,000 average personal income into approximately $448 billion in lost corporate revenue over those 40 years.  At a city corporate income tax rate of 2% that’s about $9 billion in lost corporate income tax revenue.  Adding these all together we see a total loss of tax revenue to the city of approximately $18.8 billion due to the loss of 273,000 jobs.  Plus or minus.

This is a crude guesstimate with an emphasis on crude but it could be close enough to explain what happened in Detroit.  For with the falling tax base Detroit turned to borrowing more and more money to pay for an oversized public sector.  To service a disappearing population.  With those pension and retiree health care benefits being especially burdensome.  Which forced the city to borrow so much it left them with a debt of $18.5 billion (very close to the $18.8 billion in our little exercise above) that they don’t have a chance in hell of ever repaying.  Leaving bankruptcy as the only option.  Unless the federal government steps in.  Which probably won’t happen.  And shouldn’t happen.  For Detroit is not the only government suffering under the weight of unfunded pension obligations and retiree health care benefits.  If they bail out Detroit then they’ll have to bail out all other states and municipalities.  Which they can’t afford to do.  For the federal government has its own problems with pensions (Social Security) and retiree health care benefits (Medicare).  And they’ve just added a new government benefit that will dwarf the costs of Social Security and Medicare.  Obamacare.  All while burdening the economy with a slew of anti-business regulations that has chased jobs out of the economy.  And out of the country.

So the federal government can’t step in to save Detroit.  For the federal government is working to ‘out Detroit’ Detroit.  As the problems of Detroit are the problems of the nation writ large.  What’s happening in Detroit will happen in other states and cities across the country.  That are spending more money than they have to support an oversized public sector.  And in time what’s happening in Detroit will happen to the federal government.  Bailing out these states and cities will only hasten the downfall of the federal government.  Which the federal government will do whatever it can to prevent.  For while the nation can survive a city like Detroit going bankrupt the nation cannot survive a federal bankruptcy.  Because the numbers are just too big at the federal level.

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Double Entry Bookkeeping, Trial Balance, Financial Statements, Financial Ratios, Italian City-States and Capitalism

Posted by PITHOCRATES - January 8th, 2013

History 101

The Government Finances are a Train Wreck because they have the Power to Tax and to Print Money

President Obama averaged a deficit of $1.3 trillion for each of his first 4 years in office.  Bringing the national debt up to $16.4 trillion at the end of 2012.  And there will be another drop-down, drag-out fight to raise the debt limit in a couple of months.  Why does the government spend this kind of money?  Because they can.  And because they can they can buy a lot of votes by giving stuff away.  Stuff paid for with all of that spending.

When the government implemented Social Security and Medicare there was still an expanding birthrate.  More people were entering the workforce than were leaving it.  Providing an ever expanding tax base.  And a rising level of tax revenue.  Without ever having to increase tax rates.  And the smart government planners thought the good times would just keep rolling.  But they didn’t.  Thanks to birth control and abortion.  Which reversed the equation.  The population growth rate slowed down.  Fewer people entered the workforce than left it.  Resulting in a declining tax base.  And falling tax revenue.  Pushing Social Security and Medicare to the brink of bankruptcy.

The government finances are a train wreck.  And they keep digging their hole deeper.  Because they can.  For they have the power to tax.  And to print money.  Something private businesses can’t do.  Which is why few corporations’ finances are train wrecks.  Except those with unionized workforces with defined-benefit pension plans.  Something long discontinued by most in the private sector.  As it’s a failed economic model.  Just like Social Security.  And Medicare.  Over time more people move from being contributors to being beneficiaries.  Pushing defined-benefit pension plans, too, to the brink of bankruptcy.

At the End of each Accounting Period they run a Trial Balance to Verify the Total of Debits Equals the Total of Credits

The difference between private sector businesses and the federal government is that private sector businesses have to be responsible while the federal government does not.  The federal government focuses on what’s politically expedient.  While private sector businesses must focus on the bottom line.  Spending only the money they have.  Because they can’t tax or print money to fix their messes.  Like the government can.  And does.  A lot.  So they have to avoid making messes in the first place.  They can’t kick the can down the road.  Because in the private sector there is accountability.  And that accountability begins with getting their hands around their business numbers.  So they can understand what their businesses are doing.  And when it’s time to take appropriate actions.  To prevent a financial train wreck.  And it all begins with double-entry bookkeeping.

Double-entry bookkeeping includes debits and credits.  Each transaction is posted to the accounting records with at least one debit and at least one credit.  The dollar amount of debits equals the dollar amounts of credits.  If they don’t equal after recording a transaction they were posted incorrectly.  For example, when someone pays cash for something at a retail store there are two debits and two credits to post.  First we debit cash $20 and credit sales revenue $20.  Then we debit cost of goods sold $18 (the cost of the item sold) and credit inventory $18 (the cost of the item in inventory).   If posted correctly the total debits equal $38.  And the total credits equal $38.  If, for example, someone debited sales revenue instead of crediting sales revenue the total debits would equal $58 while the total credits would equal $18.  Because they don’t balance we know something was posted incorrectly.  And can go back, find the error and correct it.

