The Small Business Policy Blog

Welcome again, friends, to another month of the Small Business Policy Blog.  After drifting into inexact commentary last month, I thought it appropriate to return to my original intent.  As you recall, we set out together to identify policies that are a barrier to small business growth and employment, and then to identify a policy “fix” to remove the obstacle. 

Back in February, I postulated that a reduction in the cost of labor could be accomplished in tandem with an increase in household wage income by properly and permanently fixing the Social Security System.  This would in turn increase the demand for labor by lowering the cost and increasing incomes that lead to higher aggregate demand.  In that Blog, I promised to also address another issue that increases labor costs, that being Medicare. 

Medicare has an additional component in that politicians from both sides of the aisle agree that the deficit cannot be addressed without addressing this program.  Medicare alone, due to dire demographics and simple arithmetic, has the potential to absorb the entire capital pool within a generation, leaving literally no money for the funding of private sector business expansion and employment growth.  It its current format, Medicare also costs every small business employer a 1.45% tax on every dollar of wages he pays to his employees, along with an additional 1.45% he must collect from them and remit to theIRS.  So Medicare taxes are a massive tax burden, directed exclusively against the thing we need the most in America today…..jobs. 

Several commentators, from the leftist MSNBC to the rightist Fox News to centrist business channels like CNBC have all repeatedly reported several facts.  There are, for example, 10,000 people per day entering the Medicare system.  It currently takes $8,400 per participant to pay the medical bills of recipients.  The Medicare fund will be broke sometime in 2014, and will need higher taxes on wages in order survive.  Higher payroll taxes on wages, stacked upon the already high social security, workman’s comp, state unemployment, federal unemployment, and increasing compliance costs on small business employers, will further the jobs destroying impact of our employment tax system.  All this will happen without even considering the shortage of lend-able capital for small business loans that will develop as the government covers Medicare’s unsustainable deficit. 

The Policy Fix

To sign onto my policy fix for Medicare, I will ask you to accept, and then agree to implement, four fundamental beliefs. Here is the list: 

1. People who can afford to pay their own bills out of their own funds should not take charity from their neighbors.
2. The concept of “risk pooling” and making our old people have care is a worthwhile goal.
3. If we take money from our young workers, and tell them Medicare will be there for them, we are morally bound to create a sustainable system.  To do otherwise is theft by deception.
4. Market forces to restrain costs must be brought to bear or simulated.

These four principles are important because they force us to have a Medicare system the cost of which is need based, and the arithmetic is sustainable into perpetuity.  Here are the specifics:

First we must “need base” the premiums paid by retirees.  The floor would be the existing withholding level for the Medicare program.  The ceiling would be the $8,400 annual cost, indexed going forward for inflation.  If any Medicare beneficiary has income from dividends, interest, and private pensions of $90,000 or more, their withholding starts to move toward the ceiling.  At $120,000 of other income, the participant pays their own way.  Fundamental number 1 is met.  Since the amount anyone is paying is limited to the average cost per participant, Fundamental #2 is met.

(A note here: Many high income retirees will claim they paid their own way already by paying the Medicare tax during their working life.  Please remember, however, that your employer paid half that tax and for most of your career there was an upside wage limit on it as well.  If you live to be 85, you would have to had made nearly $290,000 per year and paid tax on it all to have “paid your own way” into Medicare). 

Even with higher income people paying their own way, the system cannot survive mathematically. The simple fact is that most people don’t have high incomes in retirement, so they will pay the minimum premium.  To make the system sustainable, costs must be addressed. In Obamacare, a political solution was used.  The politicians pretended that they would enforce huge Medicare reimbursement cuts to providers, full knowing that just as in past such attempts the cuts would never really happen. This allowed the Obamaites to falsely claim that the new bill would not make the deficit bigger.  But what would the real market do if its consumers were facing a product or service where the provider just kept raising prices and did not even care if their customer could afford the price or not?  To answer a question about the markets, let us look to the market.  Just this quarter Proctor and Gamble reported disappointing results because they suffered a “Marlboro Event”.  This is an event in the market where a company is over confident about the power of their brand, so they increase prices so high that their customers ‘en mass reach a breaking point.  At that breaking point the customers unexpectedly flock to lower priced competing brands.  The phenomenon is named after Philip Morris, who survived this shock in the 1990’s by quickly lowering the price of its flagship Marlboro cigarette brand to re-capture loyalty from their customers.  What if we were to impute this market reaction onto our captive customer, the Medicare beneficiary?  What if every year in which aggregate medical care costs inflate higher than the general rate of inflation, a 3% reduction in reimbursements is imposed? This would simulate a normal consumer’s reaction to higher pricing, and limit cost increases to inflation.  Fundamental #4 has now been met.

