Abenomics appears to have Failed in Japan just as Keynesian Economics has Failed everywhere it has been Tried

Posted by PITHOCRATES - March 9th, 2014

Week in Review

The Keynesians were applauding Shinzō Abe’s economic plans for Japan.  To end the never-ending deflationary spiral they’ve been in since the late Nineties.  His Abenomics included all the things Keynesians love to do.  And want to do in the United States.  Expand the money supply through inflationary monetary policy.  Devalue the yen to make their exports cheaper.  Lower interest rates into negative territory.  Quantitative easing.  And lots of government spending.  The kinds of things that just makes a Keynesian’s heart go pitter pat.

They kicked off Abenomics in 2013.  And how are things about a year later?  Not good (see Japan’s deficit hits record as economic growth slows posted 3/9/2014 on BBC News Business).

Japan’s current account deficit widened to a record 1.5tn yen ($15bn; £8.7bn) in January, the largest since records began in 1985.

In further bad news, the country’s economic growth figures were also revised downwards…

The sluggish growth and growing deficit come just before a planned sales tax increase, scheduled to take effect in April.

They did weaken the yen.  Making it worth less than other currencies so those currencies could get more yen when they exchanged their currencies to buy those Japanese exports.  Of course, when Japanese exchanged their yen for those other currencies they got less of those other currencies in return.  Requiring more yen to buy those now more expensive imports.  Thus increasing their trade deficit.

Japan is an island with a lot of people.  They have to import a lot of their food, energy and natural resources as they have little on their island.  So the weaker yen just made everything more expensive in Japan.  Which, of course, lowered GDP.  As those higher prices reduced the amount of buying their consumers could do.

Japan’s greatest problem is her aging population.  And they have just about the oldest population in the world.  As the youth have slammed the brakes on having children.  So you have massive waves of people leaving the workforce the government is supporting in retirement.  And fewer people entering the workforce to pay the taxes that support those retirees.  Which, of course, forces higher tax rates on those remaining in the workforce.  Further reducing the amount of buying their consumers can do.  And no amount of Abenomics can change that.

Abenomics did not deliver what the Keynesians thought it would.  Because Keynesian economics (aka demand-side economics) just doesn’t work.  If it did Japan never would have had a Lost Decade to begin with.  For it was Keynesian economics that gave Japan that asset price bubble in the first place.  Which burst and deflated into the Lost Decade.

What Japan needs is a return to classical economic principles.  Focusing more on the supply side.  Lower tax rates and reduce regulation.  Let the market set interest rates.  Restore the policies that introduced ‘Made in Japan’ to the world.  They need to make their capitalism more laissez-faire.  If they do they can create the kind of economic activity that just might be able to support the generation who created the ‘Made in Japan’ label in their retirement.  But you must have robust economic activity.  So robust that lower tax rates can produce greater tax revenue.  The supply-side economics way.

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Nanny States emasculate the People and Screw and Frighten Retirees

Posted by PITHOCRATES - December 22nd, 2013

Week in Review

This world isn’t what it used to be.  Everywhere people are looking for others to pay their way.  Or are so emasculated that living frightens them so that they run to government to parent them.  Forever.  What happened to those rugged men that entered the wilderness and built civilizations?  Who asked not for help.  All they wanted was to be left the hell alone.  Because they were men.  Rugged and fiercely independent.  Who filled their speech with obscenities whenever they talked about any form of government or nobility.  Because the government and noble classes were nothing but freeloaders looking for the good life they could force others to give them.

Today people have been so brainwashed by their government that they are incapable of doing anything without government helping them.  It’s a wonder that they can wipe their bottoms after a poop these days.  The growth of the nanny state has brought advanced economies to their knees around the world as the costs of their nanny states push them to the brink of bankruptcy.  And still the privileged/frightened people ask for more (see Business groups oppose ‘made in Ontario’ pension plan by Dana Flavelle Economy and Madhavi Acharya-Tom Yew posted 12/17/2013 on The Star).

Ontario’s plans to introduce its own mandatory pension plan could put the province at a competitive disadvantage, business groups warn

“It will add a huge competitive disadvantage to the businesses in the provinces that opt to go down that road,” said Dan Kelly, president of Canadian Federation of Independent Business.

But labour groups and retirees are applauding the province’s move to fill the void left by Ottawa’s decision not to enhance the Canada Pension Plan at this time…

Federal finance minister Jim Flaherty and junior minister of state for finance Kevin Sorenson rejected growing calls to expand CPP [Canada Pension Plan]contributions and benefits, saying now is not the right time to hit employers with higher payroll taxes…

Business groups said they welcomed Ottawa’s decision, noting CPP contributions are one of the two biggest payroll taxes they pay. The other is employment insurance premiums…

Few dispute that Canada’s pension system is no longer adequate to meet the needs of an aging population. People are living longer and saving less, while fewer private-sector employers offer pension coverage at work, a trend that plagues many industrialized nations.

Why are people saving less?  Two reasons.  First, the more the government taxes away the less they can save.  Second, with the government making promises they can’t keep (we will take care of you in your retirement so instead of saving your money spend it) why should anyone save anything for their own retirement?

Of course labor groups (the privileged) and retirees (the frightened) applaud this.  Labor wants to give their members a better life than those outside their union.  And retirees are living so long into retirement they’re living beyond their contributions into the CPP.  And are all for a little generational theft to make up the shortfall.