A business accounts for every penny that flows through their business.  Each accounting period will have thousands of such entries.  And at the end of each accounting period they will run a trial balance to verify that the total of debits equals the total of credits.  When they do they can be pretty sure that the financial information they recorded fairly represent the financial activity of the business at the end of that accounting period.  Then they prepare the financial statements (the income statement, the balance sheet, the statement of cash flows and the statement of retained earnings and stockholders’ equity).  Businesses study these statements to assess the health of their businesses.  They calculate financial ratios to assess the liquidity, long-term debt-paying ability and profitability of the business.  As well as calculate ratios for investor analysis.  To make sure they are satisfying the owners of the company.  The stockholders.

The First Use of Double-Entry Bookkeeping dates back to the Italian City-States of Florence, Genoa and Venice

This is a lot of valuable information.  Courtesy of that double-entry bookkeeping.  Something that can be so mundane and mind-numbing at the data entry point.  Especially if you’re trying to figure out why your trial balance doesn’t balance.  But when it does balance.  And the financial information is fairly represented.  Business owners and managers can make informed decisions to avoid doing what our federal government does.  Including making the hard decisions that permit these businesses stay in business for a decade or more.  Even a century or more.  Thanks to merchant banking.  And the Italian city-states.

For those of you who hate bookkeeping blame the Italians.  Some of the Florentines were using it as early as the 13th century.  The Genoese were using it shortly thereafter.  Soon Florence, Genoa and Venice were using double-entry bookkeeping.  This mastering of economic data made these city-states the dominant economic powers of the Mediterranean.  Making them masters of trade.  And merchant banking.  To manage that trade.  This system of accounting even made it into textbooks in the late 1400s.  Helping to spread good business practices.  Where they were picked up by other great traders.  The Europeans.

With double-entry bookkeeping businesses were able to grow.  First with the help of government.  Mercantilism.  Then without.  Free market capitalism.  Which created the British Empire.  And gave us the Industrial Revolution.  Then the United States came into their own in the late 19th century.  And surpassed the British Empire.  Economic activity exploded in the United States.  Because they were able to get their hands around all of those financial numbers.  And thanks to free market capitalism they focused on the bottom line.  And made the necessary decisions.  No matter how painful they were.  Something that the federal government just can’t do.  Because those decisions aren’t politically expedient.

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FUNDAMENTAL TRUTH #80: “A nation’s government spends too much when its spending increases at a rate greater than its population growth.” – Old Pithy

Posted by PITHOCRATES - August 23rd, 2011

Parents do what they can to Live within their Means 

People don’t have as many children as before.  Why?  Cost.  It’s expensive to have children.  And to raise a family.  Those who decide to raise children make serious changes in their lives.  Because of the costs.

Before kids these people may drive a new car.  Have nice toys.  A boat.  A motorcycle.  Electronic gadgets.  They may go out to eat a lot.  Eat steak at home a couple times a week.  Go to the movies.  Take some exotic vacations.  After kids?  Used car.  Fewer toys.  More hamburger-based dishes at home.  No more movies.  And vacations are closer to home and less exotic and more mundane.

Parents do what they can to live within their means.  And it’s not easy.  Because they typically start families when they are starting their careers.  So their incomes aren’t very large.  And kids are expensive.  Put the two together and you have some serious austerity living in these early years of starting a family.  But they do what they must do to raise their family.

Personal Responsibility is a very Effective System

So let’s take a look at these costs.  The Center of Nutrition Policy and Promotion’s 2010 annual report shows annual costs for different income groups for different ranges of children from babies up to age 17.  Let’s focus on the low set of income numbers (average annual income of $36,840).  To reflect a new family starting at the same time as the income-earner’s career.  And average the two groups of children that cover ages 0-5.  Crunching these numbers to see the impact of adding one additional child on remaining monthly income looks something like this:

(Source:  Center of Nutrition Policy and Promotion’s 2010 annual report, page 26.)

This is only a crude estimate.  But the numbers are telling.  Kids are expensive.  The more you have the less you have.  Money, that is.  That’s why married men raising a family are such better employees than single men with no kids.  That kind of financial responsibility keeps you in on a Friday night instead of drinking with the boys.  It makes you a punctual employee.  And a hard worker.  Eager to advance to higher pay levels.  Because if you don’t, things are going to get pretty difficult when that third child comes along.

It’s a very effective system.  Personal responsibility.  Especially when it’s your income paying your expenses.

We have Social Safety Nets to Help People in their Time of Need

Now suppose this worker doesn’t advance his or her income before having 4 children.  Which will leave only $141.67 a month to live on.  That won’t pay for much rent.  Or food.  In fact, this person will probably be evicted from their home.  And file personal bankruptcy.  Unless family and/or friends offer to help with their finances.  Or they become a ward of the state.

