The American Dilemma and How We Can Fix It

Posts tagged ‘national debt’

FOR THOSE WHO JUST DON’T GET IT (THOUGHTS ON THE LOTTERY)

I don’t anticipate a lot of “likes” on this post.  As I’ve said before, stories that appeal to our human side and are warm and fuzzy get the most people hitting that button not only on my blog but on others that I regularly read.  I understand that since I often make my “like” decisions based on whether I walk away smiling or thinking.

This is one of those “thinking” posts and it deals with one of the most banal of all subjects – economics.  I probably wouldn’t have even gotten your attention if I hadn’t changed the title to include a reference to the lottery.  But I promise to make this as painless as possible.

I have decided to use the explanation of how taxes affect productivity using the example of the lottery because for the many who have never run their own business this is an easy example for them to understand.

So what is a lottery?  If you have followed for some time you’ve probably heard my definition of it that for most Americans it is one of the two ways they view becoming wealthy.  The other one is filing a law suit.

The actual definition is “that it is a game of chance in which players pool their money which is then redistributed in a small number of large prizes after the promoters deduct their fees for operating the game.”  I think we all understand the concept.  It is nothing more or less than a scheme for wealth redistribution.

I am always bothered when I hear people say that they “invested” X number of dollars in a lottery drawing.  Sadly, this speaks to the extreme lack of financial education that most Americans share.  This is a “gamble” not an “investment” and I am in no way passing judgment on whether gambling is good, bad or indifferent.  I mean, after all, I live in Las Vegas.

So these are the economic realities of the lottery.  You buy a ticket for two dollars.  The operators (the inter-state Lottery System) immediately pocket one dollar to cover profit and operating expenses.  (Fifty percent of your money just disappeared when you completed your purchase).  The remaining dollar gets added to the prize pool.

Now that one remaining dollar “investment” is still working for you.  You have approximately a 1/175,000,000 chance of hitting the jackpot – although you might collect a smaller prize.

Fortunately for you, you were born under a lucky star and are one of the two winners of the grand prize.  You and the other winner both decide to accept the lump sum option of $384 Million which is split between you.  (Please note that this represents a 35% reduction from the advertised $587 Million amount you would have received if you took your prize as a 30 year annuity).

And now, of course, you owe taxes on your winnings to both the Federal government and, for most winners, to the state in which they reside.  So the gross amount of your prize of $192 Million each now shrinks by an additional 35% to become $125 Million.  Still, that’s more money than you had in your checking accounting the last time you balanced your bank statement so you’re a very happy camper and are probably debating which color you should choose for your new Ferrari.

If you opened a bank account with a deposit of $1,000 and got your statement at the end of the month and the bank had “charged” you $500 for opening the account, then an additional $175 for “maintenance fees” and then an additional $113.75 for “miscellaneous fees” leaving you with a balance of $211.25, you would probably be screaming at the top of your lungs that you were “ripped off” – and you would be correct.

If you do the math, of the total prize pool collected, the Federal, state governments and the Lottery wind up with well over 70% of the money that is “invested” – and the players with less than 30% of the money.  That is the economics of the lottery – but is actually not the main point of this post.

When you go to your grocery store to buy oatmeal and diapers, that store is operating on a margin of only 2 – 3 %.  So your twenty dollar purchase might net them a whopping $.60.  And yet grocery stores by rigorously controlling costs, minimizing theft and being able to negotiate favorable contracts with wholesalers are able to survive.

They struggle but they are still able to turn a profit – which is a good thing for us because if they didn’t there would be no place for us to purchase oatmeal and diapers.  Of course, they don’t pay their employees extravagant wages because if they did they would be out of business.

I wrote the last two paragraphs because of the picketing which took place during the Thanksgiving weekend at Walmart for paying its employees “low wages” and offering “minimal benefits.”  They really don’t have much choice in the matter based on the economics of their business.  Just for disclosure, I have no axe to grind regarding Walmart as I don’t own stock in the company and almost never shop there.