Finally, how do we guarantee sustainability to our children, as we must?  To this end we must look to Representative Paul Ryan’s plan for a “private provider” substitution at a future point certain.  This will allow for using tax dollars to assist in purchasing coverage that is subject to price competition. That in turn should lower premiums, but will definitely insure sustainability. Fundamental #3, the holy grail of Medicare reform, now becomes possible.  But we must remember that this cost savings must be shared with employers, who now share 50% of the tax cost.  In this way we once again reduce the cost of labor and increase household incomes.  And that, my friends, means more jobs.

Volume V                                                                                                      April 1, 2012

Welcome to the April 2012 posting of the “Small Business Policy Blog”.  It is the first of April, seventeen days before the filing deadline for 2011 tax returns.  As a practicing CPA with a responsibility to see that my small business clients are able to timely file their tax returns, it is no surprise that on this Sunday I have been working at my desk since early morning.  So, readers, composing this month’s blog is a much appreciated respite from the annual struggle to help my clients comply with the 9,515 pages of our U.S. Tax Code, modified in part by the 2,211 pages of analysis of the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010”, all ably explained in the 882 page 2012 “Federal Tax Handbook”. 

For two months I have spent time discussing specific policy initiatives that could help create more small business hiring and general jobs growth.  I have tried to be specific, and often found myself waxing eloquent about the specific applications of Economics in real world business situations.  This month, I will stray away from this tact, and steer toward a new medium, that being the importance of the “atmosphere”. 

“Atmosphere” is used here not in the sense often used by those who would expand environmental regulations, or argue about the issue of “global warming”.  Instead I would like to discuss the “economic” atmosphere in which we as small business owners are asked to risk our money, our other capital, our family’s futures, and our livelihoods every day as we either start or attempt to maintain our small businesses. You see, if we feel good about that atmosphere, we have the faith in the future to place our bets and expand our businesses.  This creates jobs. If we instead do not have this faith, we draw in, get defensive, hoard our resources, and then we don’t grow.  This reaction stifles jobs growth at its most fundamental level.  So what is the primary condition, you ask, in the emotional atmosphere of business in America, so relevant to jobs creation?  The answer is an easy yet awful one.  The answer if “Fear.”  Palpable, growth prohibitive, job destroying, capital freezing, “Fear”.  I have been serving actual small businesses for 33 years, and never have I seen such fear.  Of whom, you ask? The answer is this: We are afraid of our government. 

Let’s look as some examples, shall we? 

I recently talked to a young finance guy who asked me what was going on.  “What do you mean?”  I asked.  He asked me then why so many middle aged business men in their early to mid 50’s were telling him they just weren’t going to do it any more.  Governments at all levels were acting like business owners were evil and employers were considered simple exploiters.  Audits by governments at every level were multiples of what they once were, and the President has decided that profits over a certain level were too much, and would be subject to further plunder as an act of high morality.  Jobless “campers” were occupying a private park in New York, destroying property, and demanding things that these men had spent an entire life earning.  It was as if they woke up one morning and society had decided they were now the “bad guys”, and all the government agents, collectors, and social workers were now the “good guys”.  “Is Atlas shrugging?” he asked.  “Are all you guys who actually do things, build things, and make things actually calling it quits?”  The fact that the question was being asked made me shudder, but I have seen it too. 

Three talking heads onCNBC, forgetting for a moment that they were suppose to understand capitalism and business, asked a guestCEOwhy big business was holding their cash, not expanding, not deploying their resources so people could have jobs? “We have 3.5 million jobs with no one with the skills do them” he replied.  “That is part of it, but you want the number one reason?  We are afraid. We are afraid to do more, to make more, or to have more.  We are afraid of our government”.

 In the Wall Street Journal on Friday, March 30, it was noted that the Government has now backed off from allegations that our drilling for natural gas in the mid-west was contaminating ground water.  It seems that this government was using the EPA to strong arm our economy away from energy independence, since their core belief is that fossil fuels are evil.  It is natural, then, that producers of energy must be attacked, vilified, burdened with special taxes, crippled with more regulation, and the cost of their products driven above that which would be charged for alternative fuels.  If the truth, and the freedom of individuals to choose their own products, must be sacrificed, then so be it.  The government is the good guy, and doesn’t their pursuit of “goodness” justify “any means necessary?” 

A Workman’s Comp official inOhio, the person in charge of treating employers fairly in the face of the crippling costs of havingOhiobecome the disability capital ofAmerica, was asked last year to testify in front of the Ohio Senate.  He defended the costs of his agency and the job killing impact of higher and higher premiums and benefits.  At the end of the testimony, a Senator asked in frustration “Don’t you think Ohio’s employers care about their employees?”  “I wish I could think so”, he replied.  Once again, we are the bad guys.  The government agents are the good guys.  The answer of the older business man to the young advisor echoes in my ear. And so it goes……. 