Sadly, things like this happen far too often.  A plant closes.  A husband has a debilitating injury.  There’s a catastrophic health crisis in the family.  So we have social safety nets in place for these people.  To help them in their time of need.  Due to circumstances beyond their control.

But what about those who willfully spend more than their income can support?  People who live on credit?  Refusing to ever live within their means?  Often blaming others for their insufficient income that won’t support the level of spending they want to maintain?  What about them and their irresponsible ways?  Should they force others to pay more to support their irresponsible spending?  Just because they have the power to tax.  And can run deficits?

The Social Safety Nets are becoming more like European Socialism

The federal government has the power to tax.  When they can’t tax anymore they can run deficits.  Financed by borrowing.  Or by simply printing money.  When spending beyond your means is that easy, you can see why the government continually spends beyond its means.

And they are spending ever more.  And the social safety nets have grown.  Social Security.  MedicareMedicaid.  And now Obamacare.  Which are no longer social safety nets.  But more like European socialism.  Like the social democracies of Europe.  That are currently imploding in the Eurozone financial crisis.

Why?  Because the Europeans are no longer treating their people as citizens.  But as children.  Children that never leave the nest.  Cared for from the cradle to the grave.  The responsible parent can understand the problem.  They are trying to raise more children than they can afford.  Just like a few extra children can bankrupt a family of modest income, this ever expanding social welfare will bankrupt the state.  It’s just a matter of time.

Government could take a Lesson from the Average American Family

The problem with generous benefits is that they cost.  And as populations grow so do these benefits.  So they have to pay these ever increasing costs with ever increasing revenue.  Which becomes a problem.  In the private sector.  As well as the public sector.

As GM lost market share, their health care costs increased greater than their sales growth.  They went bankrupt.  Social Security and Medicare costs are growing faster than the population growth.  Which means fewer taxpayers will be available to pay a growing number of benefit recipients.  Both programs are projected to go bankrupt.

Families have to live within their means.  That’s why a family with an annual income of $36,840 doesn’t raise a family of ten children.  They wait until they can afford to.  If that’s what they want.  They make sure they work hard to earn the income necessary to raise a large family.  Government could take a lesson from the average American family.

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LESSONS LEARNED #53: “The essence of politics is taking from the many and giving to the few.” -Old Pithy

Posted by PITHOCRATES - February 17th, 2011

Good Times Turned into Chronic Deficits and Punishing Debt

Two things have historically made government good at filling its coffers.  The power to tax.  And a growing population.  It’s a simple mathematical equation.  And each year it totals more.  As long as you have a growing population to tax you can sustain government spending for a long time.  All the while putting a little of those taxes aside to take care of you and yours.

Businesses call it economies of scale.  Sell more of a thing and the cost per thing goes down.  If you have $1 million in total costs and sell only 4 things, then each thing will have to sell for $250,000 just to break even.  If you sell 5 million things, then you only have to sell each thing for a nickel to break even.  If you sell more things you can charge less for each thing.  It’s sort of like that with taxes, too.  If you have a growing population (with an expanding birthrate), each succeeding generation will have a lot more tax payers than the previous one.  So a small tax rate on a growing population will continue to increase the amount of tax dollars flowing into the government’s coffers.  And a good time will be had by all.

But right now, the federal government, some states and some cities are struggling to balance their budgets.  Something happened.  What others would have described as the perfect Ponzi scheme became like a real one.  The money paying current benefits became larger than the current contributions.  And good times turned into chronic deficits and punishing debt.  So what happened?

Government Employees Grew 280% from 1946 to 2010

Well, to begin with, some people just got greedy.  They spent a lot of money.  Grew the size of government.  Put more and more people onto the public dole.  At all levels of government.  City.  State.  And federal.  And they based all of this growth on the most hopeful of economic assumptions.  That revenue (i.e., tax receipts) then would continue to grow at the same rate forever and ever.   So they grew government.  Gave themselves very generous pay and benefits.  Pension plans that they could never sustain in the private sector.  Job security.  And other good stuff those in the private sector just don’t get (more holidays, more paid vacation, better healthcare, etc.).  And why not?  They had the power to tax.  And an increasing population.  I mean, what could go wrong?

Well, things change.  Even in government.  In 1946 (about when FDR gave us Social Security), there was approximately 6 million government employees (federal, state and city).  Fast forward to 2010 and that number grew to 23 million.  That’s an increase of 280%.  That’s a huge transfer from the private sector to the public sector.  Which required an enormous amount of additional tax revenue.

Of course, if the population grew at a corresponding rate, then perhaps that growth can be justified.  Maybe they just hired more people to administer a growing population.  It’s either that.  Or they were just expanding the role of government into our lives.  Perhaps a look at some population data will answer that question.

Population Grew 118% and the Birthrate fell 31% from 1946 to 2010

The population in 1946 exceeded 141 million.  In 2010 it exceeded 308 million.  That’s an increase of approximately 118%.  Less than half of the growth rate in government jobs.  So, no, government hasn’t grown larger to keep pace with a growing population.  It has grown larger to expand its role into our lives.