The defined-benefit pension is a relic of another era.  It doesn’t work anymore.  If we would have kept having babies like we once did the Ponzi scheme may have kept working.  But we didn’t.  So the Ponzi scheme is collapsing.  As they all eventually do.  The rest of the private sector has gone to 401(k)s and other such retirement vehicles.  Where we put OUR money away for OUR retirement.  Where the government can’t get their dirty little fingers on it.  This is the future of retirement savings.  Because unlike defined-benefit pensions they are sustainable.

All government pension plans need to make such a change.  Because once they do the age of the population will not matter.  Because you are saving YOUR money for YOUR retirement.  Those retired and those within a decade or so of retirement need to be protected from the folly of government in their retirement.  But younger generations coming up need to provide for their own retirement.  Because we can’t keep raising taxes.  For all that does is send jobs from the First World to the Third World.  Good for the Third World.  But bad for the First World.  And retirees.

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Roosevelt, Wage and Price Controls, Fringe Benefits, Health Insurance, Pensions, Unions, Bankruptcy and Bethlehem Steel

Posted by PITHOCRATES - September 3rd, 2013

History 101

(Originally published November 20th, 2012)

The Roosevelt Administration fought Inflation by Passing a Law to Cap Employee Wages

Most times when those in government try to fix things they end up making things worse.  Giving us the unintended consequences of their best intentions.  And the government had some good intentions during World War II.  They were printing money to pay for a surge in government spending to pay for war production.  As well as a host of New Deal programs.  Which sparked off some inflation.  Inflation is bad.  Enter their best intentions.

One of the biggest drivers of inflation is wages.  Higher wages increase a company’s costs.  Which they must recover in their selling prices.  So higher wages lead to higher prices.  Higher prices increase the cost of living.  Making it more difficult for workers to get by without a pay raise.  Which puts pressure on employers to raise wages.  If they do they pass on these higher costs to their customers via higher prices.  It’s a vicious cycle.  And one all governments want to avoid.  Because higher costs reduce economic activity.  And that’s how governments get their money.  Taxing economic activity.

Enter wage and price controls.  The Roosevelt administration thought the way to solve the problem of inflation was simply passing a law to cap employee wages.  To halt the vicious cycle of escalating prices and wages.  Something employers didn’t like.  For that’s how they got the best people to work for them.  By offering them higher wages.  With that no longer an option what did these employers do to get the best people to work for them?  They started offering fringe benefits.  Which became a killer of business.

As People lived longer in Retirement Retiree Pension and Health Care Expenses Soared

Employers began offering health insurance and pensions as fringe benefits for the first time.  To get around the wage and price controls of the Roosevelt administration.  Which they had to pass on to their customers via higher prices.  So the wage and price controls failed to do what they were supposed to do.  Keep a company’s costs down.  Worse, these benefits made promises many of these businesses just couldn’t keep.

Roosevelt also empowered unions.   Who would negotiate ever more generous contracts.  By demanding generous pay and benefits for current workers.  And pensions and health care for retired workers.  But it didn’t end there.  The unions also expanded their membership as much as possible.  So in those contracts they also got very costly workplace rules.  If a lamp burnt out at a workstation the worker had to call an electrician to replace the lamp.  They could not screw in a new lamp themselves.  The unions defined every work activity in a workplace and created a job classification for it.  And only a worker in that job classification could do that work.  Which swelled the labor rolls at unionized plants.  Who all were receiving generous pay and benefits.  As were a growing number of retired workers.  Greatly increasing labor costs.

For awhile businesses could absorb these costs.  Business was growing.  As was the population.  There were more younger workers entering the factories than there were older workers retiring from them.  But things started changing in the Sixties.  The population growth rate flattened out thanks to birth control and abortion.  So as the population grew slower the domestic demand for manufactured goods fell.  While in the Seventies foreign competition increased.  So you had falling demand and a rising supply.  Making it harder to pass on those high labor costs anymore.  Which proved to be a great problem as their market share fell.  For as they laid off employees fewer and fewer workers were paying the pensions and health care costs for an ever growing number of retirees.  Pensions were chronically underfunded.  Worse, people began to live longer in retirement thanks to advances in medicine.  Increasing retiree pension and health care expenses for these businesses.  Bleeding some of them dry.

Bethlehem Steel filed Bankruptcy when they had 11,500 Active Workers and 120,000 Retirees and Dependents

Bethlehem Steel helped build America.  And win World War II.  It made the steel for the Golden Gate Bridge.  And the bridges between New York and New Jersey.  Many of the skyscrapers you see on Manhattan are made with Bethlehem steel.  Little Steel.  Second only to Big Steel.  U.S. Steel.  Big Steel and Little Steel dominated the US steel industry.  Until, that is, foreign competition entered their market.  And the steel minimills arrived on the scene.  Neither of which had unionized workforces.  Or those legacy costs (retiree pension and health care expenses).  Which spelled the doom of the sprawling Bethlehem Steel.  From 1954 to 2003 hot-rolled steel sheet prices rose 220%.  While wages soared over 900%.  And it got worse.