On the other hand, government doesn’t have that problem.  When you consider that the lottery nets them collectively 70% of the gross revenue it generates, they can well afford to pay their employees (our employees) beaucoup bucks – and they do.  When you’re swimming in cash you can afford to be careless with it – and we have been to the tune of some $16 Trillion.  And yet, that still is not the point of this post.

But we have now arrived.

At the heart of the deadlock on the fiscal cliff is the question of raising taxes on “the rich.”  Warren Buffett recently offered a suggestion that we should consider “the rich” as a family which earns $500,000 per year rather than the $250,000 that President Obama made a campaign theme.  Those earning that or more would see an increase in the percentage of Federal Income Tax that they paid.

The Republican House has been adamant, so far, in its position that there shouldn’t be any tax increases on the “most productive members and the job creators” in our society because this will undermine our economic recovery.  (This is commonly described as “trickle down economics”).  Of course, this notion is pooh-poohed by their opponents in this debate.

So let’s get back to the lottery as a frame of reference to investigate the “fallacy” of this theory.

If you’ve read this post diligently and have followed the math, you are now aware that government is already collecting 70% of the revenue from lottery sales and winnings.  With only a 30% return to the players people are still lining up in droves to buy tickets.  If government decided to up their stake to 80% of the money spent on the lottery we would probably see some decrease in the amount of sales and at 90% an even further decline in interest in the game.

So what if they decided to raise that to 100% of the amount collected?  How many people do you think would be lining up at convenience stores to purchase tickets, knowing that if they “won” they would have to turn over all prize money to their state and the IRS?  And that’s the problem with “trickle up” taxation.  You see, at the point where government confiscated all the profit, even someone who had invented a time machine and knew what numbers would be drawn would have no incentive to play.

Similarly, a small business owner, burdened with some of the highest tax rates in the industrialized world combined with needing to comply with regulations which in many cases serve more to provide someone a job to oversee them than to accomplish anything productive will ask himself the question – do I want to play this game anymore?  Those business owners (and people who have considered opening their own new business) have looked at the way the game is structured and said, “No.”  And that is why we are unable to make any serious progress in reducing our rate of unemployment.

Of course this does suggest a solution to the “fiscal cliff” debate which is ongoing in Washington.  As you have seen, the Lottery is an enormously profitable scheme for the operators (making anything that Wall Street has concocted look like mere child’s play).  So I would like to offer this solution to our financial conundrum which I hope will make its way to our legislators and the President.

If you want to get the country out of debt, balance the budget and have money left over to waste on who knows what, simply require that all left over money that a wage earner has at the end of a month must be “invested” in buying lottery tickets.

I can already visualize the headlines now:

“Lucky Hoboken resident splits $239 Billion Lottery Jackpot with 157 other winners.”

America – what a country!

A PRIMER ON ARITHMETIC (COURTESY OF A. EINSTEIN)

As a follow up to the two previous posts on government accounting it just so happened that I was reading today that Albert Einstein’s brain was “different” from most of ours.  Without going into the specifics (of which I have only a poor grasp), let me just acknowledge that he was a genius – whatever the reasons for that might have been.

Einstein claimed that his greatest discovery was “The Rule of 72”.  He happened upon it when he was employed in the patent office as a clerk and had some down time in his duties.  The rule is very simple.

If you want to know how long it takes money to double at a specific compound rate of interest, divide the interest rate into 72 for an approximation.  In other words, one dollar will double at a rate of one percent interest in approximately 72 years; at two percent in approximately 36 years, at three percent in approximately 24 years, etc.

This rule becomes less accurate the higher the rate of interest – as we can see by inspection.  An interest rate of seventy-two percent is not going to double in the expected one year but show an increase of seventy-two percent.  The smaller the rate of interest, the more accurate the calculation.

What the rule demonstrates is the power of compounding.  That can work either to our advantage or to our detriment.

The handwritten chart below demonstrates this principle at five different interest rates.  There is a reason that the chart is handwritten (pardon my calligraphy).  Yes, I can use Lotus and Excel spreadsheets.  Yes, they look neater.  But plugging in formulae and letting a computer do the thinking for us is one of my pet peeves.

