The Public Sector and the Tax Base

Posted by PITHOCRATES - June 3rd, 2013

Economics 101

All Government Bureaucracies Grow Bigger and Pay their People Very Well

Big cities throughout the United States are suffering financially.  They are drowning under the costs of their public sector employees.  For when the Great Recession hit tax revenues fell.  People lost jobs and paid less income taxes.  People out of work spent less in the local stores causing a fall in sales taxes.  People drove less and paid less gas taxes.  Home values plummeted, reducing property taxes.  Tax revenue fell at all levels of government.  Leaving the big cities unable to pay their bills.  With less help from the governments above them.  While their infrastructures crumbled.  And they struggled to furnish basic city services.

Governments don’t make anything.  They just have people doing things.  So there are little economies of scale.  Just a lot of people.  The public sector includes every worker in the city paid by tax revenue.  The mayor, city council, school teachers, police officers, firefighters, garbage collectors, boiler operators, electricians, janitors, building inspectors, meter readers, bus drivers, etc.   And all the civil servants and bureaucrats that push paper.  Requiring a huge payroll.  And lots of benefits.  In a large city with a population of 1.5 million those costs can look like this:

Public Sector Costs 1

All government bureaucracies have two things in common.  They always grow bigger.  And pay their people very well.  So the above table has three columns.  Showing the growth of the public sector.  (Assuming a constant population to simplify our math).  From 1% of the city population to 2% then to 3%.  So the number of city employees goes from 15,000 to 30,000 to 45,000.  By the time you add in pay, holiday pay, vacation pay, sick days and health insurance the active employee costs are huge.  Going from $1 billion to $2 billion to $3 billion.  Today it is not uncommon for a big city with a population of 1.5 million to have 45,000 public sector workers.  So we will build on that figure.  And add in retiree costs.

As City’s Population Declines so does its Tax Base

Another big perk of working in the public sector are the great pensions.  Something that has long since disappeared in the private sector.  While most of us have to put money away in a 401(k) public sector workers can count on a generous pension during a long retirement.  Perhaps getting as much as 80% of their base pay.  Plus they keep their health insurance.  Which is unlike the health insurance most of us get in the private sector.  For it covers everything.  With few co-pays.  And only the best name-brand pharmaceutical prescriptions.  This is why people want to work in the public sector.  And why they want to retire from the public sector.  Because no one else pays as well.

Public Sector Costs 2

Public sector workers retire long before their counterparts in the private sector.  Allowing them to live a long retirement.  And because they live so long into retirement the city ends up paying for almost as many retirees as they do active workers.  Putting great cost pressures on these cities as more of their workers retire.  Within as few as 2 decades the cost of retired workers can go from $648 million to $1.9 billion.   When we add this cost to the cost of their active workers we get the total cost of the public sector.

Public Sector Costs 3

As time passes and more people retire from the public sector we can see how the cost of the public sector (active and retired) rises from $3.7 billion to $4.4 billion to $5 billion.  Which, of course, the people living in the city have to pay.  The taxpayers.  They pay income taxes, property taxes, sales taxes and a variety of other taxes and fees.  Who by the time the number of retirees reach 40,500 must pay $3,336 per year.  Or $278 per month.  Or $64.15 per week.  Or $9.16 each day.  Just to get a true feel of how much this is do the following exercise.  Each day take a $10 bill out of your wallet or purse and throw it away.  This will approximate the cost of the public sector you pay for.  Until the people start leaving the city.  And as the population declines so does the tax base.  Requiring each person to pay a larger share of the public sector cost.

To pay for an Expanding Government you need a Growing Population

If a city starts losing population it doesn’t reduce the need to pay the bloated public sector.  Both active and retired.  So the fewer people remaining in the city have to pay a larger share of the public sector cost.  Because the public sector union isn’t going to allow the city to lay off any workers.  So it’s up to the taxpayers.  But as the population shrinks it becomes more painful to do.

Public Sector Costs 4

By the time the population falls to 500,000 the amount of taxes a person must pay to support the public sector amounts to a house payment.  Or $192.46 per week.  Or $27.49 each day.  Can you imagine taking three $10 bills out of your wallet or purse every day just to throw them away?  Probably not.  Because no one would.  Cities just can’t keep increasing the tax burden on their people.  For there is a limit.  And when a city reaches it they start borrowing.  Which is how cities go into debt.  And flirt with bankruptcy.  Because of these bloated public sectors.  That grew when the cities grew.  But they didn’t shrink as their populations shrank.