Employment peaked in 1957 at 167,000 workers.  By the mid Eighties that fell to 35,000.  With some 70,000 retirees and dependents.  That is, Bethlehem’s retiree costs were about twice their active labor costs.  As business continued to fall employment fell to 11,500.  While their retirees and dependents rose to 120,000.  Just over 10 retirees for each active worker.  Unfunded pension obligations soared to $4.3 billion.  Just impossible numbers to recover from.  Which is why Bethlehem Steel is no longer with us today.  The company was dissolved in 2001.  With International Steel Group (ISG) buying some of their remaining assets.  Then, in 2005, a foreign steel company, Mittal Steel, merged with ISG.  Leaving no remnants of Bethlehem Steel in American hands.

ISG got the steelworkers union to reduce the number of job classifications in the Bethlehem plants they took over from 32 to 5.  Greatly shrinking the labor rolls.  And increasing efficiency.  Helping these remaining assets to move forward.  The pension fund was taken over.  With retirees losing only about $700 million, giving retirees a pension of up to $44,386.  But retirees lost their health care.  Some $3.1 billion in spending obligations that the company couldn’t pay.  And didn’t.  A sad ending for an American great.  A failure the Roosevelt administration was responsible for.  As their good intentions resulted in unintended consequences.  Setting businesses up to fail with costly fringe benefits.  Adding yet another demand to the union’s list of demands.  Spending obligations these businesses couldn’t pay once domestic demand fell while steel supplies rose.  Leading to the inevitable.  Bankruptcy of large unionized companies.

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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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Email and Electronic Bill Paying as well as Retiree Benefits are Bankrupting the U.S. Postal Service

Posted by PITHOCRATES - February 10th, 2013

Week in Review

The United States is not the only country having trouble with their postal service.  Email and electronic bill paying have taken away a huge source of revenue for the postal service in the US.  As well as in the UK (see Post Office will shut one in five branches after ‘losing £40m a year’ by Anna Edwards posted 2/7/2013 pm the Daily Mail).

The Post Office said they were losing £40 million [$63 million US] a year, so it was seeking retail partners for 70 branches, enabling them to stay in their current locations…

CWU general secretary Billy Hayes said the announcement was a ‘huge blow’ to the Post Office network, saying: ‘Staff will be in shock at the scale of what will effectively be the closures of Crown post offices across the country.

‘This move will have a huge impact on the high streets of small towns earmarked to lose their Crown post office.

‘These offices provide a dedicated specialist service to communities which will not be replicated by a window or two in a bigger shop…

‘It leaves huge questions about the future of the Post Office – how can it realistically deliver services for passport applications, identity services and a range of financial services while being dramatically pruned back? What does it mean for Metropolitan Police plans to move into London post offices?’

Robert Hammond, of Consumer Focus, said: ‘The Post Office network must change if it is to be sustainable.

‘These changes to Crown post offices are part of the biggest-ever programme of change to the network and consumers will want to see Post Office services that are high-quality and accessible, and offer the products and services they need. This is more important than the issue of who operates the post office itself.

People are using Royal Mail less in the UK.  So to save the postal service the UK is taking drastic action.  Basically privatizing as much of it as they can.  By partnering with other retail outlets that can cut the overhead cost of standalone post offices.  Some people may not be happy about these developments.  But it’s their own fault for using email.  And paying their bills online.  If they want to keep the postal service this may be their only chance.  Something the Americans should consider.  Based on the money they’re losing (see Postal Service loses less, but still in trouble by Jennifer Liberto posted 2/8/2013 on CNN Money).

In the three months ended Dec. 31, the agency lost $1.3 billion — considerably less than the $3.3 billion lost in the year-earlier period.

The service was hurt as the volume of first-class mail, which most consumers use to pay bills and stay in touch, decreased by 4.5.%, said USPS chief financial officer Joseph Corbett. But it got help as shipping and package volume for the busy holiday season increased 4% compared to the prior year.

Still, the service is in trouble. The key culprit remains a 2006 congressional mandate, under which it has to pre-fund healthcare benefits for future retirees. The USPS has been borrowing billions of dollars from taxpayers to make up for the shortfalls…

The Postal Service on Wednesday unveiled a plan to end Saturday delivery of mail, a move which is expected to save $2 billion a year, a drop in the bucket compared to the $16 billion loss the organization reported for 2012.

The US has about 5-times the population of the UK.  So if we multiplied their losses (in US dollars) by 5 it comes to $316 million.  A far cry from the $16 BILLION lost in 2012.  The U.S. Postal Service has a far greater crisis on its hands than the Royal Mail.  And it goes to that unfunded retiree health care plan that the U.S. government is now forcing them to fund.  Compounding the problem of email and electronic bill paying.

Employers who provide retiree pensions and health care benefits are supposed to put money aside for their current workers’ retirement.  In accounting terminology, this retirement expense should be expensed on the income statement (lowering profits) with a credit going to the balance sheet to show the money owed.  A liability.  When a person retires and starts incurring retirement costs the employer pays for these and debits that liability account.  Reducing it.  And credits a cash account.  Reducing it.  When an employer pays a retiree it should be entirely a balance sheet transaction.  Completely off the income statement.  With no impact on profitability.  This payment should reduce their cash balances.  As well as their liability account for retirees.  For as they pay their retirees it reduces what they owe their retirees.

The U.S. Postal Service didn’t do this.  They simply paid and expensed these retirement benefits as they incurred them.  Greatly understating their retirees’ costs.  And overstating their profitability.  Leaving a massive unfunded retiree health care liability.  Funding this massive unfunded liability is bankrupting the U.S. Postal Service.  Or rather these massive retiree costs they were hiding off the books are now bankrupting the U.S. Postal Service.  Unions want to go back to NOT funding these retirement costs.  And have the U.S. taxpayer bail them out.  Just like they bailed out the UAW retirement plans when GM and Chrysler went bankrupt.

