I’ve written the following to show where I think the economy is going and what we should do to improve our odds for success. I have great fears for the future of my children and grandchildren. I offer the only medicine I know to improve their lot as well as the way to save the jobs of police, firefighters, teachers and other really critical government jobs. This may appear to have political overtones, but the political observations apply to all those in public office, no matter what their party affiliation.
Common Sense Economics
I am not an economist and make no pretence about being able to quantify any long-term economic projections. Paraphrasing Milton Friedman’s comments about John Maynard Keynes, “I wish I could be as positive about anything as [economists] are about everything.”
Nevertheless, I’ve had a fair amount of economic “science” exposure having taken economics courses from Nobel Prize winners Robert Solo, Paul Samuelson and Franco Madigliani. Further, I attended lectures of Charles Kindleberger whom I admired the most because he was more practical than theoretical. He authored the Marshall Plan that rebuilt Europe after World War II. I’ve also had some exposure to government style economists as a consultant to the Washington State Governor and the federal government’s Departments of Commerce, Interior, Energy and Defense. On the more practical side of economics I’ve supervised Boeing’s economists and try to respond to personal economic questions using common sense such as “If you can’t afford it, don’t buy it,” “Always save for a rainy day,” and “Cut spending to the bone in bad times.”
So today I’d like to offer my common sense views of current government economics. Most public media don’t cover these things nor do the majority of economists who often have the bias of their employer, whether it be the government, a financial firm or a commercial company. All such “experts” must present a happy-face about consumer based growth and the national economy. They all want us to spend more to increase economic growth and thereby their own revenues whether taxes or product sales.
Never mind, think they, that personal savings are far too low to support the ever growing number of elderly people. Savings are the opposite of spending. You do one at the expense of the other. National savings rates are a disgrace and have been so for two decades at the expense of wild consumption. The loss of savings over those years means that workers would have to save more than 20% of their disposable income for the next two decades to make up for that loss. As if that weren’t bad enough, employers have largely abandoned pension plans in favor of under-used employer savings plans. Pensions were supposed to have been the third leg of the three-legged retirement stool with Social Security and savings providing the remaining two. Now it’s an unstable two legged stool except for most government employees who have Social Security, lavish pensions (often with cost-of-living-adjustments), savings plans and hard-to-beat medical insurance.
Now that I’ve brought it up, let’s look at health care for the rest of us. We are going to be adding at least 30 million more people to the insurance roles. We are promised annual exams and additional drug coverage. Insurers will no longer be able to put limits on maximum lifetime coverage or reject those with preexisting conditions. We are promised better insurance than most retirees who currently have little or no dental, hearing or eye care coverage under Medicare and Medigap policies. It’s obvious that all of these things have to increase government and personal expenses. Unable to see through the politicians’ rhetoric, many people believe they will see lower insurance cost growth and better medical care.
Common sense tells us they won’t. For older people like me, it’s getting very hard to find a doctor who will take Medicare patients. A Mayo Clinic in Arizona will no longer accept Medicare and has turned away about 3,000 of its regular patients. Further we’re likely to see emergency room costs soar as queues for appointments will be much longer. Instead of the uninsured using expensive emergency care services, there will be even larger numbers of “insured” that saturate emergency care services because they can’t get to see a doctor quickly.
That’s not to say that the government isn’t trying to reduce medical costs. By way of regulatory appointees, the government is going to specify the amount of administrative costs permissible for hospitals and medical facilities as well as what kind of care will be covered. Further, an important element of the new health-care legislation is going to continue to reduce the compensation of doctors, something that will exacerbate the already short-handed supply of general practitioners—and drive even more people to emergency care facilities.
Then there’s supposed to be great savings by instituting a national medical records data base so that medical care givers can get instant computer reports on previous patient care records. Consider though that many doctors still have hand-written records in folders for each patient that will need to be digitized.
Even more expensive will be the development of a common medical history data base and its support and upkeep. As an officer of one of the larger companies in the country, I have watched first-hand the futile attempts to get divisions within the same company to use a common data base. If it’s accomplished at all, it has to incorporate provisions for the most complex situations—few of which will apply to the majority of users. As if that isn’t problem enough, it’s extraordinarily difficult to get diverse software systems talking to each other. This project, though naively well meaning, will cost many, many times whatever are the current estimates of time and money.
OK, let’s change the subject to the matter of debts of all kinds facing our nation, debts that are growing at an incredibly fast rate as we add entitlements and well-intentioned government programs. These gain votes for politicians because we vote our own pocketbooks with little thought of the longer term. Some organizations like the Peterson Foundation and the providers of the “Debt Clock” ( www.usdebtclock.org) have tried to warn us about the pain our children and grand children will face as a consequence of our reckless spending. Unmindful of the warnings, within the past year we have added additional entitlements, all inflation adjusted, as well as government spending to stimulate people to spend more, not save.