The birthrate in 1946 was 20.4 births per thousand of population.  In 2010 the birthrate fell to 14 births per thousand of population.  That’s a decrease of 31%.  So while the population grew at 118% between 1946 and 2010, the number of births only increased approximately 50% (from 2.8 million to 4.3 million).  In other words, our current birth rate accounts for less than half of our population growth. 

So we have a public sector growing more than twice our population growth.  And we have a birthrate that is less than half of our population growth.  You put these two facts together and what does it tell you?  The growth of taxpayers to fund the public sector is decreasing while the public sector is increasing.  And this can mean only one thing.  Tax rates on the individual have to increase so fewer taxpayers can support more tax consumers (i.e., the public sector).

Payroll Taxes (Social Security and Medicare) Grew 665% from 1946 to 2010

To simplify the discussion, let’s look only at Social Security and Medicare.  In 1946 there was only Social Security.  And the payroll tax was 1%.  In 2010 we have both Social Security and Medicare.  The total payroll tax for these two is 7.65%.  That’s an increase of 665%.  If you earn $30,000 that comes to $2,295 today.  If the tax rate was at the 1946 level it would only be $300.  Giving you an additional $1,995 to spend.  (If you make $65,000, the numbers are $4,972.50, $650 and $4,322.50, respectively.)  Could you use another $1,995?  If you don’t think that’s a lot consider this.  We pay a lot more taxes than just Social Security and Medicare.  You add all of them up and it totals the price of a decent car.  A care that you pay for but never get to drive.

These numbers increased because costs went up at a greater rate than the number of new taxpayers.  Therefore, each individual taxpayer had to pay more.  This is a problem repeated at every level of government.  Government grew and expanded its role.  And its payrolls.  Based on population models used before birth control and abortion.  But then birthrates declined.  In the second half of the 20th century, new babies made up less than half of our new population.  Which explains the government’s earnest desire for blanket amnesty for all illegals in the country.  To make up for that declining birthrate.  And restore the population growth rate to the numbers the actuaries used in all their calculations to fund all that Big Government spending.

As noted, we pay more taxes than just Social Security and Medicare.  And they’re all going up.  For the same reasons.  Government overstepped its bounds.  Spent money under the most ideal assumptions.  And the moment a little reality entered into the economy their house of cards came tumbling down.  The big states and the big cities are all drowning under their public sector obligations.  They have pension obligations that are pushing them towards bankruptcy.  And the federal government has its own problems with Social Security and Medicare.

It’s Spending Cuts or Bust

It was a simple plan.  Tax a little from everyone.  Give generous benefits to the few you need to vote for you.  Live happily ever after.  But they overreached.  Grew government too big.  Just as the population growth rate took a nosedive.  They have raised taxes on the remaining taxpayers in the private sector about as high as they can go.  If they raise them anymore the greatest recession since the Great Depression may very well turn into another Great Depression.  So what to do?

Well, based on that simple mathematical equation, we have but two choices.  Increase the growth rate of the taxpaying population.  Or cut spending.  If we started today raising families of 10 plus kids, it would still take about 20 years (or more) before these new taxpayers start paying taxes.  But we may not have 20 years.  So that leaves the spending cuts.  Even blanket amnesty for illegals won’t help.  Because government spending is a function of the birthrate.  And sustained spending requires a sustained birthrate.  Amnesty won’t give you that.  So it’s spending cuts or bust.  Literally.

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FUNDAMENTAL TRUTH #53: “The essence of politics is taking from the many and giving to the few.” -Old Pithy

Posted by PITHOCRATES - February 15th, 2011

That Great Sucking Sound of our Money Leaving our Pockets

All right, here’s the dirty little secret about politics.  Most people enter politics for the money.  They can say whatever they want but when it comes to voting tax increases, guess what?  There are tax increases.  Always.  The amount of money transferring from the private to the public sector is always increasing.  Always.  Congress set up close to half of the federal budget to increase automatically.  That great sucking sound isn’t jobs going to Mexico.  It’s our money leaving our pockets.

Take a look at your check stub.  Compare gross pay to net pay.  Are these numbers almost the same?  Or is the difference closer to a car payment?  A house payment?  Depending on where you are in your career this difference on your weekly paycheck could pay for a nice car.  Add them up in a month and they could get you into that nice house in the good school district.  This is a lot of money.  Ask your grandparents what was the difference between gross pay and net pay on their paychecks.  You’ll probably be surprised.  Because, back then, net pay was very nearly gross pay.

Today, nobody gives gross pay a second thought.  We talk about what we ‘net’.  Because we’re just used to it.  You see, the government (federal, state and local) didn’t just start taking hundreds of dollars out of our paychecks.  It was incremental.  Over a long period of time.  Sometimes coming to pennies a day.  Hard to see.  And just not enough to bitch about.  We may see tens of dollars of our gross pay taxed away over a decade or two.  But we typically make more over that same time.  Again, in the great scheme of things, these are small incremental changes.  Just not big enough for a great number of people to bitch about.