You see I believe that, notwithstanding the wonderful achievements we have attained through technology, once in a while it is imperative that we use our own brains to solve problems.  Otherwise, we unintentionally wind up dumbing ourselves down – and there is a lot of that going around.

This example assumes that Grandma made a gift to her grandchild in the amount of $100 at the age of sweet 16.  The child had the choice of placing this gift in an investment that would yield a consistent return at one of five specified interest rates, ranging between two to twenty-four percent.  (You will say, there is probably no investment available that would yield a consistent twenty-four percent and you would be correct.  In today’s market environment it’s hard to find an investment that yields a consistent two percent).

This example also assumes that there would have been no tax collected on the increase of the investment during the years from 16 to age 70 when the grandchild cashes in her gift.  (Now there’s hallucinatory thinking elevated to its epitome).

So here’s the chart:

CCF11202012_00000

As you can see, after fifty-four years of working on behalf of the grandchild, the investment which yielded two percent has now grown to a mere $286.  (I computed the difference from age 52 to age 70 manually since this investment required a 36 year period to double).  That’s pretty anemic.  Of course, the investment at four percent did better – but not twice as well as many would expect.  It did almost three times better than its lower tier brother.

And then we get into the shocking return on the eight percent investment.  Again, twice the interest rate had the effect of producing eight times the result.  And the twelve percent interest rate dwarfed that, providing the beneficiary of Grandma’s original $100 gift by rewarding her with $51,200 in her account.  We’ll save discussing the twenty-four percent interest rate for just a bit.

It really is amazing how the difference in the interest rate on an investment coupled with long time periods results in different returns.  Unfortunately, most of us are not cognizant of this because we are never taught these principles in our schooling – and many of our parents are as unaware of them as our teachers.

Now there is good news and bad news in all of this.  You’re probably correct in believing that receiving a guaranteed return of twenty-four percent a year is un-attainable.  And you’re right – unless you happen to be a bank that issues credit cards to less than top notch borrowers.  A twenty-four percent interest rate on unpaid balances is not unusual for people who fall into that category.

So instead of an investment, let’s think of this $100 as a loan.  The bank which issues it is very generous.  They are making it for a 54 year period – and the terms (other than the rate of interest) are very beneficent.  Nothing will be due until the loan recipient reaches age 70 – at which point the principal and interest will become payable in full.

As you can see from the chart, this $100 loan and accrued interest has grown to the staggering amount of $26,214,400.  Egad!  And that is the negative effect of compound interest.

After reviewing and, I hope, thinking about this for a bit, you will perhaps understand why the American consumer has gotten herself into very muddy waters with credit card debt.  But that is merely the tip off the iceberg.

We have a government that has similarly encumbered itself (and all of us) in the same problem.

It is estimated that the interest that will be due on our National Debt for calendar year 2012 will be approximately $360,000,000,000.  For those of you who, like me get lost with all those zeroes, that’s $360 Billion.  Take into account, that amounts to an interest rate of only 2.25% of our current outstanding balance – even with the Federal Reserve’s current policy of artificially suppressing interest rates.  The reason the effective interest rate is this high is because a significant amount of this debt was issued at higher rates than the one quarter of one percent rate that is currently in effect.

So if you want to think about an apocalyptic event, consider what a return to normal interest rates, (in the area of 3 – 5 %) would mean in terms of the amount of money that would be required to pay the interest on our $16 Trillion National Debt balance.

And that’s why, when you hear people say that we have encumbered ourselves and our children and our grandchildren with an almost unresolvable problem – short of default – they have a serious point that they are making.

And on that happy note, I’m going to spend a bit of time reading and then head off to slumber land – thinking about the National Debt and Albert Einstein.

Darn, that guy was smart.

English: Albert Einstein Français : Portrait d...

English: Albert Einstein Français : Portrait d’Albert Einstein (Photo credit: Wikipedia)

THE POWER OF POSITIVE CONFUSION

Obama Logic

VOTING IN FEAR

The 15th Amendment to the Constitution struck down the denial of the right to vote based on race.

The 24th Amendment to the Constitution struck down the ability of the states to impose a poll tax on voters – whose goal was ultimately to undermine the 15th Amendment and to deny black Americans the right to cast their ballots.