The U.S. needs not only to privatize portions of the U.S. Postal Service like the UK they also need to privatize pensions and health care plans.  Like most businesses have.  Give employees money to put away for their own retirement needs.  For the old ways just don’t work anymore.

Funny how progressives hate all of the other old ways.  Like thrift, going to church, waiting until marriage before having sex, etc.  But pensions?  Retiree health care benefits?  No, when it comes to these things they’re all for going back to the Fifties.

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Trend Analysis GM and Toyota 2005—2008

Posted by PITHOCRATES - January 29th, 2013

History 101

GM’s Problems were caused by Franklin Delano Roosevelt and his Ceiling on Wages

The GM bailout is still controversial.  It was part of the 2012 campaign.  It was why we should reelect President Obama.  Because Osama bin Laden was dead.  And General Motors was alive.  But the bailout didn’t fix what was wrong with GM.  Why it went bankrupt in the first place.  The prevailing market price for cars was below their costs.  And what was driving their costs so high?  It was labor.  It was the UAW wage and benefit package that made it impossible for GM to sell a car profitably.

GM’s problems go back to Franklin Delano Roosevelt.  The country was suffering in the Great Depression with double-digit unemployment.  He wanted to get businesses to hire people.  To reduce unemployment.  And pull us out of the Great Depression.  So how do you get businesses to hire more people?  Hmmm, he thought.  Pay people less so businesses have more money to hire more people.  It was brilliant.  So FDR imposed a ceiling on wages.  Why did FDR do this?  Because he was from a rich family who didn’t understand business or basic economics.

Of course there was one major drawback to this.  How do you get the best talent to work for you if you can’t pay top dollar?  Normally the best talent can go to whoever pays the most.  But if everyone pays the same by law you might as well work at the place closest to your house.  Or across from the best bars.  No, if a business wanted the best workers they had to figure out how to get them to drive across town in rush hour traffic and sit in that traffic on the way home.  A real pain in the you-know-what.  So how to get workers to do that if you can’t pay them more?  You give them benefits.

Toyota doesn’t have the Legacy Costs that Bankrupted an Uncompetitive GM

And this was, is, the root of GM’s problems.  Those generous pension and health care benefits.  Things we once took care of ourselves.  Before our employers started providing these.  And the UAW really put the screws to GM.  Getting great pay, benefits and workplace rules.  For both active workers.  And retirees.  Even laid-off workers.  Such as the job bank.  Where GM paid workers who had no work to do.  It’s benefits like this that have bankrupted GM.  Especially the pensions and health care costs for retired workers.  Who outnumbered active workers.  Those people actually assembling the cars they sell.

It’s these legacy costs that have made GM uncompetitive.  Toyota, for example, didn’t suffer the FDR problem.  So their costs for retired workers don’t exceed their costs for active workers.  In fact let’s compare GM and Toyota for the four years just before GM’s government bailout (2005-2008).  We pulled financial numbers from their annual reports (see GM 2005 & 2006, GM 2007 & 2008, Toyota 2005 & 2006 and Toyota 2007 & 2008).  We’ve used some standard ratios and plotted some resulting trends.  Note that this is a crude analysis that provides a general overview of the information in their annual reports.  A proper analysis is far more involved and you should not construe that the following is an appropriate way to analyze financial statements.  We believe these results show general trends.  But we offer no investment advice or endorsements.

GM Toyota Current Ratio

We get the current ration by dividing current assets by current liabilities.  These are the assets/liabilities that will become cash or will have to be paid with cash within 12 months.  If this ratio is 1 it means current assets equals current liabilities.  Meaning that a business will have just enough cash to meet their cash needs in the next 12 months.  If the number is greater than 1 a business will have even a little extra cash.  If the number is less than 1 a business is in trouble.  As they won’t have the cash to meet their cash needs in the next 12 months.  Unless they borrow cash.  Toyota’s current ratio fell slightly during these 4 years but always remained above 1.  Falling as low as 1.01.  Whereas GM’s current ratio was never above 1 during these 4 years.  And only got worse after 2006.  Showing GM’s financial crash in 2008.

The GM Bailout did not address the Cause of their Bankruptcy—UAW Pensions and Health Care Benefits

There are two basic ways to finance a business.  With debt.  And equity.  Equity comes from outside investors (when a business issues new stock).  Or from profitable business operations.  Which typically accounts for the majority of equity.  Profitable business operations are the whole point of running a business.  And it’s what raises stock prices.  To see which is providing the financing of a business (debt or equity) we calculate the debt ratio.  We do this by dividing total liabilities by total assets.  If this number equals 1 then total assets equal total liabilities.  Meaning that 100% of a business’ assets are financed with debt.  And 0% with equity.  Lenders do not like seeing this.  And will be very reluctant to loan money to you if your business operations cannot generate enough profits to build up some equity.  And that was the problem GM had.  Their business operations could not generate any profits.  So GM had to keep borrowing.