Incrementalism, Progressive Tax Rates and the Withholding Tax

That’s the power of incrementalism.  Baby steps.  Little by little.  Big growth over time.  Like watching grass grow.  You don’t see it grow.  Then one day you have to cut it.  And so it is with taxes.  One day you look at your check stub and realize how much you’re paying in taxes.  You may have never realized you were paying so much.  A progressive tax system keeps the tax burden on the young who don’t make a lot money yet low.  So they don’t see it at first.  And keep voting Democrat.  Not because they want to pay higher taxes.  But because the higher taxes haven’t impacted their lives yet.  When they do start paying more in taxes, that’s when some of them start voting Republican.

So taxes creep up on us.  We don’t see them all that clearly at first because of progressive tax rates.  And the fact we pay them before we see them.  Via the withholding tax.  Which provided the greatest advancement in the collection of confiscatory taxes.  For without it there would be tax revolts when April 15th rolled around and people didn’t have tens of thousands of dollars sitting in their checking accounts to pay their taxes.  I mean, what’s easier?  Getting us to pay our taxes with money we never saw?  Or paying our taxes after having that money in our hands first?  Funny thing about earnings.  Once we have the cash in hand we don’t give it up lightly.

That’s why the government introduced withholding taxes.  It makes getting our money from us easier.  And allows them to raise our taxes ever higher.  Because we pay those taxes with gross pay.  Pay we never get.  In our real world, gross pay is a myth.  It doesn’t exist.  Our earnings only become real at net pay.  Sad.  But true.  So they can increase our taxes a lot more than if we were paying them in full in April.  And do.

Pandering and Patronage

Yeah, but America is a center-right country.  And liberal Democrats on the left are the ones who want to keep increasing our taxes to pay for their Big Government programs.  So how can they?  When America is a center-right country.  I mean, if it’s a minority of Americans that want to raise our taxes to grow government, how do they get the votes to increase our taxes in the first place?

By pandering.  Buying votes.  And patronage.  The power to tax provides near-limitless money for politicians to spend.  The trick is in the getting and giving amounts of money.  You tax the many.  And give to the few.  You tax a hundred dollars or so from each paycheck.  And give hundreds of thousands of dollars to those who can help you win election.  That’s how the tax and spend people win elections.  They give money to small groups in exchange for their vote.  Or legislate favorable legislation for them.  Or put someone from that group in the government itself in an oversight position of the industry there’re in.

A small group by itself can’t make a big difference at the polls.  But you get enough of them, they can.  Luckily for the tax and spenders, a lot of these small groups can be found in the political center.  Which helps pull some of that ‘center-right’ to the left.  And this is how the difference between gross pay and net pay continues to grow larger.  These ‘swing votes’ may pay more in taxes, too, but the special privileges they receive from the government more than makes up for it.

The Little Programs Add Up

We pay a lot in taxes.  And yet you don’t hear too many people complain about it.  Why?  The progressive tax rate plays a role in this.  There are more poor people than rich.  So fewer people pay taxes.  And the withholding tax helps, too.  Because most of us don’t even pay attention to what we’re paying.  But what really helps government is the number of taxpayers.  The total amount of taxes each taxpayer pays can ‘appear’ small.  And the amount each taxpayer pays for a specific program can appear smaller still.  This can get a lot of people to ‘support’ these little programs.  Simply by their passive lack of opposition.

For example, heating assistance for the poor is not a very big part of the budget.  And it doesn’t take much out of your paycheck.  You feel for the poor who can’t pay for heat.  You want to help.  So there isn’t a lot of political action against this program.  It’s like those commercials where you can save a child in Africa for the price of a cup of coffee.  I mean, who wouldn’t feel guilty for refusing to buy one less cup of coffee to save a life?  It’s an effective tactic.  Making people feel guilty for being so greedy that they are unwilling to drink one less cup of coffee.  And no one wants to be seen as this greedy.

But the little programs add up.  You start out by sacrificing a cup of coffee.  But when each of these little programs costs you a cup of coffee, they can add up to a dinner.  A movie.  A night on the town.  A new car.  And they do.  That’s why a lot of people can’t live in the school districts they want to.  Because of the aggregate of all of these little programs.  But we never look at the aggregate.  It’s always one program at a time.  To make the taxpayer feel guilty for their greed.  To break down their will to oppose cuts.  To go along with further tax increases.  And a lot of us do.  Which makes that gap between gross pay and net pay grow ever larger.

Taxpayers and Tax Consumers

But things are changing.  And it’s causing a problem.  The baby boomers are beginning to retire.  They’ll soon be using Medicare.  And collecting Social Security.  So the number of taxpayers will go down.  While the number of tax consumers will go up.  And that changes everything.  The fewer taxpayers will have to pay a larger amount of taxes to support these entitlements as well as all of those little programs.  And this will make it a lot harder to hide these taxes.  To make them appear small.  More people will have to go with less to pay these taxes.  Even those who once did all right during periods of high taxation will have to go with less.  Because more people will be consuming Medicare and Social Security benefits.  And it’ll be political suicide to cut these programs.  Leaving little choice but to cut some of the little programs.  Which will give the patrons of Big Government little incentive to support tax and spend any longer.  Because they’ll see more taxing.  And less spending.  On themselves.