We have ignored corporations in our exercise.  Which increase the tax base.  But we have also excluded additional costs.  Buildings, vehicles, equipment, housing assistance, food assistance, fuel for city vehicles, car insurance, property insurance, liability insurance, lawsuits, etc.  If we factor these things in the numbers will only look worse.  As the cost of the active and retired workers increases there’s less money to pay for the basic city services.  So they deteriorate.  Which when added to the higher taxes chase even more people out of the city.  Reducing the tax base further.  Leaving even less money for the basic city services.

When the population declines so does the city.  As the public sector workers consume a greater percentage of the shrinking tax base cities suffer increasing urban decay.  As there is little money for anything but the public sector workers and their benefits.  For when it comes to paying for government population is key.  You need a growing population to pay for expanding government.  To spread the costs of a bloated public sector over as many people as possible.  And you can’t do that with a declining population.  Which is why big cities flirt with bankruptcy during bad economic times.  For they can pay for their bloated public sectors only during the best of economic times.  And only during the best of economic times.

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FT123: “It takes both a tax rate and economic activity to generate tax revenue.” – Old Pithy

Posted by PITHOCRATES - June 22nd, 2012

Fundamental Truth

There is an Incredible Amount of Economic Activity behind a 20-Ounce Bottle of Soda Pop 

Have you ever considered all of the economic activity that had to happen before you could buy a cold 20-ounce bottle of soda pop from a convenience store?  First of all, building that convenience store itself required a lot of building supplies.  And construction workers to build it.  People in factories hired people and bought materials to build the food equipment, coffee equipment and coolers.  The people utilities hire make sure the store has access to electric power, gas, water, sewage, telephone and Internet access.  Transportation companies deliver food and merchandise to the store.  Who buy trucks and vans from dealerships who buy them from automotive manufacturers.  They hire drivers for their vehicles and workers for their warehouses.  They buy fuel for their vehicles.  Refineries provide the fuel and they hire people and buy petroleum oil.   Which provides more jobs in the pipeline, railroad, trucking, shipping and oil drilling industries.  Who all hire people and buy things built by other people.

The food and merchandise came from plants that hire people and buy material.  The one brand of soda pop you purchase hires many employees and operates one or more bottling plants.  They buy advertising that provides jobs for others.  They buy cans and bottles that come from suppliers who make them out of raw material that still others extract out of the ground.  These suppliers hire even more people and buy even more materials.  There is label or artwork on the cans or bottles that other people are hired somewhere to provide.  Their offices operate with computers and software built, shipped, installed and programmed by others.  They maintain a web presence which creates further jobs.  Their employees use smart phones the company purchased from others who hire people and material to build them.  And hire even more people to maintain and operate the networks.

And the list goes on.  There is an incredible amount of economic activity behind that 20-ounce bottle of soda pop.  In a vast complex of horizontal and vertical business relationships.  Each providing their little part in the big picture that lets us walk conveniently into a convenience store whenever we want and buy a cool and refreshing beverage in a 20-ounce bottle.  Now multiply this for every product in that store.  And for every store in the country.  Millions of people working in millions of jobs earning a paycheck.  And each paycheck deducts payroll taxes.  Such as Social Security, Medicare, state unemployment, federal unemployment and workers’ compensation.  Each check (in most states) deducts federal and state income withholding taxes.  Some cities even deduct a city withholding tax.  Businesses pay taxes on their earnings.  On their personal and real property.  Just as homeowners pay real property taxes on their homes.  And there’s more.

In 1992 the Middle Class paid approximately 40% of their Total Earnings in Taxes

If you look at your cellular bill there are taxes itemized on it.  When you go to the store you pay a sales tax on most purchases other than food.  Some people even pay a city sales tax.  If you buy cigarettes or drink alcoholic beverages you pay an excise tax.  Or sin tax.  They tax the gasoline you buy for your car to pay for the roads we drive on.  If you buy sugar in the store you’re paying a sugar tariff.  If you make a capital gain on your investments you pay a capital gains tax.  And on and on.  Throughout that complex of horizontal and vertical business relationships there are taxes.  Just as consumers pay taxes throughout their ordinary day.  It adds up.  According to CATO, in 1960 the middle class paid about 30% of their total earnings in taxes of every kind at every level.  In 1992 that number rose to 40%.  And is no doubt rising.