GM Toyota Debt Ratio

GM went from bad to worse after 2005.  Their debt ratio went from 1.02 in 2006.  To 1.24 in 2007.  And to 1.94 in 2008.  Indicating massive borrowings to offset massive operating losses.   And how big were those losses?  They lost $17.806 billion in 2005.  $5.823 billion in 2006.  $4.309 billion in 2007.  And in the year of their crash (2008) they lost $21.284 billion.  Meanwhile Toyota kept their debt ratio fluctuating between 0.61 and 0.62.  Very respectable.  And where lenders like to see it.  As they will be more willing to loan money to a company that can generate almost half of their financing needs from profitable business operations.  So why can’t GM?  Because of those legacy costs.  Which increases their cost of sales.

GM Toyota Cost of Sales

GM’s cost of sales was close to 100% of automotive sales revenue these 4 years.  Even exceeding 100% in 2008.  And it’s this cost of sales that sent GM into bankruptcy.  Toyota’s was close to 80% through these 4 years.  Leaving about 20% of sales to pay their other costs.  Like selling, general and administrative (S,G&A).  Whereas GM was already losing money before they started paying these expenses.  Thanks to generous UAW pay and benefit packages.  The job bank.  And the even greater costs of pensions and health care for their retirees.  It’s not CEO compensation that bankrupted GM.  It was the UAW.  As CEO compensation comes out of S,G&A.  Which was less than 10% of sales in 2007 and 2008.  Which was even less than Toyota’s.

GM Toyota S G and A

GM’s costs kept rising.  But they couldn’t pass it on to the consumer.  For if they did the people would just buy a less expensive Toyota.  So GM kept building cars even though they couldn’t sell them competitively.  And sold them at steep discounts.  Just to make room for more new cars.  So the UAW could keep building cars.  Incurring massive losses.  Hoping they could make it up in volume.  But that volume never came.

GM Toyota Automotive Sales as percent of 2005

Toyota continued to increase sales revenue year after year.  But GM’s sales grew at a flatter rate.  Even falling in 2008.  It was just too much.  GM was such a train wreck that it would have required a massive reorganization in a bankruptcy.  Specifically dealing with the uncompetitive UAW labor.  Especially those pensions and health care benefits for retirees.  Which the government bailout did not address.  At all.  The white collar workforce lost their pensions.  But not the UAW.  In fact, the government bailout went to bolster those pension and health care plans.  So the underlying problems are still there.  And another bankruptcy is likely around the corner.

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Public School Teachers and Public Sector Workers have Secret Millionaire Retirements

Posted by PITHOCRATES - January 6th, 2013

Week in Review

President Obama stood firm during the fiscal cliff debate to raise taxes on the millionaires and billionaires.  To get those who can afford it to pay a little more.  The visible millionaires.  To help pay for the secret millionaires.  Public school teachers.  And public sector employees (see Millionaires, Billionaires, and Teachers by Randall Hoven posted 12/10/2012 on American Thinker).

Our President likes to use the phrase “millionaires and billionaires.” A person whose net worth is $1 million or more is a “millionaire.”

Most of us working stiffs have trouble thinking in terms of net worth; we are more used to the concept of annual salary. How does net worth translate into annual income, or vice versa? In round numbers, the annual income equivalent is 4% of an investment nest egg. So if you have $1 million socked away, consider that to be equal to $40,000 income every year…

That relationship can be turned around: if you have an annual pension of $40,000, you are effectively a millionaire, especially if that pension is adjusted for cost of living…

Now let’s look at public school teachers. In Illinois, where I live, the Illinois State Board of Education puts out a report on teachers’ salaries. The table below is a pretty good summary of that 110-page report. A beginning teacher with a Bachelor’s degree in a median school district might make about $40,000 per year. But by the time a teacher retires, she could be making $55,000 to $120,000, depending on how much graduate education she got and her school district.

And when that teacher does retire, what is her pension? If most school districts are like Chicago’s, the teacher will make about 50% of her final salary if she retires at age 55, or 75%, the maximum, if she waits until age 59…

In short, a lot of retired Illinois teachers are millionaires.

But that’s not all. Teachers who retired from the Chicago school district get 60% of their health insurance premiums subsidized. In round numbers, let’s call that a value of $8,000 per year.

Also, the above values do not include any other savings or investments made over the teachers’ careers, including home values. If they have their own 401k’s in addition to their pensions, those were not included. Social Security was not included either.

Wait, there’s more. These pensions are for life. Many or most of them are also adjusted for cost of living. Every month, for the rest of their lives, retired teachers get checks or automatic deposits of a reliable amount, indexed for inflation and guaranteed by the government. They don’t have to worry about investment risks…

The situation of the retired public school teacher is also not that much different from fire fighters, policemen, postal workers and other public employees. Nor is it that much different from a lot of other retired workers, especially union members such as General Motors retirees. If such people are getting pensions and benefits of $40,000 per year or more, not an exceptional amount, they are millionaires…

The main reason the US Post Office, the federal government and many state and local governments face unsustainable debt, bankruptcy and default is due to the costs of public employee pensions. GM went bankrupt largely due to the costs of its retirees’ pensions and benefits.

Businesses go bankrupt, governments face default and economic growth slows to a near standstill. Meanwhile, retired public school teachers, who had to work 9 months of the year during their careers, now pull in checks 12 months a year, indexed for inflation and guaranteed by the government, in amounts that often make them millionaires, maybe twice over.