In his most recent budget, despite massive new increases inIRSenforcement over the last several years, President Obama proposed 5,000 new agents and a 10% increase in spending for theIRS.  IRSofficials said this spending would be free, in fact profitable for the government, as every agent would find and collect more money than he cost.  “But what if the returns they examine are correct?”  I thought.  Isn’t theIRSsupposed to be enhancing a system of voluntary compliance?  How can they justify expanding their size by saying they will search for and find more money to fund their own growth?  But we all know that business owners are all cheating on their taxes, right?  We are the bad guys.  The newIRSagents are the good guys, and the new money that they take from people in audits will only fund good things, right?    

TheIRSannounced a program to require everyone who prepares tax returns for a fee to get an “ID” number.  We already put our social security numbers on every return, so they already knew who we were.  When the AICPA requested to know the purpose of the program, they were told that it was to increase the education requirements of preparers, making sure that people doing returns were qualified, and increase compliance.  “Good”, our profession said, and we signed on in support.  Right after implementing the program, theIRSused the new ID numbers to do analytical procedures on the clients of preparers, developed a secret “template” of what returns should look like.  They then sent threatening letters to preparers who seemed outside the statistical norm ascribed by the template, 29,000 letters, telling preparers that at least 5,000 would be “visited” by an agent. 

I had my staff do an individual study showing that theIRS“matrix” may not be identifying errors or variances correctly, and I filed a “Freedom of Information Act” request asking that they provide me with the results of any testing on my own ID number.  They did not reply to my data at all, and they refused to release their studies.  They said the details of their program was “a law enforcement technique”, thus exempt from the law requiring release.  But making sure that evil, rich, exploiting business owners pay every dime of their evil booty is a good thing, right?  So misleading a profession about the purpose of a program, then keeping its details secret from the public should be OK, shouldn’t it?  Besides government agents are the good guys, right? In fairness to this agency, I have had a very professional and productive relationship with the field agents and staff of theIRS.  I trust those men and women, and I have never given them reason to not trust me.  But they work for anIRScommissioner who is an appointee of the President.  And that President believes that government is good and the private sector is bad.  That core belief creates fear. 

Great American companies produce goods and services, employ people, and make profits all over the world.  America is one of the few countries in the world that taxes its own corporations, wherever the money is earned, when that money is brought back to the United States.  President Clinton, having actually run a state before becoming President, knew the importance of private capital, the good it does in the economy, and how it can create wealth, employment, and higher living standards.  So he cut taxes on profits if our greatinternational companies would bring that money home.  This administration says that was a mistake.  They want to mandate what the companies do with the money.  “When President Clinton did that, all the companies did was pay dividends and buy back stock” they say.  Apparently this administration is not aware that the recipients of these payments are shareholders, (i.e. pension funds, unions, individual owners, retirees, etc.).  This administration thinks such payments to U.S. households are wasteful payments that are surely only going to evil rich people.  So the money stays abroad, and capital is invested in Asia instead of the United Sates.  Shareholders go without dividend income that they would otherwise spend in the U.S. on homes, cars, or (god forbid) a yacht made by workers in New England or an airplane made by workers in Kansas City, (see January’s blog).  Besides, stock owners are members of the exploitive, evil 1% that climbs the backs of the 99% to gain evil, wealth and (gasp), profit, right?  Who better to plunder their ill gotten gains when they try to bring those gains back to America than the ultimate “good guys”, the government, right? 

In a recent exchange with theIRSover their “Tax Payer” ID program, I told them that they had the power to take away any CPA’s ability to make a living.  I maintained it was unethical for them to try to intimidate qualified, experienced and ethical preparers from utilizing their skills to limit a client’s taxes to only the legal minimum.  That was our job. I said I was afraid of them, and I was.  I am afraid in having written this blog.  Who wouldn’t be? 

Over the years I have said that I insist that if someone complies with the simple, literal interpretation of the law, then they should be safe from their own government’s power.  The law as it reads, not a bureaucrat’s expansive opinionated, bias interpretation, should be an absolute defense.  The law protects us.  The absolute assurance that all the enforcement arms of the various federal, state, and local governments must adhere to the letter of the law keeps them from becoming bullies. Most do so, and are not a source of fear. 

But the defining belief of the government that is inWashingtonnow is that they are the primary definer, provider, and arbiter of what is and is not good.  What we eat, what we drink, if we smoke, what we feed our children, how much they should weigh, how we treat our bodies, what we do with our property, when we use our phones, how we conduct our affairs, and if we can keep the fruits of our labors all now come under their power because with this power they will try to do “good.”  We see examples again and again, from unlawful restrictions against Boeing to mandates in Obama Care, to lies about drilling and ground water, where this government thinks that the pursuit of their definition of “goodness” gives them license to slip the restraints of the Constitution and not be bound by the law. 