Staying with the 1992 number, this means for every dollar you earn you ultimately can only spend 60 cents of that dollar on you.  The other 40 cents goes to some governmental coffer.  Or looking at it in another way say you gross $800 a week.  Your net pay will be less for the taxes you see withheld from your paycheck.  But when you add the other taxes you don’t see you really only get to spend $480 of that $800 you earned.  Or if you gross $41,600 annually you’ll be paying approximately $16,640 in taxes of every kind at every level of government.  In a word – ouch.

Yeah, we all know that we pay a lot in taxes.  Most of us are just resigned to it.  But with all these debt crises (at the city, state, federal and international levels) it does make you think a little more about all those taxes we pay.  And the cries to get the rich to pay their ‘fair share’.  The amount of taxes the rich pay are even worse.  The percentage numbers may be lower if they pay a lower capital gains tax rate on an investment portfolio, but they are paying from hundreds of thousands to hundreds of millions in tax dollars.  Which dwarfs our $16,640.  Yes, they can afford it more than those less rich can.  But that misses an important point.  Tax rates alone do not make tax revenue.  You have to have a prosperous economy, too.

The more People that are Working the more People pay Payroll, Income, Excise and Property Taxes

You cannot tax yourself to economic prosperity.  For if the number of jobs remains the same while we increase tax rates that will only leave businesses and consumers with less money to spend to create economic activity.  And when they spend less in economic exchanges all those taxes we apply to those economic exchanges will generate less tax revenue.  This is why cities, states and national governments have deficits during poor economic times.  Because there is less economic activity to tax.  All you have to do is some simple arithmetic to see why.

Say there is a city with 250,000 working middle class people.  Each earning on average $41,600.  So each contributes $16,640 in taxes at the various levels of government.  Or $4.16 billion in total tax revenue.  Now say a recession comes along.  And the city suffers 10% unemployment.  Putting 25,000 people on the unemployment rolls.  This will reduce that tax revenue down to $3.74 billion.  Or reducing tax revenue at every level by $416 million.  Just about a half billion dollars in lost tax revenue.  All while government benefits increase at every level to cover those 25,000 unemployed.  Add a second city and that could add up to $1 billion in lost tax revenue.  Ten cities could reduce tax revenue at all levels by $5 billion.  Causing deficits at the city, state and federal levels.  It adds up.  And they cannot make up those shortfalls by increasing tax rates.  Because higher taxes reduce economic activity.  Which is what generates those tax revenues.

Now consider the alternative.  Say the government removed some costly regulations for businesses.  Or they repealed Obamacare.  But only removed some costly regulations while leaving tax rates as they are.  This business-friendly environment would encourage businesses to rehire people.  Let’s say they rehire all 25,000 laid-off employees.  If they did they would, of course, restore that lost $416 million in tax revenue.  Without raising tax rates on anyone.  The point being that you can’t generate tax revenue without economic activity.  So any policy that would discourage economic activity would reduce tax revenue.  For the more people that are working the more people pay payroll and income taxes.  The more people that are working the more money consumers will have to spend and pay taxes on their purchases.  And the more people that are working the more houses they will buy which would bring in more property taxes.  Higher tax rates can’t make this happen.  Only economic activity can.

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Even Democrats are Complaining about the High Cost of Government Workers Bankrupting their Cities and States

Posted by PITHOCRATES - April 29th, 2012

Week in Review

So who isn’t paying their fair share?  I know who you’re probably thinking.  And if you are you’re wrong.  For here it is direct from a Democrat mayor’s mouth (see Steven Malanga: How Retirement Benefits May Sink the States by STEVEN MALANGA posted 4/27/2012 on The Wall Street Journal).

Chicago Mayor Rahm Emanuel recently offered a stark assessment of the threat to his state’s future that is posed by mounting pension and retiree health-care bills for government workers. Unless Illinois enacts reform quickly, he said, the costs of these programs will force taxes so high that, “You won’t recruit a business, you won’t recruit a family to live here.”