So public school teachers, fire fighters, police officers, postal workers and other public employees are not the same as people who work in the private sector.  For when people retire from middle class jobs in the private sector they don’t live a long retirement like a millionaire.  They live a shorter life in retirement worrying that they may outlive their retirement savings.  Or that some illness may wipe out their retirement savings.  Forcing them to return to work in the last remaining years of their life.  Something school teachers, fire fighters, police officers, postal workers and other public employees don’t have to worry about.  As long as they can maintain a privileged class in America.  An American aristocracy, if you will.  The thing we fought the Revolutionary War to put an end to in the New World.  Old World aristocracy.

Not everyone can live like this.  For there just isn’t enough taxpayer income to tax away to pay for everyone.  Which is why the aristocracy is a privileged class.  In a ‘classless’ America.  A class that attacks rich people to pay their fair share.  So they can enjoy their millionaire retirements.  Without having the talent or ability of an entrepreneur.  The investment savvy of a Mitt Romney.  Or simply not having been lucky enough to be born into an aristocratic family.  Like a Kennedy.

And if you think these millionaire retirees have earned their good life like an entrepreneur, consider how hard they have to work for their Masters Degree.

You might notice from the table of teacher salaries that a Masters Degree with extra graduate hours can add $20,000 or more to a teacher’s annual salary. Just for fun I want to show you two course descriptions. The first one happens to describe an engineering course I teach which is for undergraduates, required of all engineering students and generally taken in a student’s 2nd or 3rd year of college.

 Engineering Mathematics: The Laplace transform and applications; series solutions of differential equations, Bessel´s equation, Legendre´s equation, special functions; matrices, eigenvalues, and eigenfunctions; vector analysis and applications; boundary value problems and spectral representations; Fourier series and Fourier integrals; solution of partial differential equations of mathematical physics.

This second course description is taken from the University of Missouri St. Louis bulletin. It describes a graduate level course in the Education school.

 The Educational Role of Play: Emphasizes play as a constructive process with applications to cognitive and social development. Special attention to facilitating play in early childhood classrooms.

Note that the first course description (the one with all of that math) was an undergraduate course.  While the second course description (all about having fun) is a graduate course in the school of education.  The person learning about fun in the classroom will live like a millionaire in their retirement.  While the odds are that the one that worked so hard to learn all of that math to help create the wonderful things in our high-tech economy will not.  Why?  Because brilliant engineers have to earn their retirement.  While the privilege class makes the engineers and other hard working Americans pay for their millionaire retirement.  Is that fair?  According to the Left, yes.

Worse, these are the people teaching our children.  This privileged class that exploits the taxpayer so they can live a longer and more comfortable retirement are teaching our kids the evils of capitalism.  To turn them into Democrat voters.  So they vote for the party that attacks those who earn their wealth.  To make them pay their fair share.  So these teachers and public sector workers can continue to live their millionaire retirements.  While most of their student’s parents struggle in their own lives because they’re paying so much in taxes to support the better lives of their children’s teachers.

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AARP’s Endorsement of Obamacare puts pressure on Social Security Benefits

Posted by PITHOCRATES - December 29th, 2012

Week in Review

AARP endorsed and helped pass Obamacare into law.  In exchange for an exemption from the very law they supported so they can sell their “Medigap” insurance policies easier than their competitor Medicare Advantage could sell theirs (see AARP latest to receive Obamacare break by Matthew Boyle posted 5/19/2011 on The Daily Caller).  Good for AARP.  But not for the senior citizens they represent.  For Obamacare will lower the quality of US health care.  And increase health care costs.  Especially for seniors.  So whenever AARP starts quoting Ronald Reagan one should be suspect as they are no friend of Ronald Reagan.  For Ronald Reagan would not have approved of what AARP did to help pass Obamacare into law.  Even if he and Tip O’Neill worked together to pull Social Security back from the brink of insolvency (see Ronald Reagan’s 9 Wisest Words About Social Security by Alejandra Owens posted 12/19/2012 on AARP).

That legislation, negotiated by President Reagan and Democratic House Speaker Tip O’Neill, focused on what was needed protect Social Security for the long term. Reagan understood that Social Security is a separately funded program unrelated to problems in the rest of the budget, and he clearly stated that: “Social Security has nothing to do with the deficit.”

Indeed, today the Social Security trust funds hold $2.8 trillion in government bonds. These reserves have been built up with the contributions that workers and employers have paid into the system for the dedicated purpose of paying Social Security benefits. These funds are held in legally established trusts and cannot be used for any purpose other than paying benefits. According to the latest Trustees’ report, Social Security can pay full benefits through 2033, and roughly 75 percent of benefits beyond that time.

The Social Security Trust Fund?  There’s no trust fund.  The government raided it long ago and replaced it with IOUs.  Government bonds.  Current Social Security taxes go to pay for current benefits.  There is no pile of cash earning interest anywhere.  No personalized savings accounts for individual Social Security contributors.  If there were then there would be no Social Security crisis.  No, that money is gone.  Spent by the government to fund their current spending obligations.  Which are so great that even by raiding the Social Security Trust Fund they still can’t find enough cash to prevent a deficit.

The government spends our Social Security contributions for every other purpose they want to other than paying our benefits.  They just launder the money first through the Treasury Department.  Exchange IOUs (i.e., government bonds) for that cash.  Then they go and spend that cash.  And when it comes time to redeem those government bonds they’ll probably just print money.  Inflating the money supply.  And depreciate the dollar.  Making it ever harder for a senior to live on their retirement savings.  And because of what AARP did to help pass Obamacare into law there will even be less money available for Social Security benefits.  Requiring more printing of money.  And more devaluing of the dollar.  Making life a living hell for the retirees they supposedly represent.  At least according to that article in The Daily Caller.