And this, my friends, makes me very, very afraid.

Volume IV                                                                                                  March 1, 2012

Welcome to the March 2012 Small Business Policy Blog.  They say that all politics are local, and to some degree it can also be said of economics.  This month I must apologize to my readers outside of Ohio, as in this posting we will address a significant barrier to small business hiring in my “neck of the woods”, Northwest Ohio. 

In February we talked about how if the cost of labor could be lowered without lowering wages, then hiring could increase without harming household wage incomes.  Nowhere is there a better opportunity to accomplish this goal in Ohio than to address our antiquated system of “Workman’s Compensation”. 

Most Americans would not describe themselves as “Socialists”.  Socialism is an over-used term in politics to describe anyone who believes that government has a role in the economy.  That is not correct.  “Socialism” is a socio-political system where the government is the owner of economic enterprises, and theoretically runs those enterprises “in trust” for the mutual benefit of the society’s members.  It is the ultimate expression of the core Liberal belief that business owners are bad, employers are exploitive, and that the ultimate source of good is the government. 

The whole concept sounds good on paper.  The problem is, as usual, in the flaws of the basic premise.  Socialists believe that while individual owners of private enterprises are inherently evil and corrupt, government is somehow immune from the corruptive influence of power and wealth.  Socialists also believe that human beings will suspend their desire to improve their own lives, and voluntarily subjugate their own interests perpetually to the “public good”.  Neither of these things is true.  Because government officials are just as desirous as the rest of us to improve their own lot in life, they very quickly define the “public good” and the benefit of their government enterprises and bureaucracies as being one and the same.  Therefore the only ones who benefit from Socialism are government Socialists.  The rest of us see non-profit oriented, inefficient, ineffective government enterprises founder and the nation’s standards of living spin into a “free fall”.  Any objective reading of history confirms this truth.  Socialism equalizes by pushing everyone to the bottom. 

So what, you ask, does a diatribe against Socialism have to do with labor costs and over regulation harming private sector employment in Northwest Ohio?  Excellent questions, my astute readers!  The answer is found in these six words:  The Ohio Bureau of Workman’s Compensation.  You see, Ohio is one of only four remaining states to own an insurance company that is the sole legal provider of medical and disability coverage to Ohio employers for “on the job” injuries.  It is actually illegal, (oddly it violates Ohio’s Constitution), for any of Ohio’s 250,000 plus small business employers to buy such insurance from any other company. Even though they pay the premiums, the employers are not viewed as customers or policy holders of the government owned company.  They are “Taxpayers”, and the OBWC operates for the benefit of the small business employees, and their “public good”.  Sound familiar?

So how is this working out, you ask?  Well, let’s take a look at Ohio, versus the states with which we must compete for the jobs Ohioan’s need if they are to stay here and pay taxes in our communities. According to studies published by the NFIB, here are some tidbits of data: 

While the OBWC is supposedly “non-profit”, 8 to 10% of premiums and charges are retained by it to cover the cost of self-perpetuation for its staff and administration.  Its’ future benefits asset pool is over funded by $6.4 billion dollars, yet it retains these funds in its own trust. 

Medical costs paid for lost-time injuries by OBWC are up 45% since 2008 even though there are fewer employees in Ohio than in the base year.  Medical cost inflation is up 21% over that period.

Employers in Indiana, just over an hour west of most of my clients, pay on average 1.16% of wages for coverage.  In Ohio it is almost double at 2.24%.  (Yep, you guessed it.  No government owned insurance companies in Indiana.  Where would you locate?) 

In Ohio, if disabled on the job, you can receive benefits until you die.  Since Workman’s Comp predates Social Security, there is no adjustment to benefits when you hit social security age. Amazingly, a worker can become disabled just months before retirement, then collect from both systems without adjustment for the balance of his life! 

In Ohio, if your secretary is injured in her car driving for your business, and is injured by the negligence of another party, it is a work injury charged back to you.  OBWC has no requirement to pursue offsetting claims against the negligent party’s insurer (Subrogation).  There is no need. They can just charge you a penalty rate on your future coverage, and you are a legally captive customer who must pay it.  In competing states with private coverage, this is not the case. 

In 2007, 75% of all injured workers went back to work.  By September of 2011, it was down to 69%. OBWC has no economic incentive to get people back to work.  To make sure no one is defrauding the disability system, we must rely completely on the OBWC and their sense of “the public good”.  The only person harmed by disability fraud is the employer, and he has no power other than to employ fewer people. 