We’re likely to hear more such worries in coming years. That’s because state and local governments across the country have accumulated several trillion dollars in unfunded retirement promises to public-sector workers, the costs of which will increasingly force taxes higher and crowd out other spending. Already businesses and residents are slowly starting to sit up and notice…

Government retiree costs are likely to play an increasing role in the competition among states for business and people, because these liabilities are not evenly distributed. Some states have enormous retiree obligations that they will somehow have to pay; others have enacted significant reforms, or never made lofty promises to their workers in the first place.

Indiana’s debt for unfunded retiree health-care benefits, for example, amounts to just $81 per person. Neighboring Illinois’s accumulated obligations for the same benefit average $3,399 per person…

Back in Illinois, Dana Levenson, Chicago’s former chief financial officer, has projected that the average city homeowner paying $3,000 in annual property taxes could see his tax bill rise within five years as much as $1,400. The reason: A 2010 Illinois law requires municipalities to raise the funding levels in their pension systems using property tax revenues but no additional contributions from government employees. The legislation prompted former Chicago Mayor Richard Daley in December to warn residents that the increases might be so high, “you won’t be able to sell your house.”

What was that about the 1%?  Just who is it living off of the generosity of the 99%?  Who isn’t paying their fair share?  And is asking others to pay far more than their fair share?  Who is it that has pension and retiree health care plans worth several trillions of dollars?  All funded by tax dollars from the 99%?  As well as the 1%?  Our government workers.  That’s who.  Those people who have made themselves more equal than the 99%.  Even though they claim to be a part of the 99%.  While living more like the 1%.  But one thing you can say about the 1%.  They’re not bankrupting their cities and states like these government workers are.  Or destroying our lives to pay for their lives.

You want to talk class warfare?  Let’s talk class warfare.  The richest 1% pay approximately 30% of all federal income taxes.  The richest 10% pay approximately 70% of all federal income taxes.  And we don’t pay any of these rich people with our taxes.  They get it however they get it.  But they don’t get it from us.  The taxpayers.  So they providing a huge net good for us.  Paying the lion’s share of taxes.  And not taking our money from us.  And yet these are the people that we vilify.  While those who are harming us the most get a free pass.  Now that’s some clever class warfare.  Making it sound like it’s the rich who are oppressing the middle class.  While it is the wealthy government class oppressing the middle class.  And they do it very well.  You’ll hear people everywhere say that the government should stick it to the rich.  But they never say a word about these government workers who live a better life than they do.  Even though they are paying for that better life.  Through ever higher taxes.

So when your property taxes go up think about your retirement plans.  And though you may not have much be comforted in the fact that your government workers do.  Thanks to you.  So even though you may not be able to travel the world in your retirement you’ll know that somewhere a retired government worker is.  Because that’s only fair.  And being fair is important.  Fair share sacrifice.  That’s all they want.  As long as, of course, your share of sacrifice is greater than theirs.  The wealthy government class.

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The 2010 Census Confirms the Consensus that Liberalism has Failed

Posted by PITHOCRATES - December 19th, 2010

America is a Center-Right Country

The people voted against liberalism in the 2010 Midterm elections.  And they’ve been voting against it since 2000.  With their residency.  They’ve been moving out of the blue states.  And into the red (see New population count may complicate Obama 2012 bid by Charles Babington, Associated Press, posted 12/19/2010 on My Way).

The population continues to shift from Democratic-leaning Rust Belt states to Republican-leaning Sun Belt states, a trend the Census Bureau will detail in its once-a-decade report to the president. Political clout shifts, too, because the nation must reapportion the 435 House districts to make them roughly equal in population, based on the latest census figures.

People are moving out of the big welfare states.  They have rejected tax and spend.  They have rejected Big Government.  And they have rejected Big Union.  At least based on the states where they’re moving to. 

The biggest gainer will be Texas, a GOP-dominated state expected to gain up to four new House seats, for a total of 36. The chief losers – New York and Ohio, each projected by nongovernment analysts to lose two seats – were carried by Obama in 2008 and are typical of states in the Northeast and Midwest that are declining in political influence.

Out of the blue.  And into the red.  As one would expect in a center-right country.