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Roosevelt, Wage and Price Controls, Fringe Benefits, Health Insurance, Pensions, Unions, Bankruptcy and Bethlehem Steel

Posted by PITHOCRATES - November 20th, 2012

History 101

The Roosevelt Administration fought Inflation by Passing a Law to Cap Employee Wages

Most times when those in government try to fix things they end up making things worse.  Giving us the unintended consequences of their best intentions.  And the government had some good intentions during World War II.  They were printing money to pay for a surge in government spending to pay for war production.  As well as a host of New Deal programs.  Which sparked off some inflation.  Inflation is bad.  Enter their best intentions.

One of the biggest drivers of inflation is wages.  Higher wages increase a company’s costs.  Which they must recover in their selling prices.  So higher wages lead to higher prices.  Higher prices increase the cost of living.  Making it more difficult for workers to get by without a pay raise.  Which puts pressure on employers to raise wages.  If they do they pass on these higher costs to their customers via higher prices.  It’s a vicious cycle.  And one all governments want to avoid.  Because higher costs reduce economic activity.  And that’s how governments get their money.  Taxing economic activity.

Enter wage and price controls.  The Roosevelt administration thought the way to solve the problem of inflation was simply passing a law to cap employee wages.  To halt the vicious cycle of escalating prices and wages.  Something employers didn’t like.  For that’s how they got the best people to work for them.  By offering them higher wages.  With that no longer an option what did these employers do to get the best people to work for them?  They started offering fringe benefits.  Which became a killer of business.

As People lived longer in Retirement Retiree Pension and Health Care Expenses Soared

Employers began offering health insurance and pensions as fringe benefits for the first time.  To get around the wage and price controls of the Roosevelt administration.  Which they had to pass on to their customers via higher prices.  So the wage and price controls failed to do what they were supposed to do.  Keep a company’s costs down.  Worse, these benefits made promises many of these businesses just couldn’t keep.

Roosevelt also empowered unions.   Who would negotiate ever more generous contracts.  By demanding generous pay and benefits for current workers.  And pensions and health care for retired workers.  But it didn’t end there.  The unions also expanded their membership as much as possible.  So in those contracts they also got very costly workplace rules.  If a lamp burnt out at a workstation the worker had to call an electrician to replace the lamp.  They could not screw in a new lamp themselves.  The unions defined every work activity in a workplace and created a job classification for it.  And only a worker in that job classification could do that work.  Which swelled the labor rolls at unionized plants.  Who all were receiving generous pay and benefits.  As were a growing number of retired workers.  Greatly increasing labor costs.

For awhile businesses could absorb these costs.  Business was growing.  As was the population.  There were more younger workers entering the factories than there were older workers retiring from them.  But things started changing in the Sixties.  The population growth rate flattened out thanks to birth control and abortion.  So as the population grew slower the domestic demand for manufactured goods fell.  While in the Seventies foreign competition increased.  So you had falling demand and a rising supply.  Making it harder to pass on those high labor costs anymore.  Which proved to be a great problem as their market share fell.  For as they laid off employees fewer and fewer workers were paying the pensions and health care costs for an ever growing number of retirees.  Pensions were chronically underfunded.  Worse, people began to live longer in retirement thanks to advances in medicine.  Increasing retiree pension and health care expenses for these businesses.  Bleeding some of them dry.

Bethlehem Steel filed Bankruptcy when they had 11,500 Active Workers and 120,000 Retirees and Dependents

Bethlehem Steel helped build America.  And win World War II.  It made the steel for the Golden Gate Bridge.  And the bridges between New York and New Jersey.  Many of the skyscrapers you see on Manhattan are made with Bethlehem steel.  Little Steel.  Second only to Big Steel.  U.S. Steel.  Big Steel and Little Steel dominated the US steel industry.  Until, that is, foreign competition entered their market.  And the steel minimills arrived on the scene.  Neither of which had unionized workforces.  Or those legacy costs (retiree pension and health care expenses).  Which spelled the doom of the sprawling Bethlehem Steel.  From 1954 to 2003 hot-rolled steel sheet prices rose 220%.  While wages soared over 900%.  And it got worse.

Employment peaked in 1957 at 167,000 workers.  By the mid Eighties that fell to 35,000.  With some 70,000 retirees and dependents.  That is, Bethlehem’s retiree costs were about twice their active labor costs.  As business continued to fall employment fell to 11,500.  While their retirees and dependents rose to 120,000.  Just over 10 retirees for each active worker.  Unfunded pension obligations soared to $4.3 billion.  Just impossible numbers to recover from.  Which is why Bethlehem Steel is no longer with us today.  The company was dissolved in 2001.  With International Steel Group (ISG) buying some of their remaining assets.  Then, in 2005, a foreign steel company, Mittal Steel, merged with ISG.  Leaving no remnants of Bethlehem Steel in American hands.

