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As individual parents, we want our children to live better than we have lived and to take advantage of whatever we have built for ourselves. As voters, however, it seems that we have been stealing from our children, such a shameful act that very few parents would be willing to admit to wanting to do it, yet somehow collectively we are able to justify it. The Economist’s September 29, 2012 issue carries an article titled “Sponging Boomers” that describes how “each American born in 1945 can expect nearly $2.2m in lifetime net transfers from the state–more than any previous cohort.” (most of the data for the article comes from the International Monetary Fund)

Must we as today’s parents therefore leave our children a trust fund of a certain amount just so that they can break even on all of the transfer payments that they will be forced by the state to pay back to us?

Let’s consider a few ways in which we might let ourselves off the hook. If the population grows enough, especially through immigration, we can tell ourselves that it isn’t our own children from whom we are stealing but rather from immigrants and the children of immigrants. The U.S. population was just 140 million in 1945 (source), less than half of what it is today. The sponging boomer born in 1945 is arguably being paid back not by a single young person but by at least two.

Another way that we could let ourselves off the hook is by imagining that our own children will emigrate to a country where they won’t have to transfer a large percentage of their earnings to an older generation via taxes. For example, they might emigrate to Holland where pensions are fully funded in advance or to Australia or Singapore.

Finally we could argue that today’s child will somehow be able to kick the can down the road to his or her own children via (1) massive borrowing at today’s very low interest rates, (2) massive immigration of highly skilled workers who will grow both the population and the economy.

If we can’t let ourselves off the hook, roughly how much do we have to give each child in 2012 so that he or she can ultimately pay the taxes that will cover our Medicare, Social Security, and pensions (for those of us who are public employees)?

[This question is timely due to the pending expiration of estate tax exemptions. After 2012, “leaving money to children” will translate to “giving money to the federal government”.]

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Having predicted Obama’s reelection (December 2011 posting), I have not been following politics. However, last night I attended a friend’s debate-watching party in Cambridge and ended up watching the entire televised event.

If Romney is going to lose, he could go out with integrity, e.g., telling the woman who asked about tax breaks to be eliminated “Yes I will get rid of mortgage interest deduction because it is a huge subsidy to an industry that we should not be subsidizing.” Yet he does not appear to be heading down this path, preferring instead to pander to voters and tell them what they want to hear. Everyone is going to better off under Romney. The military will get more funding, citizens will pay lower taxes, the health care industry will continue to be showered with Medicare funds, nobody will have to work harder (except for the 20+ million unemployed or discouraged), etc. It sounds too good to be true.

When repeatedly attacked for his personal finances, Romney could have pointed out that his apparently low personal tax rate from investment income is due to the fact that it comes from corporations that already pay the world’s highest tax rates. Instead, he remained silent.

Incumbency has been a huge advantage in a country that is fearful of change. But as I watched Romney score point after point against Obama for having been associated with Americans for four years, it occurred to me that incumbency in a sclerotic country freighted down with entitlements, pension obligations, and special interest lobbyists is a liability in a debate. It really isn’t Obama’s fault that Congress won’t do anything without permission from lobbyists or that a huge number of American workers cannot be employed economically, if for no other reason than a lot of the stuff that makes the U.S. such a bad place to do business is happening at the state level. But Obama promised hope and change four years ago and now he looks bad for not delivering.

Romney kept referring back to Ronald Reagan, which struck me as naive. Reagan was able to foster growth, but the country was not smothered with debt and other problems. Public employee unions were relatively new. There weren’t huge numbers of retired state workers on $100,000+/year pensions that needed to be carried by current workers, for example. Reagan’s U.S. economy did not have to compete with China and India.

Speaking of China, the China bashing made me ashamed. Obama talked about his heroic success in preventing Americans from buying inexpensive tires from China. Obama is proud of the fact that America’s millions of unemployed people must pay higher tire prices because 1000 union jobs were preserved (we don’t know how many jobs were lost due to China blocking our imports in retaliation). Romney, meanwhile, talked several times about doing something aggressive to China because they are competing unfairly somehow. Apparently no politician is willing to stand up and say “China is full of people who worked hard in school and now work hard at their jobs, which is why their economy is growing so fast.”

My strongest impression was that our political system is not equipped to deal with reality.

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One of Mitt Romney’s big ideas is a dramatic increase in funding for the U.S. military. As a taxpayer this reminds me of watching $1 billion Navy ships confronting a few Somalis in a rubber boat with an outboard motor and wondering “How could we possibly afford to sort through these guys one at a time?”

A friend of mine is a retired Air National Guard officer. I asked him whether he thought that his corner of the military was spending money efficiently. He said “My entire branch of the Air Force should not have existed. State governors don’t need fighter jets at their command. The Air National Guard should be merged with the Air Force Reserve.”

How would that save money?