Running away from Liberalism

So the people are literally running away from liberalism.  Why?  Because blue states are expensive to live in.  Especially on a pension (see The 10 Worst States for Retirees by Robert Powell, MarketWatch, posted 12/19/2010 on Yahoo! Finance).

Plenty of folks are aware of the best states for retirees. But what are the 10 worst states in which to spend your golden years?

Among them are states with the biggest financial problems.

Arizona, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin joined California as the 10 most troubled states, according to Pew’s analysis.

Of note, TopRetirements.com’s Brady suggested that retirees and would-be retirees might want to avoid states in fiscal peril because these locales might be expected to face decreasing services and increasing taxation.

And winning an honorable mention is New York.

New York wasn’t mentioned as being in fiscal trouble by the Pew Center, but it does have “very high taxes, including property taxes.” In fact, Brady said New York has the second-highest tax burden and fifth-highest per capita property taxes. Plus, he said, the Empire State has a “dysfunctional state legislature.” As if that wasn’t bad enough, it’s terrifically expensive to live in New York.

Surprisingly, people don’t want to pay high taxes.  No matter how generous the government is to other people with their money.  And big governmental payrolls and pensions are growing to be a bigger and bigger problem.

As for Rhode Island, Brady said it’s probably the worst-off state in the Northeast from a financial viewpoint. It also has high taxes, though he noted that the state does boast some great places to live.

New Jersey, according to Brady’s analysis, has the highest property taxes in the U.S., as well as the highest total tax burden of any state, as reported in a 2008 Tax Foundation report. Plus, New Jersey has serious pension-funding issues, Brady noted. States with the greatest tax burdens after New Jersey were New York, Connecticut, Maryland, Hawaii, California, Ohio, Vermont, Wisconsin and Rhode Island, joined by the District of Columbia.

America is a center-right country with smatterings of blue on the West Coast, the Midwest and New England.

New England had two other states on Brady’s list of worst places for retirees: Massachusetts, which has high taxes including high property taxes and a very high cost of living, and Connecticut, which has the third-highest tax burden of any state as well as high property taxes.

Nevada reelected Harry Reid.  Even though his state is in the toilet. 

Ironically, the 10th-worst place to retire is the one state where it’s easy to find a cheap place to live: Nevada. As many know, Nevada is presently the home-foreclosure capital of the world. In fact, the Silver State continues to lead the nation in terms of foreclosure filings per household, with one filing for every 79 homes, according to RealtyTrac. Yes, the state is having financial problems, but the good news for retirees living there or contemplating a move there is that it doesn’t have an income tax — at least not yet.

No income tax…yet.  When you have out of control spending to fund large government payrolls and pensions, you will run out of money.  And when they do, governments don’t cut spending.  They raise taxes.  So get ready for it Nevada.  Income taxes are coming.

Federalism Kept Big Government Small.  For Awhile.

I don’t know how many more ways we can say it.  We don’t like paying high taxes.  And we don’t like paying high taxes to help other people live better lives than we do.  We’ve said it at the mid-term elections.  And we’ve been saying it since the 2000 census.

This was the genius behind federalism.  It kept Big Government small.  If a state taxed and spent and regulated our lives too much, we could move to another state.  But with the growth of the federal government, we soon won’t have that option anymore.  For when the federal government oversteps its bounds and taxes and spends to support ever larger government payrolls and pensions, and they control our pensions (Social Security) and our health care (Obamacare), where are we going to move to in protest?  China?

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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 #26: “If we need Big Government to protect us from ourselves, then our public schools can’t be the best place to learn.” -Old Pithy

Posted by PITHOCRATES - August 12th, 2010

WE ARE WHAT they teach us.  And here is a little of what our teachers taught us.  And a little of what we learned by observation.

WHEN I WAS in grade school, our teachers went on strike.  It was great.  Another week or so of summer vacation.  But I saw a curious thing.  Some of my classmates were carrying picket signs.  And there they were, walking with the teachers.  I could not understand why anyone would want to help to end an extended summer vacation.  That’s all I knew about a teacher’s strike.  I had no idea why they didn’t want to go back to work.  I just knew it meant I didn’t have to go back to school yet.