ISG got the steelworkers union to reduce the number of job classifications in the Bethlehem plants they took over from 32 to 5.  Greatly shrinking the labor rolls.  And increasing efficiency.  Helping these remaining assets to move forward.  The pension fund was taken over.  With retirees losing only about $700 million, giving retirees a pension of up to $44,386.  But retirees lost their health care.  Some $3.1 billion in spending obligations that the company couldn’t pay.  And didn’t.  A sad ending for an American great.  A failure the Roosevelt administration was responsible for.  As their good intentions resulted in unintended consequences.  Setting businesses up to fail with costly fringe benefits.  Adding yet another demand to the union’s list of demands.  Spending obligations these businesses couldn’t pay once domestic demand fell while steel supplies rose.  Leading to the inevitable.  Bankruptcy of large unionized companies.

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Labor Costs

Posted by PITHOCRATES - November 19th, 2012

Economics 101

Small Business Owners may have Nicer Homes but Chances are they are Mortgaged to the Hilt

A lot of people think business owners are cheapskates.  Greedy bastards.  Who hate their employees.  And try to pay them as little as possible.  Not for any business reasons.  But just because they are so greedy.  And hateful.  During bad economic times when the employer has to make some cuts labor leaders will tell the rank and file don’t believe the employer.  “Just look at the house the boss lives in.  And the house you live in.  Whose is better?  Bigger?  That’s right.  The boss’ house is.  Always remember that.”

Yes, bosses may have nicer homes.  But chances are they are mortgaged to the hilt.  Not to mention the fact that these bosses may be working an 80-hour week.  Which is not uncommon for a small business owner.  Especially during bad economic times.  As they may be negotiating with creditors, their banker, their vendors, keeping their customers happy and trying to find new customers.  While the rank and file work their 40 hours, collect their paychecks and enjoy their free time.

So it’s not easy being the boss.  That’s why so few people want to be the boss.  For it’s easier being an employee.  You work.  You get paid.  And you leave work at work.  Even if you think you’re not being paid as much as you deserve to be.  Something most employees feel.  That they’re overworked.  And underpaid.  But they never look at things through their employer’s eyes.  And see what they really cost their boss.

Most Businesses have gone from a Defined Benefit Pension Plan to a Defined Contribution 401(k)

What an employee gets paid and what an employer pays for that employee are two different things.  To begin with an employer pays for more hours of an employee’s time than he or she actually works.  When you factor in vacation time, holidays and sick days an employer may pay for 2,080 hours while the employee only works 1,896 hours.  If an employee makes $35 an hour those nonworking hours can add up to $6,440.  Which an employee gets for doing nothing.  We call them fringe benefits.  Just an employer’s way of saying, “Hey, I don’t hate you.  Here’s some money for doing nothing.”

Why do they pay this?  Because of free market capitalism.  If they don’t pay it someone else may.  And attract their good workers away from them.  Because if there is something employees will do is jump ship the moment they get a better offer.  Which is a good thing.  This is supply and demand.  And despite workers feeling overworked and underpaid this free market dynamic makes sure employees get paid as much as they can while helping employers pay as little as they can.  That equilibrium point where employees will keep working.  While leaving employers still competitive.  Though that’s getting harder and harder to do these days.  As the cost of doing business has never been higher.

In addition to these fringe benefits there are also health insurance, life insurance and retirement contributions.  With health care often being the greatest single employee cost to a small business owner.  Which is why most now make employees pay a small portion of their health care these days.  Retirement contributions have also gotten very costly.  Few people still have a defined benefit pension plan these days.  Typically an owner will offer a defined contribution 401(k) for the employee to contribute to.  And if times are good the employer may match their contribution up to a certain amount.  But employers will call this a discretionary contribution.  And it will be one of the first things to go when they are having cash flow problems in a bad economy.

The Last Thing a Business Owner needs while trying to Deal with Soaring Labor Costs are more Costs and Taxes

In addition to fringe benefits there are payroll taxes and insurances.  Such as Social Security.  Which the employer and employee split.  At least in theory.  The employer currently pays 6.2% on the first $110,100 in an employee’s earnings.  The employee kicks in 4.2% (which may go up another 2 points after the fiscal cliff, as that tax cut expires).  In reality the employee doesn’t pay any of this.  They get their check and go on their way while the employer has to find the cash to pay the 10.4% due.  For an employee earning $66,360 that Social Security tax payable comes to $7,571.  Another big check the owner has to write is for state unemployment.  Which can be anywhere around $4,000.  The following chart summarizes these and additional labor costs (note: the retirement contribution is probably between a 401(k) matching contribution and a defined benefit pension contribution).

An employee with a pay rate of $35/hour will gross $66,360.  Deductions will lower actual take-home pay.  But the employer’s total cost for this employee in this example is $108,252.  Or an additional $41,892 than the employee grosses.  Which comes out to another $17.04 an hour.  Something the employee never sees.  This is why labor is so costly.  And why employers want to hire as few people as possible.  For each additional employee they hire (in this example) they have to pay an additional 22.2% in payroll taxes/insurances.  And an additional 41% in fringe benefits.  Or a combined 63.1%.  In addition to what they’re paying the employees for their actual work.

And this is why employers want to offload health care (especially for their retirees).  And their pension liabilities.  As they can add an additional 30% (or more) to their labor costs.  What started out as fringe benefits to attract some of the best workers is now bankrupting many companies.  People are living so long into their retirement that these cost are growing faster and larger than any other cost a business has.  And it’s also why small business owners are very worried about new regulations and taxes.  For the last thing they need while trying to deal with these soaring labor costs are more costs.  Or taxes.  Which doesn’t make them cheap or greedy.  It just makes them very cautious business owners who are trying to keep their businesses afloat in an ever more difficult business environment.

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