Politics as usual will not work as well as it once did.  Because they will not be able to hide the cost of Big Government any longer.  They won’t be taking from the many to give to the few anymore.  They’ll be taking from the few to give to the many.  Which can’t be anything but a recipe for disaster.

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The Two Americas: The Public Sector and Those the Public Sector Screws

Posted by PITHOCRATES - November 13th, 2010

Public Sector Living it Up While We Don’t

Who’s weathering the recession with the least amount of pain?  Why, the rich, of course.  And where do the rich live?  Well, according to Newsweek, seven out ten of the richest counties can be found surrounding our nation’s capital (see You live in nation’s richest counties posted 11/12/2010 on www.wtop.com).  Coincidence?  Or is it because many of those people living around Washington DC work in Washington DC?

Meanwhile, in California, voters rolled up a newspaper and swatted their public sector unions across their collective snout (see The Rollback Begins, and Investor’s Business Daily editorial posted 11/10/2010).

Last week’s elections didn’t just upend the Democratic Party in Congress. They also delivered a warning to the public-sector unions that form the core of the party’s support. In nearly all elections where public pay and benefits were an issue, the voters ruled that the era of ever-richer rewards for government was over: Say goodbye to fat pensions at 55. Get used to living like the rest of us.

Did they finally just have enough?  Or is it that they’re just finding out how much better they live than the people paying those salaries and benefits?

Then there’s the Bell effect. Earlier this year, struggling taxpayers learned just how well some public-sector employees were doing. The revelation of outrageous salaries in the California city of Bell was a catalyst for scrutiny of public pay in general. All kinds of data have surfaced since then about six-figure salaries and lavish overtime in places large and small. It’s clear that the governing class has not been shouldering its share of sacrifice in these tough times.

They had no idea how bad their government was screwing them.  When they did, they spoke at the recent midterm elections.  They said, “Bad public sector unions!  Bad!  [Deleted expletive] you and the horse you rode in on.”

Your Stimulus Program at Work: $27 Light Bulbs

And if the raping and pillaging wasn’t bad enough (and don’t you think it should be?), look at what we got for that excessive compensation.  Graft, corruption and incompetence.  Government construction contracts have long been a license to steal.  The vehicle of choice?  Change orders.  Contractors win bids by submitting quotes substantially below cost.  Once they get the contract, the raping and pillaging begins.  They submit grossly inflated invoices for extra work.  Bloomberg reports a typical example (see New Jersey Auditor Questions $27 Light Bulbs Billed Under Stimulus Program by Dunstan McNichol posted on 11/12/2010). 

One contractor sought $27 for light bulbs, while another billed $1.50 for similar items, according to the report and Assistant Auditor Thomas Meseroll. Another vendor charged $75 for carbon-monoxide detectors that it had provided to a different program for $22, the report said. Eells also cited $32,700 in auditing fees when “no services had been performed” and $69,000 in construction costs that couldn’t be verified.

There are honest contractors out there.  But it’s hard for an honest contractor to get any of these contracts when incompetent boobs in government make it so easy to steal.  Especially repugnant in this example is that we paid for this contract via the $814 billion federal economic-stimulus program.  And, sadly, we know this is not the exception to the rule.  It is the rule.

Neither Rain nor Sleet nor Competence nor Fiscal Accountability

Whenever government runs anything they do a piss poor job of it.  Take, for example, the U.S. Postal Service (USPS).  Sure, it’s an independent organization, but the House oversees it.  And provided it a $15 billion line of credit.  Which they just borrowed the remaining $3.5 billion available on it (and who out there really thinks that they will repay that $15 billion?  If you have your hand up, put it down.  You’re embarrassing yourself).  If it walks like a duck, quacks like a duck then it’s run by government.  And run poorly.  UPS and FedEx are doing fine.  In fact, they’re chomping at the bit to deliver some mail.  But the government says no.  Only government has the requisite skill and expertise to walk around and put things into slots (thank you Seinfelds Newman for that bastardized line).  And just how well are they doing over there at the USPS?  Not good.  They’re projecting bankruptcy unless government saves their sorry ass (see Postal Service posts $8.5 billion loss by Ed O’Keefe posted 11/12/2010 on the Washington Post).

The cash-strapped U.S. Postal Service delivered more bad news Friday, announcing it lost $8.5 billion in the fiscal year that ended in September. Without congressional action to change its obligations, officials said, the Postal Service likely will go broke at the end of fiscal 2011.

Railroads used to say they were in the railroad business.  That’s why a lot of them went belly up.  They didn’t know what kind of business they were in.  And because of that, their competition swooped in and took their customers.  Because truckers understood what kind of business they were in.  Transportation.  And they could compete against the railroads.  Stunned by this revelation, the railroads reinvented themselves.  Understood their role in the transportation industry.  They’re doing well now.  That’s what the USPS needs to do.  Find their role.  Because this can’t be your dad’s USPS anymore.  And they can’t keep trying to run it like it is.