In Ohio, attorneys have found legal ways to “fish” for workman’s comp claims, by-passing all privacy laws.  It is not uncommon for a worker who goes to an emergency room for a precautionary visit or minor injury to receive as many as 15 unsolicited letters from law firms telling him about his “disability” rights.  How do these law firms access this data?  It is illegal for employers to screen for “serial disability filers” when hiring new employees.  Why can lawyers find them with such ease? 

The list of outlandish aberrations caused by OBWC having no incentives to properly adjudicate claims could go on forever.  However, oddly this is not an indictment of the “rank and file” employees of this agency.  As is often the case with agents of OBWC,IRS, and other regulatory bodies, the agents with their “boots on the ground” so to speak develop empathy for the employers they oversee.

They see businesses close due to rising workman’s comp premiums, back payroll tax obligations, and unbearable filing requirements.  In some cases they actually advise (off the record, of course) on how the employer might survive.  These front line agents are nothing like the aloof and detached administrators who build these agencies into self absorbed fiefdoms.  They are generally professional and objective. 

But despite this fact, the bottom line is this:  an Ohio small business employer involved in construction, manufacturing, warehousing, trucking, industrial services, or assembly is better off to leave Ohio.  They are one injury away from being put out of business by OBWC.  If they lose their group rating and get into a penalty rate category, they have virtually no choice but to lay off someone to cover the costs of the future premium hikes.  THIS IS TRUE EVEN IF THEY HAD NO FAULT IN THE INJURY EVENT.  I regularly advise clients who are having workman’s comp affordability problems that the only real solution is to lay off employees whose wages equal the future cost increases, and just work more hours themselves.  There are few other options.

THE POLICY FIX

The first fix is for the Ohio Assembly to adopt the NFIB “12 Suggested WC Reforms” listed at NFIB.COM/OH.  This list is not a total solution, but consists of a group of moderate common sense changes that may save a few people their jobs. 

Secondly, we must re-define what is “disabled”, and incentivize people to return to work.  A hard cap on the number of years of benefits would be a start, and a narrowed definition would be beneficial. 

Stop the “war on subcontracting”.  The government needs to understand that this status is already specifically defined under law, and it is they who have driven small businesses to use this classification.  Government must stop forcing small business to use this status, and then penalize them for doing so.  If you outlaw subcontracting as a status, you will literally kill thousands of small businesses in Ohio.  That is a guarantee. 

Get the Workman’s Comp legal community under control!  Require that all claims for workman’s comp be initiated by the employee.  Outlaw access to private data, and initial “fishing” contacts by law firms.  Outlaw direct attorney intimidation of doctors and employers. Require billings by “hour of service” for all workmen’s comp cases. 

End lump sum disability buy outs.  These are just a contingent fee funding mechanism for aggressive law firms.  A disabled worker should be paid over the period of his disability until retirement age, and must be required to utilize resources for re-entry into the work force until then. 

And finally, the best and in fact only way that OBWC will ever be an efficiently run enterprise that treats employers with any sense of fairness is to interject competition into the market.  We must de-socialize this service and have multiple participant providers of coverage.  Until then this universal truth of all Socialist markets will remain.  We will get a sub-standard result at an above standard price, and the only true beneficiary of our system will be the job seeking citizens of Indiana!

Volume III                                                                                                February 1, 2012

Welcome again to fellow policy wonks who look beyond complaining about problems, and actually enjoy thinking about solutions.  This month, I must take you again to a basic fundamental of economics, as I wish to explore another policy barrier to small business employment growth.

Anyone who took an undergraduate economics course and retained some level of understanding of the basics of economics may recall this fact. The “Demand” for any commodity and the “Supply” of that same commodity engage in a free market dance that determines “equilibrium price”.  At this point I would ask you to also recollect that the normal reaction to a reduction in the price of any good or service is that the amount “demanded” by the consumer rises. Conversely, if the price is increased, the amount “demanded” by the consumer normally falls. Think for a moment about the amount you drink at a wedding reception with a cash bar, versus the one with an open bar.  As the price of beer falls to zero, the demand for beer goes up. (Having paid for a daughter’s wedding, I know this to be true).                                                                    

These concepts are important in our discussion about barriers to small business jobs growth, because small businesses are as a group the largest “consumer” of labor.  Consequently, those who believe in the fundamentals of economics will also believe that if the cost (i.e. the “price”) of the labor component paid by small business enterprises across the economy goes down, then in aggregate small business will demand more labor (i.e. they will hire more people). 