The signs my fellow students carried said something about making our schools better.  As kids typically don’t like being in school, I couldn’t imagine they thought much about improving the educational system.  Other than greatly shortening the school day.  And school year.  But giving a pay raise to our teachers?  Giving them more benefits?  How, exactly, was that going to make school better?  I mean, if they got more pay and benefits, our education would get worse, not better.  They would just transfer money from the classroom to the teachers.  Unless the city raised property taxes to replace the classroom money that was given to the teachers.  And that would only increase the household costs of these kids’ parents.  Meaning less presents at Christmas.  Couldn’t these kids see the folly of their ways?

Of course they couldn’t.  They were just useful pawns.  They hadn’t the foggiest idea why teachers go on strike.  The teachers told them what to say.  What to think.  And they lied to these kids.  They weren’t striking because they wanted more money and better benefits.  Which they were.  No.  They told these innocent children that they were striking so they could have a better art department.  A better music department.  Better field trips.  That’s why these teachers were on the picket lines.  For the children.  And that every time there were cuts in the classroom, it was because of the greed of their parents who didn’t approve a millage.  Or who bitched about rising property taxes.  It was never their OWN greed.  Never that.

WE HAD A mock election when I was in 7th grade.  It was an ‘exercise in democracy’.  I remember voting for the Democrat candidate.  I don’t know why.  I knew nothing about politics.  I had only recently quit playing with my toy cars.  I was still reading The Hardy Boys mystery novels.  And thinking about the pretty girls in class.  What I don’t remember was spending much time thinking about the presidential election.  But there I was, voting for the Democrat candidate.  Who won in our little mock election.  But how did I, as well as my fellow students, know enough about politics to vote for the Democrat candidate?

Obviously, they taught us what to think.  That the Democrat candidate was the better candidate.  Because he was for the working man.  And cared about the little people.  That the Democrats cared about education.  Not profits.  All these touchy feely things.  Which was about all a kid could understand.  A kid can’t understand monetary or fiscal policy.  The intricacies of foreign policy.  They don’t have a clue about those things.  But kids do know that they should play nice.  And that’s what the Democrats are all about.  Playing nice.  And providing political muscle for the teachers’ unions in exchange for votes.  And obedient little minds of mush that will one day become voters.

I HAD A speech/debate class in high school.  Our teacher used the latest in progressive teaching methods.  A lot of touchy feely stuff.  Feel more than think.  We often did these exercises where the class as a whole debated the pros and cons of a particular position.  One day we went through a list of five or so.  I found the last one interesting.  It was about a ‘death ray’.

I had recently watched a program about nuclear weapons.  I learned that the size of their warheads was a function of the accuracy of the weapons.  They needed a big radius of destruction to guarantee the destruction of the target.  This is true for all weapon systems, conventional or nuclear.  The less accurate they are, the bigger the destructive force required.  (Whereas smart weapons today can have smaller warheads because they can be steered onto target.)  The more accurate the weapon, the less destructive it can be.  The less collateral damage there would be.  Less civilian dead.  The lesson described the ‘death ray’ as a weapon of pinpoint accuracy.  Based on what I just recently learned, I thought that it would be very interesting to discuss the pros of such a weapon.

When we finished discussing the position before the ‘death ray’, he said something like it was obvious that no one would argue for such a weapon system.  So there was no point in discussing it.  And then, as an afterthought, he said “unless someone does” with a condescending smirk.  I raised my hand.  I began to make some positive points.  He cut me off.  There was to be no discussion in favor of any weapon system in his class.  Turns out he was anti-war.  Free speech was one thing but not when you disagree with the program.

TWO BOOKS THAT that stand out from high school that were required reading are The Grapes of Wrath and Johnny Got His Gun.  You couldn’t find a couple of more depressing books if you tried.  The Grapes of Wrath was about the plight of a family who lost the farm during the dust bowl of the Great Depression.  In it you learned that bankers were evil.  Rich people were evil.  That Big Business was evil and exploited the poor.  Whereas poor people were virtuous.  And only poor people helped other poor people.  That Big Government was good and helped the poor people.  That FDR’s New Deal was good and helped the poor people.  That unions are good and protect those who Big Business exploits.  You get the picture?  Democrats good.  Republicans bad.  Because the Democrats take care of the little guy.  And evil bankers and fat cats are all Republicans.  Or so we were taught.