The Only Thing Government is Good for They’re not Good AT

Whether it’s graft or incompetence, the end result is the same.  Government screws us.  That’s what the power to tax can do for you.  You can give yourself whatever pay and benefits you want.  You have no competition.  No one can sell better government services for less.  There is no restraint on their greed but their conscious.  Which, of course, they have repeatedly shown not to have one.

If you place a government employee into a room, without a doubt he or she will be the most unqualified person in the room.  They have no marketable skills.  They can’t run a business.  They just know how to buy and sell votes.  And how to get rich off of the public purse.  If you want to destroy a business, let government run it.  If you want cost overruns, let government run it.  If you want to cozy up with unscrupulous people who want to steel from the public purse, let government run it.  And yet who do we keep demanding to fix and run things?  Government.  It boggles the mind. 

We need government.  Some government.  As in ‘limited’ government.  Private business cannot provide some public goods and services.  Sanitary sewers, for example.  Or the fresh water system.  But it’s like Peggy Bundy said on the television show Married with Children.  She was lamenting about the sexual inadequacy of men.  She said, “The only thing they’re good for they’re not good at.”  And so it is with government.  At least, based on their track record.

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LESSONS LEARNED #35: “Not only is ignorance bliss, but it’s a godsend to Big Government.” -Old Pithy

Posted by PITHOCRATES - October 14th, 2010

If Jefferson Could Talk from the Grave He’d Be Hoarse from Shouting by Now

Politicians.  They’re all the same.  Well, most of them.  They enter politics for one thing.  For a career.  And what do people want from a career?  Great success.  Great prestige.  Great wealth.  Great power.  And a little revenge.  The pencil-neck, computer-nerd geek takes great pleasure in seeing a jock from his high school days emptying his trash while boarding his private jet. “Those wedgies and swirlies were a bitch but look at us now.”  It’s true.  The best revenge is living well.

But some people lack any talent or ability.  Some of them will never amount to anything.  They’ll never know the joy of looking down on people better than them with sweet condescension.  So these people go into politics.  Where people with no talent or ability can live well.  It’s a simple formula.  Sell your soul.  Whore yourself out.  Shake down businesses with taxation and regulation (and get even with all those people who have far more talent and ability than you ever had).  Collect tribute.  Consolidate power.  Hold those you serve in contempt.

Lord Acton wrote in 1887, “Power tends to corrupt, and absolute power corrupts absolutely.”  A century earlier, Thomas Jefferson fought tirelessly to prevent great money and federal power from conjoining.  The Old World capitals consolidated money and power.  And this concentrated the money and power into fewer and fewer hands.  Kings ruled by whim.  And oppressed their hapless subjects.  It’s a story as old as time.  And is still true today.  To the great chagrin of Jefferson.

Go West, Young Man

The transcontinental railroad was making poor progress during the Civil War.  Because it was starved for capital.  No one would invest.  Few doubted that they could build it.  Even if they could, few doubted it would ever make money.  The West was mostly raw, unsettled land.  There was nothing to transport.  Nothing to earn revenue.  It was a huge investment with a huge risk.  Investors are smart when it comes to money.  And they saw the transcontinental railroad as a one-way road that their money would go down and never return.  They needed something.  Big Government.

When it comes to throwing money away on a losing investment there is but one place to go.  Uncle Sam.  With the power to tax, the federal government has huge piles of money to play with.  So here’s what happened to build that railroad.  Union Pacific (UP) created a shell company called Crédit Mobilier (CM) to finance and build the railroad.  These companies were one and the same.  Without getting too complicated, UP sold their ‘worthless’ stock to CM at par.  Now, CM being a finance and construction company, a train never had to run over the road they were building to make a profit.  Union Pacific, on the other hand, needed trains running on that new track.  They were a transportation company.  They earned a profit from transporting goods on their trains.  This meant it could take years before UP could even hope to earn a profit on the new transcontinental railroad.  CM, on the other hand, could start earning a profit with the first invoice they submitted for construction.  And they did.

CM had strong revenues.  They submitted grossly inflated construction invoices to UP.  UP added a small construction management fee and submitted them to the government.  The government paid UP.  UP paid CM.  With revenues far exceeding their costs, CM made obscene profits.  CM stock took off into the stratosphere.  Some of which was sold to Congressmen at a deep discount who in turn realized obscene capital gains if they sold their stock.  Or collected obscene dividends if they held onto their stock.  In return for this sweetheart deal, they approved all cost overruns.  Killed any legislation unfavorable to UP/CM.  Provided lucrative incentives to build track on the worst ground in the most indirect path (to maximize the railroad’s mineral rights).  Provided little to no oversight on the construction of the road (some track was built on ice, with cheap steel and flimsy wooden trestles wherever possible).  When east met west the different railroads kept on building, parallel to each other to keep billing Uncle Sam.  All paid by the public treasury.  By the taxpayer.  The little guy.  Being raped and pillaged by their own representatives.