I offer this information as historical background.  The right to vote is an inestimable privilege and responsibility.  To go into the public forum and state your opinion, free of the prospect of harassment.  Which brings me to the subject of this post.

A few days ago I spoke with an elderly neighbor, a lady in her 80’s and asked if I might take her to the grocery store with me.  She readily agreed since I think that she recognizes her driving is not quite as good as it once was.

This lady, I’ll call her, Lily is a white woman who grew up in Biloxi, Mississippi.  She married a man who had a career in the U. S. Air Force and whose last deployment was here in Las Vegas at Nellis AFB.  He passed away quite a few years ago.

During our ride to the store, Lily brought up the rapidly rising cost of groceries and engaged me in a political conversation – much to my surprise.  Of course, regular readers of this blog will realize these are subjects which interest me, so we spoke.

She said that, “Despite everything that he has done, I am thinking about voting for President Obama on November 6th.”

I asked, “Why?  Do you have something against Romney?”

“Oh, no.  I think he is honest – but doesn’t have a lot of personality.  I think he probably would be a better President.”

This confounded me, so I asked, “Well, why would you vote for Obama?”

Her answer really shocked me.

“I’m afraid what will happen if Obama loses.  I’m afraid that a lot of his supporters will start breaking into stores and burglarizing houses because they see the end of their meal-ticket.  And I live by myself.  I’m afraid for my safety.”

By “a lot of his supporters” I took it that Lily meant people who happened to be black Americans.  I find that statement (if my inference is correct) to be offensive – but I also understand her cultural background in making it.  And I understand her fear which is real.

I remember the riots in Watts, almost 47 years ago to the day.  And I know that Lily remembers those events as well.

What Lily may not understand is that this is not a matter of color but is a matter of economics.  And there is less opportunity for many members of the black community than there is for other members of our society. We see that clearly in the rate of unemployment for blacks which is nearly twice the national average.

In the 1960’s and 1970’s I knew some people who looked at welfare, then merely in its infancy, and looked down on the people who accepted it.  Concurrent with their disdain was the underlying belief that this was a program that was designed only for the benefit of black Americans.  They were wrong.  At the time, the majority of welfare recipients were white.

If you create a class of people who have no upward mobility because of lack of education, few marketable skills and a mindset that life is about waiting until the first of the month when the EBT card gets refilled so that they can survive another thirty days, you have created the kind of potential scenario which my friend Lily fears.  That is just what we have created through our government policies which have transformed slavery into welfare.

What my friend Lily may not understand is that eventually this has to stop for the simple reason that we have run out of the ability to pay for these sorts of programs (and probably, whether our politicians will admit it or not, realize that this was a poorly misguided attempt to bring about social justice).  There is simply no quick fix for a problem that has been fifty years in the creation.

It would be naïve to believe that President Obama is the cause of this problem.  It would be equally naïve to believe that a President Romney will spend four years in office and fix it.  But we know that continuing our present path is surely not the answer that a person with vision would endorse.

The answer at its most basic lies with education.   That is, by it’s nature, a long-term solution and does not address the issue of those adults who have not benefited from it themselves and who comprise a growing portion of our society.  To be candid, I do not know the answer for how to improve their prospects – but at least I am willing to face the problem and think about it honestly.

What Lily may not understand is that we are at a turning point – irrespective of who is the next President.  Our fiscal imprudence is going to cause us to have to look not only at social programs like welfare but the entire way that we as a country conduct ourselves and our business.

At some point, all it would take would be those who have willingly purchased our bonds to float our increasing debt to say, “We don’t know if our money is safe in America any more,” and to stop.  That would create an implosion that would be heard around the world.  And with the recent downgrade in our debt, for the first time in our history, that day many not be too far down the road.

Or consider a natural disaster.  A violent sun spot emission knocks out our communication systems.  We have become so dependent on technology that if we found ourselves without it, most of us would find ourselves helpless.  With no communication, society would quickly find itself victimized by the predators who would loot stores and steal food.  And when that food has disappeared from the shelves,  with law enforcement taxed beyond anything it was ever designed to do, you can see the possible scenarios that might ensue.