You will then surely ask if my “policy solution” for this month is to mandate a drop in wage rates.  It surely is not, for two reasons.  First of all, mandates come from government, and history has clearly shown that in the world’s “economic village” government most often behaves like the “village idiot”.  Rarely do their policy mandates achieve the desired results, and on the rare occasion where mandates work, the benefit is normally swamped by negative unintended effects. Secondly, I am a believer that higher productivity will continue, driven by “market selected” technologies (not government selected ones); if the government does not regulate these advances away in vain attempts to “protect” obsolete technologies.  Real wage rates will then rise in response to this higher productivity, as they always have. 

The problem addressed over the next three months will be this; Government policy has directly increased labor costs on small business while wage rates paid to employees have stagnated and jobs growth has stalled.  One of the specific causes of this unholy phenomenon is that government has decided to impose more and more payroll taxes onto employers, raising the cost of labor.  Government inefficiently keeps significant portions of the tax revenue to fund their own ever expanding audit, compliance, collection, and enforcement infrastructure.  They then dole out the balance as incentives to individuals to become non-productive.  There are three areas where government over the last decade has continually raised payroll taxes paid by employers, those being social security, Medicare, and direct benefit taxes such as workman’s compensation and unemployment insurance.  You may not believe it until you read further, but this month we are going to fix the first one, social security!

 My three fundamental premises for this fix are as follows: 

First of all, it is not supportable that people should receive financial benefits from taxes imposed on their neighbors that exceed what they themselves funded, simply because they have reached a certain age.  If someone who reaches a statutory retirement age, and collects benefits from his neighbor’s taxes over and above what he has earned, then it should be because of an economic “need” in keeping with the historical goodness and benevolence of our people. 

Secondly, anyone who has paid into the social security system, regardless of need, should receive their money back plus a fair return on their money, so long as the balance of their own payments plus interest may last.

Finally, we Baby Boomers should not “steal” from our children.  This sounds harsh, but let’s give this some thought.  We are promising our children that if they work hard until their late 60’s, and allow us to take from them 12.4% of their income for their entire working lives, we will give them a lifetime annuity that is less that the present value of their contributions, an awful disability policy, and a tiny life insurance benefit. 

Their survivorship rights for their spouse will be limited if any, because almost all of our children will have a working spouse who has their own premium to pay.  And they can leave none of their money to their adult children.  Obviously this is a horrible policy benefit set, and no knowledgably person in their 30’s would pay this outlandish premium unless forced to by law. But it gets worse.  If our young people fail to pay this premium, we fine them.  If they knowingly deceive us to evade paying it, we put them in federal prison.  Yet the money we are taking from them now is not set aside to pay the benefits we promise them, low as those benefits may be.  The money is instead paid out immediately to us, since we failed to set aside any of our premiums either.  And because so many of us will retire over the next 15 years and live so long, there is no mathematical way we can keep the promise to pay our young people even these outlandishly over-priced benefits!  And since we currently know that this is true, telling them otherwise is a lie! 

So tell me, when you take someone’s money by force, falsely promise them that you will give them something in return that is worth the money you are taking, and you know at the time that there is no way you can deliver on that commitment, what else can we truthfully call it?  I look at how hard my 30 year old son and my 25 year old daughter work to establish their own households and care from my grandchildren, and I have a sense of shame at how we boomers have layered so many entitlements for ourselves at our children’s expense.  My friends, we are stealing from our children, and if we don’t stop, they will someday cut us off!

The Policy Fix

“Two wrongs don’t make a right”,  my momma said!  So since we are lying to our children, let’s not lie to our parents too.  Step one is this; anyone who is already on social security or who will begin doing so in the next 12 months gets a pass.  Nothing changes. 

I am 54, so I will use that age for the group that is going to get screwed the worst.  Anyone 54 or older has to stay in this system, God awful as the benefits are, since we have been in it so long. The only change is this;  when we reach retirement age, we will apply for our “paid for benefit” period in the Social Security System.  The SS agency will calculate how much was withheld from our checks for social security or paid in by us as self employed persons, to establish our investment.  (They already do this, but decided it was too expensive to keep sending us a statement).  They will then add interest to our balance over our lifetime, atU.S.government bond rates, to give us our investment total including interest.  At this point, we will start collecting our benefits, and do so until our own money plus interest is paid back to us.  If we die before we get it all, the balance goes to a beneficiary named by us.  There is no indexing.  We get our money plus interest over a life expectancy.  Not a great deal, but better than now.  Now when our money is gone, we have to go in and re-apply.  If our household income from other sources (interest, dividends, other pensions, etc.) exceeds $90,000, indexed for inflation ($45,000 if single) then the benefit starts to phase out.  If we have over $120,000 in income, the benefit disappears.  So if you have no reasonable economic need, you don’t get any of your children and grandchildren’s social security tax money, only your own.  If there is, your benefits continue. 