Johnny Got His Gun is an anti-war book.  It’s about a U.S. veteran of World War I.  Joe Bonham.  He lost about every part of the human body you could.  And yet they kept him alive.  I read it in the 10th grade.  Young and impressionable, I saw the folly of war.  War hurt good, young men like poor Joe Bonham.  (Incidentally, the name ‘Bonham’?  It’s from the French ‘bon homme’, good man.)  A pity only the anti-war crowd read it.  Apparently no one read it in Germany or Italy or the Soviet Union.  Maybe if their citizens did read it World War II would not have broken out.  Thankfully for the free world, though, men did serve in the armed forces despite what happened to poor Joe Bonham.  And they saved liberty.  And the burning of books did not spread further.  And books like this, because of men who did pick up a gun, remain in the public school curriculum.

Of course, you know why they (the public school teachers) are anti-war, don’t you?  It’s simple.  Any money spent on the military is money not spent on them.

I HAD AN electronics teacher in high school who was really cool.  He let us drink coffee in class (or, should I say, cream and sugar with some coffee).  He’d send a student across the street to buy donuts to eat with our coffee.  And he taught us how to build little black boxes that could unscramble scrambled television.  He was also a pretty good teacher.  A PNP transistor symbol?  The arrow was P-N (peein’) on the base.  (An NPN transistor symbol pointed away from the base.)  The resistor color code?  Bad boys rape our young girls but Violet gives willingly.  The whore.  (Hey, this stuff was funny when you’re only 16 years old.)  He even set up an interview for me at an electronic repair shop.  He liked being a teacher.  But he enjoyed doing concrete flatwork, too.  One of those things he did to pay the bills while in college.  And kept doing after college.  And that’s what he did during the summer, the peak of the construction season.  And made good money doing it.

MY MOM WORKED as a volunteer at my grade school.  She got to know the teachers pretty well.  She even went to their homes.  One lived not too far away from us.  I went with her once or twice.  Talk about surreal.  Seeing your teacher outside the school.  Acting so un-teacher-like.  Wearing something she doesn’t wear to school.  Having fun.  Laughing and joking.  And seeing her being a mom to her own kids.  That was weird.  We treated her politely and with respect in school.  Her kids whined “maaaa” at home just like I did when I was at home.  My teacher was just a normal person.  Human, almost.

But what really struck me then was that though they lived in the same general area as we did, they had more.  Bigger house.  With nicer stuff.  A newer car in the driveway.  More presents under their Christmas tree.  And in bigger boxes.  It was a ‘blue-collar’ neighborhood.  Her husband was a ‘blue-collar’ worker.  Just like my dad.  But my mom volunteered.  My teacher was, well, a teacher.  The ultimate second income in a two income family.  Good pay and benefits.  And no child care to worry about.  Teachers are off when their kids are off.  Holidays.  Breaks.  Snow days.  And, of course, summer vacation.  It just didn’t get better for a working mom.

IT IS INTERESTING that people become more conservative with age.  They may start out Democrat.  But after working awhile or raising a family, they often become Republican.  Not all of them.  But a lot.  The net number of people changing from Democrat to Republican far exceeds those changing from Republican to Democrat.  If there are any.  Other than for political reasons (in a desperate attempt to get reelected by switching parties).  That’s why the Democrats depend on the youth vote.  Because the youth vote is an uninformed voted.  They haven’t been deprogrammed yet.  They still toe the party line.  Because they don’t know any better.  Yet.

As we work and live in the real world, though, away from the insulated life of home or the college campus, things change.  We get older.  And wiser.  Less naive.  Less idealistic.  Less ignorant.  That’s why there is a net change from Democrat to Republican.  We grow up.  And start thinking for ourselves.  And try as they might during our public school indoctrination, we stop being sheep.  Eventually.  We strop bleating their mantra.  ‘Big Government good.  Private sector bad’.  Why?  Because we see that public school teachers and government workers live a lot better than we do.  This privileged few, this ruling elite, continue to take from us and respond with condescending arrogance when we complain.  Angry that we don’t mind our place in the lower strata of society.  Where we belong.

And they are nervous.  They can only maintain their elite status as long as we pay for it.  The more we learn, though, the less we are willing to support this aristocracy.  And they know it.  So they try to keep us dumbed down.  For an educated constituency is the greatest threat to Big Government.  And the public school system.  This self-proclaimed aristocracy.

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