This is a dire picture.  It is not one that any of us wants to imagine or believes might happen.   In fact, we find it so dreadful that those who have the ability to take steps to avert it, our political leaders, have declined to do so because the remedies will require that we all change our lifestyles and our outlook.  And people whose way of life is challenged don’t make for happy voters.

We have a choice this November.  We may, like may friend Lily vote to continue the policies which have brought us to this place – for fear of the possibility of civil insurrection.  But that will merely insure that state of unrest will come to pass – if not now, soon.

Or we can take the common sense approach – acknowledge that we have real problems that demand realistic solutions and vote for people who tell us the truth, as painful as that may be for us to hear, and who start us back on a course away from the brink – while there is still time.  If there is still time.

Living in fear is a terrible existence.  If our fear determines how and for whom we vote, we bring that misery down on an entire nation.

.

YOU DIDN’T BUILD THAT – (BUT YOU PAID FOR IT)

First we had nature – she gave us cowslips;

Then we had President Obama’s election – he gave us pink slips;

And now the President has created his very own special brand of gaffes which I have named in his honor, Obamaslips.

“You didn’t build that,” has now become a household phrase in the vocabulary of everyone who believes the President’s greatest achievement after nearly four years in office has been to make former President Jimmy Carter look good.

But let’s take the man at his word (great leap of faith required here) and say that this comment was taken completely out of context.  I can almost buy into that since I’ve been listening to the President’s attack ads and I believe his staff has mastered this technique and knows what “out of context” is all about.

Okay, what the President was really saying was, “Small business people didn’t build the infrastructure which enables them to engage in their livelihoods.”  By the way, it also enables all the rest of us who expect to see water when we turn on the faucet or flush the toilet; expect that when we drive we are going to be able to cross bridges that are safe and roads that don’t have pot holes; and when we flip on the magic light switch, we expect to find our rooms and our lives lighting up.  We didn’t build those either.

Well, by building the infrastructure I mean we didn’t (or most of us didn’t) go out and pick up an axe or a shovel and start the process that once represented the greatest achievement seen on earth since the Romans.  No, we didn’t physically build it – but we paid for it to be built.  That is true of the person who works for someone as well as for the owner of a small business.

When I bought the house in Las Vegas in 2001 it came with a separate special present.  That was a bill for the infrastructure that had to be built as the city spread out further and further from the Strip.  The City advanced the money in order for this to be completed.  But the ultimate cost of funding it was borne by the individual homeowner or rental apartment building or the person who took the chance to construct a small shopping mall so that your favorite fast food restaurant was only a short drive away.

As I recall, this originally amounted to about $8,000 for my house, but I don’t know the exact number as I wasn’t the original owner.  By the time I inherited this bill it was down to a little over $6,000 – and while the City had floated a revenue bond and was paying interest of 4.5%, the homeowner was being charged 8% on the outstanding balance.  (It’s kind of like big bank borrowing/lending – but not as profitable).

Well I paid off the balance since it was hard to get a guaranteed return of 8%, but I always wondered, how much competitive bidding went into this infrastructure build out?  After all, if you’re going to pass the costs along to a third party who has no say in the matter, does it really concern you whether you’re getting the best workmanship at the best price since someone else is paying for it?  But that’s a conversation for another time.

Let’s get back to the fantastic highway system that President Eisenhower constructed, connecting us from east to west and north to south.  This was a project that was admittedly undertaken by the Federal government and not by small businessmen (or any of the rest of us).  It was one of the great American achievements of the 20th century.  But where did the money for this project come from – and how was it paid for?

Well, the part of the equation that President Obama doesn’t understand and I suspect never will is that the American taxpayer may not have been out digging ditches or operating heavy equipment to move boulders and mountains, but we, each of us paid for it with our tax dollars.  And more than anyone, small businesses contributed the most to this enterprise.

The decades of the 1950’s through the 1980’s saw an explosion in the number of small mom and pop, entrepreneurial business come into being.  They couldn’t have existed before the interstate highway system was developed.  But they could exist and thrive once that system was in place.