Many of my boomer brethren will moan about “fairness”, saying that we are not keeping our promise to them.  But I never promised to give rich people retirement benefits beyond what they themselves earned, and I for one think that stealing from our kids and living 30 years on the dole is a worse evil than giving up a benefit that exceeds what I actually paid for.  One more thing that will make us boomers feel better.  Since these benefits are so over priced, let’s do what the market would do.  Let’s lower that price.  Let’s lower the FICA tax rate and the employer matching from the current norm of 6.2% to 4.5%, and let’s make it permanent! 

What about people under 40?  They get a new system.  From now on they will have to put 4.5% of their pay into a 401K style plan that is provided by private investment companies.  These plans will be required to have approved, gradually adjusting, age appropriate investment mixes. The “under 40’s” employer must match it with another 4.5%.  Included in the mix is a private disability policy that you qualify for without going to federal court! (better than the current plan!).  Also included is a $50,000 life insurance policy (also better than the current plan!).  Is this enough to retire, you ask?  Well, a 23 year old who goes into this system now and invests 9% of an average career wage of $65,000 (very conservative assumption) would have $1.4 million in his account at a retirement age of 70!  And this is with a long term growth rate of only 6%.  By the way, it would be your money, and if you think you’ve got enough you can retire earlier.  If you die young, it isn’t like now where the government steals your money.  Instead, the balance in your account goes to your spouse and children! 

So let’s imagine an entire generation of independent millionaires retiring with $1.4 million in their investments, free to think and vote as they wish without the threat of the government taking away their social security check.  Wow, would they really be free!  Is this why the government doesn’t want to privatize the system? 

One more question. What about the age 40 to 54 group? Well, you guys get to pick. 

To pay for this system, we look as always to history.  In the 1980’s the government took on an unfunded obligation to bail out the entire savings and loan system of the United States.  To do so, they started a Trust, and so will we.  This Trust (the Social Security Resolution Trust, if you will) will have two sources of income to “bail out” the bankrupt Social Security System.  Note that the Social Security System will get the lower 9.0% of FICA taxes paid, but this will not be nearly enough to pay lifelong benefits to all of us “54 and above” boomers (and you “over 40” who choose the old system).  But it does have a large number of non-tradable “fake” U.S. Government bonds that it holds that are obligations from the general fund.  When those are gone, it will need a “bail out”!  And in comes our “Trust” to the rescue!  First of all, our Trust will receive a new payroll tax, paid on every penny of wages earned in America.  That payroll tax will be 7 tenths of one percent (.007 for you math majors) from all employees, matched by employers, for a new 1.4% revenue source.  This will be a debt service revenue source against which our Trust can issue its own U.S. Government long term bonds, in the amount necessary to bail out Social Security until all us “benefit addicted entitlement babies” are dead!  The Trust can do this literally for as long as it takes for the 1.4% to cover any shortfall.  My quick calculation is that at a 1.4% tax rate the shortfall may take 100 years to pay off.  But since it is open ended, it is also fully funded, and it is an off budget solution.  And besides, that is only thirty years longer than it took our government to create this mess! 

Now back to lowering labor costs without lowering wages.  Has anyone noticed that every employee in America just got a 1% raise on their first $106,800 of earnings, and every employer just got a 1% reduction in their similar labor costs?  This should increase demand for labor and demand for goods and services, both likely to increase small business hiring! And as an added benefit, we also just stopped stealing from our kids. 

In addition, we’ve freed our kids from spending their retirement years dependent on an intrusive group of bossy bureaucrats for their daily bread!  In fact we made them millionaires!  And while we pleased Republicans by solving a large slice of the long term deficit problem, we probably also pleased Democrats by raising taxes on rich wage earners! 

You would think of course that such a plan would be celebrated.  We saved social security, cut taxes on the middle class, reduced business labor costs, raised taxes on the rich, made our kids independent millionaires, made no changes in existing recipient’s benefits, and made sure boomers all get a fair return on their social security investment, even if they die young!  Sadly, for several reasons, this plan will never happen.  It asks the government to simply give up too much.  It will ask them to give up control of young people’s money, give up control of retiree’s political lives, and give up control of 2% of America’s earnings.  It would ask them to eventually get rid of the Social Security Administration and all those employees, and greatly decrease the need for much of the power and reach of theIRS.  It will end the current monthly general fund “raids” on the Social Security Trust Fund, and it moves the entire Social Security System off budget. 

So, you chuckle, I propose asking the government to tell the truth, give up power, give up control, make itself smaller, and take less of our wages.  Let’s none of us hold our breath, shall we?