Exclusive of the unfunded liabilities which the government does not report for Social Security, Medicare, Medicaid and government pensions, the federal government debt is over $13.6 trillion, or $122,000 per taxpayer, a number that’s increasing daily from more government spending, inflation-adjusted entitlements and an ever reduced number of taxpayers. Over 40% of those who submit 1040 tax returns pay no income taxes, and vast numbers get “refundable tax credits,” a euphemism for welfare payments.
Don’t stop there. We all live in states and local communities that incur their own debts. State and local governments liabilities add almost $39,000 per family, and that excludes their own unfunded liabilities. These state and local unfunded promises are hard to evaluate, but some analysts estimate about $3 trillion in addition to the $3 trillion that are reported. That unfunded liability adds another $39,000 per family. Virtually all states have constitutions that require balanced budgets. However, by heavy borrowing and assuming very high security returns, they have hidden the size of the future liabilities and continue to make impossible-to-keep pension and health-care benefit promises that will be left to future politicians to solve.
How about personal debts for mortgages, credit cards and consumer purchases? They total over $200,000 per family. We have yet to see the end of this when adjustable-rate-mortgages blow up as interest rates increase. Government is due much of the blame since it drove lenders to provide mortgages to those who couldn’t afford to own homes in another social-engineering ploy to get more people in home ownership, when many could not afford the mortgage payments much less home maintenance costs. Worse, these people now have reduced job opportunities because they are tied to job openings near their hard-to-sell homes.
That brings us to the biggest problem of all. It’s also one that’s hidden by the way the federal government keeps its books. Unlike non-government businesses, the feds don’t have to report the liabilities they incur from future promises for Social Security, Medicare, Medicaid and public pensions. This $111 trillion (That’s $111,000,000,000,000.) obligation is already approaching $1.4 million for every family in the U.S.! That’s right, read this sentence again!
The traditional way of coping with the national debt has been to increase inflation. Inflation does two things: It allows the government to pay down the debt with less valuable dollars, and it makes the debt look smaller in comparison to everything else. Now, inflation-adjusted entitlements are such a large part of the future that increasing inflation simply increases the amount of inflation-adjusted entitlements and therefore unfunded liabilities!
We are entering such an impossible-to-solve economics situation that civil unrest is a likely outcome. The government will have to do some ugly things, things that are opposed by all who vote their pocketbooks. We are going to need more than average inflation combined with reductions in inflation-adjusted entitlements. We are also going to need higher taxes in many different forms. Finally, the government is going to have to reduce spending, not in a small way, but in a forceful and arbitrary manner by cutting by large percentages of all elements of federal spending.
This is the kind of thing I experienced a number of times when we were facing bad economic conditions in our company. I’ll never forget what my boss said on one occasion: “Either we do this or the shareholders will replace us with someone with a green eyeshade and ice-water in his veins.” Everyone took large pay cuts, bonuses were eliminated, employment was cut in half, hiring stopped, travel was severely cut, buildings were sold, all perks were eliminated, communication equipment was returned and the remaining executives spent weeks delving deeply into what was really needed for each organization and how to do the work with fewer employees.
Similar things will have to be done in the public sector. There will be no more proclaiming that the police, firemen or teachers will be the first to go if voters reject additional taxes. This is a common ploy used universally by politicians at all levels of government. In industry, it’s called the “gold watch” strategy. Always tell the boss that the thing he wants most ( i.e., the gold watch) will be the first thing to be cut in any budget reduction. Experienced business managers know better. Politicians, particularly those without any long-term business experience, prefer to take the easy path using the gold watch strategy any time there is a budget problem. Unfortunately, the public unions favor increased spending-- as do confused voters. The way to quell the gold watch syndrome is to eliminate its proponent and insert someone who is willing to dig deep, particularly in the recesses of government administration, before getting to the gold watches.
It’s also time to bring the total of welfare programs to light and examine more carefully who should be eligible for what. Welfare recipients who don’t work often live better than those who do work. A group of us provide some assistance to people who only get welfare checks, but we’ve seen working people with far less than the welfare benefits of subsidized housing, free medical and dental care, child care, food stamps, telephone, cell phone, cable TV, cable internet, yard care, roof and exterior painting, etc.
So I come back to my old-fashioned, common sense economics: “If you can’t afford it, don’t buy it,” “Always save for a rainy day,” and “Cut spending to the bone in bad times.” Our government hasn’t done ANY of these things. They are pushing the problems on to our children and grandchildren. We will be the only generation in America that has left future generations far poorer than the present.
Even the Sage of Omaha, Warren Buffet, says that it will take some invention to bring us out of this. I don’t like to make plans based on some unknown invention—so I think it’s going to take the old-fashioned approach of cut spending and reduce debt. This applies to individuals as well if they expect to survive this mess.
Henry K. (Bud) Hebeler