Affordable Housing for Those Who Vote Democrat

Politicians buy votes.  Pad the federal payroll.  Steal from the treasury.  Break the law.  Violate our trust.  You know, politician stuff.  Because of the inconvenience of elections, they can’t be too blatant about their rape and pillage.  So they do things that are in the best interest of the public.  Or so they say.  Like affordable housing.  You see, the Left buys the votes of the poor and minorities by throwing bones to them.  And there are a lot of minorities in the inner cities of the bluest of blue cities.  So they threw big bones to them.  Houses.

Despite their War on Poverty, the Left just can’t help these people.  The truth is, of course, that they don’t want to help them.  If they’re poor and dependent on the government, the Left can count on their vote.  If they escape poverty and don’t need Big Government to provide for them, these people are of no use to the Left.  Ergo, they never escape poverty.

Of course, the problem of remaining in abject poverty is that you can’t qualify for a mortgage.  Banks are funny that way.  They only loan money to people who can pay them back.  So they declined a lot of mortgages to these poor inner city minorities.  Well, this was just too good for Big Government to pass up.  A large group of minorities (i.e., a large Democrat voting bloc) being denied mortgages?  Why, that’s racism.  So they drafted a lot of legislation and unleashed their justice department with extreme prejudice.  The message?  Approve these loans.  Or face the consequences (revoking a bank’s charter, a federal lawsuit, a public demonstration headed by Jesse Jackson, Charlie Rangel, et al, etc.).  So they found creative ways to approve loans.  And they got a little help from Uncle Sam.

The Subprime Mortgage Crisis is a Lot Like the Crédit Mobilier Scandal

By a little I mean a lot.  Uncle Sam screwed the mortgage bankers by making them approve extremely risky loans.  So, to help the mortgage bankers, Uncle Sam screwed the American people.  They guaranteed those highly risky mortgages, thus transferring the risk from them to us, the taxpayer.  And to further mitigate the bankers’ risks, they purchased a lot of those highly risky mortgages to remove them from the banks’ balance sheets.  It’s called the secondary mortgage market.  And the primary players are none other than Fannie Mae and Freddie Mac, ground zero of the subprime mortgage crisis.

Once upon a time, a mortgage was one of the safest investments.  People saved up to pay a 20% down payment.  With their life savings invested, people paid their mortgage payment and they paid them on time.  And if you could afford a 20% down payment, mortgage bankers had a lot of confidence that you would be able to service your mortgage.  But in the day of 5%, 3% and 0% down, a person doesn’t have a whole lot to lose.  This makes the first few years of these mortgages especially risky.  The introduction of ‘no documentation’ mortgages meant people could lie about their income (or include overtime earnings).  Add to that the Adjustable Rate Mortgage (ARM) and the interest-only mortgage and you just made these especially risky mortgages even more risky.  Sure, these will get almost anyone into a home, but they get in by the skin of their teeth.  But if they lose their overtime due to a weakened economy, if their interest rate on their ARM resets at a higher rate or a balloon payment is due on their interest-only loan, guess what?  That stream of mortgage payments could very well stop.

Now that would be a BIG problem.  Because of what Freddie and Fannie did with those mortgages they bought.  They sliced them up and built creative investment vehicles.  Derivatives.  Mortgage backed securities called collateralized debt obligations.  Wall Street repackaged all these risky mortgages into highly profitable investments.  Everybody bought them.  Pension funds.  Trust funds.  In America.  And throughout the world.  Big gains with a low risk.  Or so it would seem.  You see, they never eliminated the risk.  They only transferred it to someone else.  And once people couldn’t pay their mortgage payments anymore, the house of cards came crashing down.  We call it the subprime mortgage crisis of 2008.  It caused a worldwide recession.  And cost the American taxpayer dearly.  Even those not born yet.

Yes We Can…Screw the American Taxpayer

The subprime mortgage crisis of 2008 is a government creation.  Their quest of affordable housing to buy votes put more and more people into houses they couldn’t afford.  They created legislation akin to extortion of the banking industry.  They used the Justice Department to apply the muscle for that extortion.  They had their friends in the media and the activists for racial equality to further pressure the banking industry.  Their lack of oversight of Fannie and Freddie (thank you Barney Frank and Chris Dodd) let them make extremely risky loans.  And their policies of buying extremely risky mortgages ultimately transferred all risk to the taxpayer.  Why?  Because like all good government scandals, the seekers of favors rewarded our representatives well for their complicity with sweetheart mortgage deals, vacation junkets, fat contributions to their campaign war chests, etc.  In other words, politics as usual.  But on a grand scale.

Why do they do it?  Because they can.  They count on you being ignorant of history.  And accepting every lie they tell you.  Because they hold you in contempt.  They look down on you with sweet condescension.  These pencil-neck geeks who could never amount to anything on their own merit or ability.  But some sold souls later and they have finally gotten even with those who were better than them.  And here they are.  Still living well.  Even during the worst recession since the Great Depression.

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