Volume II                                                                                                January 1, 2012

Happy New Year to all the policy wonks who follow this Blog, and care as I do about the passionate pursuit of “breadwinner jobs” creation in the American economy. Let us hope that 2012 will see an epiphany among the government bureaucratic class whose policies are the primary barrier to American jobs growth and recovery. 

With all the anti-employer regulations and taxes dampening small businesses ability to hire, the NFIB still reports that the number one reason that small businesses are not hiring is a lack of demand for goods and services.  This fact would appear to give government a pass on the issue of stagnant job creation, unless one looks at where “higher demand” comes from.  For this, we must look to the laws of economics. 

Higher demand for goods and services comes from two sources.  The first is obvious, that being more households having disposable income.  In the long term, population growth to fuel a higher number of productive, non-dependent households is the source of this demand. 

Higher government employment or benefits cannot raise demand, as every dollar paid to a government worker must eventually be taken from another private sector worker. (Sorry, Democrats, perpetual borrowing to fund higher and higher government employment is not a sustainable demand builder).  With birth rates among non-government dependent households low and falling, the source of new worker growth will come in large part from immigration, (Sorry Republicans. We can’t grow our way to prosperity in “Reaganesque” style without growth, and that requires allowing workers to come in). 

The second source of demand is higher incomes for existing households due to higher economic productivity per economic participant.  Such higher productivity allows companies to pay workers more while remaining profitable and without raising prices.  For this higher productivity to happen, our government cannot be blatantly “anti-employer”, as it is now.  It must allow the free movement and application of capital, the protection of private property rights, market rates of return on technology that is selected by market forces, and the development of natural resources to fuel this growth. 

According to the Bureau of Labor Statistics, we are producing a net gain of about 120,000 jobs per month in 2011.  Most economists say as many as 300,000 per month are needed to drive down real unemployment, (not recent drops in rates caused by the long term unemployed leaving the work force).  So where are these jobs coming from, and how has government’s anti-employer and anti-private sector worker bias kept them from happening?  Surprisingly, the financial media has provided a host of examples in the last few months: 

• The government hates private jets:  The Obama administration’s hatred of private aviation is purely political class warfare, which increasingly appears to be his specialty.  However, he seems to forget that it is highly paid unionized workers, (can you say “Democratic Base”), that builds these planes.  The private aviation industry employs over 35,000 workers in the greater Kansas City area building private jets.  According to the Wall Street Journal, 85% are exported and thus are never deducted on a U.S. tax return.  So the President’s argument about the evil of giving rich people (i.e. employers) a tax deduction for their evil jets is a specious argument.  But there is no law that a company that builds jets has to do it in a country that hates their industry.  So it should be as no surprise that Bombardier has decided to build their new model in Mexico.  Jobs lost? 8,000.
• The government hates fossil fuels:  While saying its objections were environmental, clearly this government is using its appointees in the EPA to create shortages and increase prices for carbon fuels.  The policy of reducing our dependence on carbon fuels is one of the stated reasons for the “delay then kill” strategy for the Keystone XL pipeline.  Jobs lost? 117,000
• The government hates southern employers:  The now infamous and completely illegal “law writing” adventure of the Obama administration’s Labor Relations Board bypassed Congress and declared that Boeing could not move a plant to South Carolina to avoid costly delays due to a history of repeated strikes.  There is no law allowing them to make such a policy decision, but it did cost South Carolina 12,000 jobs.
• The government hates small banks:  I will refer you to last month’s policy Blog to see how our unelected federal regulators are destroying small banks and limiting available credit to small business employers.  But the Wall Street Journal on November 30 reported that over 2,500 small banks had laid off  20,332 employees in response to lower loan revenue and higher regulation costs.
• The government hates natural gas:  Once again using its unelected appointees in the EPA, the Obama administration has gotten water used for “fracking” natural gas declared toxic waste subject to EPA control.  Clearly a “delay then kill” plan for this new natural gas technology is on the way, keeping it from making “green energy” alternatives price prohibitive.  Used effectively on nuclear plants for years and on pipelines more recently (see above), the “delay then kill” technique for the new natural gas has CNBC’s Jim Kramer fuming.  His job loss estimate?  Over 3 million!
• The government hates immigrants:  We all know that the political right’s boogey man against the free movement of labor across borders is “illegal immigration”.  But according to the U.S. Travel Association, extending this crackdown to travel visas is costing us 467,000 jobs in the travel and tourism industry.  And the recent crackdown on Chipotle’s workforce has brought hiring to a standstill.  Their annual hiring?  30,000 per year.  

So there it is folks!  Specific government policies getting in the way of jobs growth that would increase the number of non-government dependent households and increase household incomes. Just this list totals a whopping 3,654,332 jobs, enough to get unemployment down to the 7% range.  This total is without even considering the new small business jobs providing goods and services to these new households.  How’s that for demand growth!