As they grew, they paid more and more taxes because they earned more and more income.  And their numbers grew and they hired more people to work in their roadside fruit and vegetable stand or at the little gas station that they had opened.  And the economy exploded into one of the greatest periods of prosperity in the history of our country.

That highway system paid great dividends – and people realized the benefit that they had received and were happy to pay taxes for something which had given them an opportunity for a new and better way of life.  Respect for those in Washington was probably at the highest level since George Washington was in office.

Today we find ourselves with a group of political Aristocrats who exhibit, with few exceptions, none of the greatness and little of the pride that was widespread and commonplace among our legislators and presidents of fifty years ago.  We find small-minded people, bickering over who is most deserving of the best and biggest piece of meat to be carved from the still barely breathing wounded animal.  So absorbed in their petty fighting, they do not see that the buzzards are circling overhead what soon will be merely a carcass.  And the buzzards will strip it to the bone.

I guess what President Obama said is in fact true – “We didn’t build that.”  But if we continue to elect men and women to public office with miniscule mindsets and self-serving petty agendas, “We will all pay for it.”  And the price will be dear.

THE RIGHT PERSON FOR THE JOB

John got home a little later from work than usual and when he walked in the door he could smell the wonderful dinner that Mary was getting ready to serve the family that evening.  He thought to himself, “How lucky the kids and I are that I found such a wonderful woman to be my wife and their mother.”

As the family sat at the table, John asked Mary, as he usually did, how her day had gone.

She said that it had gone fine – other than the fact that she had experienced the worst tooth cleaning of her life.  John asked her what had happened.

Mary said, “Well, it’s probably my own fault.  I should never have gone to Al’s Auto Repair to get it done.”

Mary would occasionally cross over into the slightly-warped dark side of humor and John thought that statement was one such foray.  He put down his fork and he and the kids began laughing at the joke Mary had made.

Mary looked annoyed – which was unusual for her.  So she said, “You think that’s funny?”  Then she retracted her lips and to the shock of her family they could see that her once pearly-white teeth were streaked with grease.

Of course you realize I fabricated this story, my point being that it is important to try to select the right person for any particular job.  Perhaps even more frightening than Mary’s selecting someone totally incapable of doing what she needed done was that they actually attempted to do it knowing full well that they didn’t have the expertise.

I have hired a great many people over many years of owning my own business.  I always put a great deal of thought into the individuals who were interested in joining us because I felt that we had to be mutually-comfortable in the commitment we would make to each other.

I viewed our relationship not so much as one between employer/employee but as a marriage.  We had to be compatible and we had to share a basic philosophy and work ethic.  Lacking those elements, our relationship was ultimately doomed to failure.

As I’ve said in previous posts, I always viewed the failure of any employee as my failure – not his.  Either I had made a poor hiring decision based on what I perceived to be the nature and character and potential of the person whom I had hired; or I had failed to inculcate our corporate philosophy in that individual or they were unwilling to accept it.  Whatever the case, it necessarily meant that we would part ways – sometimes through my choice and at other times through theirs.

Letting an employee go was the part of my job that I hated the most.  It was difficult for me emotionally because I knew that my decision would have a major impact on the employee’s life – at least in the short term.  But I also had to consider that by getting rid of some dead wood the whole tree had a greater chance to survive and flourish.

Admitting that I had made a mistake was as difficult for me as it is for most of us.  But when you see the handwriting on the wall, an intelligent person should not fail to read and act on the message.

Have we hired the right person to lead this country?  To what can our employee, the President point as being justification for keeping his job?  Are things better or worse than they were when we voted for him based on what he said his nature and character and potential were?  If not, it’s time to prune the tree of the dead wood so that it has a greater chance of surviving and flourishing.

Admitting that we have made a mistake is always embarrassing.  Choosing to pretend that we haven’t is simply ignorant and is likely to lead to disaster.  Given those two options, I’ll select a moderate case of dealing with egg on my face.  Because I know, it’s always important to try to find the right person for the job.

One of the most articulate men of our time on economics, race relations and childhood development speaks on the matter of nationalized healthcare.

A Heapin' Plate of Conservative Politics & Religion

Thomas Sowell decimates Obamacare in one sentence.

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