“There are about 6000 officers and civilians in the Air National Guard headquarters at Andrews Air Force base. We call it the ‘crystal palace’. Every person there has a job that duplicates a job in the Air Force Reserve, which usually duplicates a job in the mainline Air Force. For example, there are F-16s, KC-135s, and C-130s in all three of these branches. Each branch therefore has a group of program managers who are responsible for buying spare parts for, say, the F-16. Each branch has ‘career field managers’ for every possible job within the branch, e.g., maintenance or finance.”

How much would that save? If we figure $300,000 per year per person, including real estate and pension and health care benefits, 6000 people costs about $1.8 billion per year (admittedly less than 1/500th of an Obama annual deficit).

My friend said “Don’t forget that the same thing can be done in reverse for the Army. Give the Army Reserve to the governors to be part of the National Guard.” He finished by pointing out that Congress and the military seldom truly save money because they are seldom willing to shut anything down completely. Instead of closing a base, they will cut operations to 10 percent of what they had been, but this leaves the taxpayer still with about 75 percent of the cost.

At first glance it would appear that Mitt Romney, having noticed that the country is spending way beyond its means, has decided to give one of the world’s least efficient organizations a whole lot more money. Has Romney articulated how our society will benefit by putting extra money into the military?

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A distressing trend in American museums and public aquariums is the substitute of touch screens or, in the case of San Francisco’s aquarium, non-touch screens, for paper signs or backlit transparencies. In theory it sounds good to replace a 1 cent piece of paper with a $500 touch screen, but in practice it is now possible to learn about just one animal at a time where in the past it was possible to learn about all of the animals in a tank at once. Below is a rather clumsy touch screen from the Dallas aquarium. It was not nearly as responsive as an Android or iOS tablet and most patrons simply gave up on using these devices. It would have taken 5 minutes or so to associate names with photos for 10 or 12 fish within a tank. Maybe Edward Tufte needs to write a new book just for people who design museum exhibits, explaining that it is better to be able to see 20 things without any interface.

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CATO Institute has published its “Fiscal Policy Report Card on America’s Governors 2012” (link). Page 8 is where it get interesting for me, in a section called “Tax Incentive Disease”. Hungry for revenue, states have raised taxes on businesses to levels so high that hardly anyone wants to do business in those states. The fix then becomes special-purpose tax exemptions and other incentives, with Wisconsin having 170 such patches. In Illinois the tax breaks are handed out on a company-by-company basis (see top of page 10) and only fairly big companies, e.g., Sears and Motorola, are big enough for politicians to want to negotiate with.

[This is consistent with my experience running a small company (about 80 employees) in the U.S. I was never able to find a clever way to avoid paying any state or local tax. We were never able to avoid paying the advertised (world’s highest) federal corporate income tax rate.]

A bizarre practice noted by the CATO report is state taxes on health care providers that are then immediately rebated to those same health care providers (see page 10). States wire money back and forth between their treasuries and hospitals in order to “apply for an receive more federal matching funds.”

For those who have believed newspaper reports that state governments are spending less, the report’s Figure 2 shows “total state and local government spending”, which has risen from 2.08 trillion in 2007 to $2.29 trillion in 2011 and 2012 (estimated). There was no year in which state and local government spending fell.

How’s the future fiscal health of states looking? The report cites an analysis that state pension funds are underfunded by about $10 trillion (page 13).

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I visited a friend with a baby in Washington, D.C. Trying to return to her high-paying job at a government contractor, she has contacted practically every day care center in the city and in the northern Virginia suburbs. They typically have two-year waiting lists. I visited another friend, a professor at Georgetown University. His wife is expecting in February. “They have day care at Georgetown for children of employees, but it is harder to get into than the university itself is for undergrad,” he noted. There is no way to apply until the child is actually born.

The young mother asked me how it was possible that the day care centers have not been able to expand fast enough to keep pace with the growth in wealth and jobs that has been fueled by the expansion of the federal government, contractors to the government, and the lobbying industry (is the term “Government Gold Rush” taken?)? I posited that all of the Washingtonians who are reliable enough workers to show up every morning at 7:00 am have already been hired, either by a day care center, the health care industry, or a government-affiliated employer.

So if you’ve been having trouble finding a job and enjoy spending time with kids, consider hanging out a shingle as a nanny (or “manny”!) in Washington, D.C. Pay ranges from $35,000 per year (illegal immigrants with no experience, paid in cash) to $100,000 per year.

 

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I tested out the new Apple Maps iOS 6 application while driving a friend’s car around Washington, D.C.

My first destination was 9707 Old Georgetown Road in Bethesda. This is an enormous apartment building on one of the most major arteries of the metropolitan area. Apple thought it was about 1 mile from the actual location and had it on the wrong side of the street.

The application does not seem to take advantage of traffic information. This is a serious problem in a city whose Saturday afternoon traffic would make nearly any Third World capital seem like an efficient place to live. The 20-minute trips of my youth (1970s) are now one-hour ordeals, albeit ordeals that are endured by Washingtonians enthroned in the most luxurious cars on the market (I saw two Lamborghinis!).

The iPhone 4S was not useful for more than one trip in the Washington area because the battery life when using navigation is limited to about one hour. It is possible to turn off the LCD backlight and rely on voice directions, in an attempt to save battery power, but the screen turns itself back on every time there is a new instruction.

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I’m in Washington, D.C. right now and, aside from noting the glorious wealth compared to Boston (the new cars, the new or rebuilt houses, the lack of vacant retail space), I am encountering a lot of government workers. One Labor Department official expects that the reelected Obama will add a raft of new regulations for employers. One example cited, that could be done without any new law being passed by Congress, was a quota system requiring companies that get revenue from the government, either as contractors or subcontractors, to hire 7 percent disabled workers (WSJ article). Given the large percentage of the economy taken up by government, this might end up embracing those companies where a majority of Americans work. Another new tangle of Labor Department regulations is related to Obamacare (article). The new requirements are so complex that the government workers who are to enforce them are requiring continuing education and training (from private contractors, of course!).

After all the dust settles from the new regulations, what was the most surprising thing for this Labor Department official? “I can’t believe that any private company is willing to hire a worker in America.”

[Where can employers find enough disabled workers to meet the Obamaquota? Here the government itself may provide the solution. In a lot of places, e.g., New York City, a majority of firefighters and police officers retire on a disability pension (example; note that this means that pension obligation calculations by local governments are even more wishful thinking (article)). As these folks may be under 50 years old at retirement they can supply the required 7 percent quota.]

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A lot has been made about Mitt Romney’s career in private equity, which started in 1984 at Bain Capital and ended in 1999 when he left to run the Salt Lake City Olympics. This calculator shows that the annualized return of the S&P 500 during this period was 18 percent (i.e., this was an exceptionally fortunate time for an investor in U.S. companies; the same calculation for the period 2000-2011 results in a 0.5 percent return).

Did Mitt Romney do even better than a passive investor in the S&P 500? Yes, as did most private equity shops during this period. Was that due to the fact that the folks who collected massive fees for managing private equity funds knew something about how to operate a business that had escaped the managers who’d spent their entire lives within a given industry? Not necessarily. Jeremy Grantham, one of the world’s most successful investors, is fond of pointing out that KKR has demonstrated very similar returns to what an investor would have achieved by buying the S&P 500 using the same amount of leverage that KKR used to buy companies. In other words, instead of paying a 20 percent fee to KKR, an investor could have simply bought the S&P 500 on margin and walked away, keeping 100 percent of the fruits of the investment rather than 80 percent. And KKR, instead of working hard to identify exactly the best companies to purchase and the best managers to hire, could simply have bought stocks at random to achieve the same result. (Indeed KKR might have done better with a more hands-off approach; the company offered a full partnership to Ken Lay, the Chairman of Enron, shortly before Enron’s accounting frauds were exposed (see this book excerpt).)

So while there may be other reasons to like Mitt Romney, his ability to outperform the S&P 500 is not necessarily one of them. Anyone who was able to borrow money at an interest rate lower than 18 percent could have beaten the S&P 500 during the period of time that Mitt Romney was involved in private equity.

[Has anyone seen this kind of analysis in a mainstream newspaper article or TV show? It seems odd to report that Mitt Romney was a big success as an investor without noting that so was almost everyone else during the same period of time.]

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People seem sort of shocked when countries such as Greece and Spain come crashing down to earth or when an unlikely success story such as Israel or Singapore emerges. I’m wondering if a simple study could predict a country’s economic future: Is a young person better off going to work for the government, or in a quasi-government job, or for private industry?

China stagnated for centuries and many historians have put forth as a explanation that the best and brightest young people wished to enter the civil service rather than become merchants or engineers. Israel has one of the world’s most successful economies, despite a huge range of challenges. A schoolteacher in Israel starts at about $18,000 per year (source; compare to about $51,000 in Chicago (source)), despite the fact that the cost of living in Israel is higher than in most of the U.S. (see this ranking by city; Tel Aviv is at 24 while Chicago is down at 108).

Air traffic controllers in Spain could earn more than $1 million per year (see this entry from 2010). A young person would have been foolish indeed to choose a private sector career over a government or government-affiliated job in Spain back in 2010 and in 2012 we see where the country ended up.

How about the U.S.? We certainly have some great opportunities in government. A California state prison guard, who may have no education beyond high school, earns more than an average Harvard graduate (WSJ). It is not uncommon for police and fire department workers to earn $150,000 to $250,000 per year (more if the value of defined benefit pensions are included). Health care jobs in the U.S. must be regarded as quasi-governmental due to the fact that the government pays for roughly half of health care bills. Doctors in the U.S. earn more, on average, than private-sector workers with similar amounts of education (e.g., PhD engineers). Given the regulated nature of banking, the subsidies handed out to Wall Street in 2009 and 2010, it might be argued that some financial industry jobs are really government jobs.

I wonder if we could quantify this by looking at projected 10-year earnings, including the actuarial value of pension commitments, for young workers starting out in different standard careers across a variety of countries. The ones where the government jobs are the plum jobs are the countries whose relative decline we can expect.

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