How Jim Cooper ruined my lesson plan

In my free time, I teach High School Economics, and for the past two weeks I have been prepping the students to hear Representative Jim Cooper. We did a benefit-cost analysis of the stimulus bill, and came up with the usual criticisms

1. The multiplier is tiny
2. It cannot be done quickly enough
   
3. It is likely irreversible
   
4. Congress stuffed the bill like a Turkey
   
5. It is likely to start a protectionist trade war
6. We have never been able to spend our way out of a recession
   
7. Government bureaucrats, instead of consumers, decide where to spend our money
   
8. Who pays for it?

On the last point, the students were smart enough to figure out that the stimulus represented future liabilities that their parents were passing on to them. I had the students ready to tear Cooper's head off, but then he ruined my lesson plan by voting against the stimulus. And now, George Will praises him as one of the few in Congress who is both smart enough to recognize the bigger problem (saddling our children with huge entitlement debt of about $200,000 for each person), and principled enough to try to do something about it:

Cooper, who has an unshakable appetite for unappetizing numbers, wishes more Americans were similarly eccentric and would read the 188-page 2008 Financial Report of the United States Government -- the only government document that calculates what deficit and debt numbers would be if the government practiced, as businesses must, accrual accounting.

Under such accounting, future outlays to which beneficiaries are entitled by existing law are acknowledged as expenditures before they are paid. Were the Social Security surplus sequestered for accounting purposes, reflecting the truth that it is already obligated, and were there similar treatment of the other entitlement programs' liabilities, the deficit for the fiscal year that ended Sept. 30 would have been $3 trillion rather than $454.8 billion. The report's numbers show that the true national debt is $56 trillion, not the widely reported $10 trillion.

Cooper is trying to make visible the true costs of our entitlement programs by forcing the Feds to use accrual accounting, that includes future liabilities.

Canary in the coal mine

Our entitlement problems, while enormous, are smaller than those facing Japan

...combined with the estimated trajectories of social-security contributions and taxes, ... the total sum that workers pay to the government and social security [would rise] from 18 percent of household income today to 37 percent by 2035.²

This magnitude of their entitlement burden is bigger than Sweden's (36 percent) and almost as big as Germany's (40 percent). And like our entitlement problems, no one knows how to address them.

Any increase in premiums is likely to encounter opposition from both employers and workers. ... Alternatively, policy makers could raise copayment rates, [already] among the highest in the world. [30 percent for those aged 3-29; 10% for those over 70]

To close the funding gap further would require additional measures, such as boosting consumption tax rates to 11 percent (from 5%) or raising insurance premiums to 20 percent (from the current 8 percent)

In praise of irrational politicians

James Buchanan won the Nobel prize for discovering that politicians are like everyone else--they respond to incentives. He found that he could explain a lot of their voting bahavior using the rational actor paradigm (rational, self interested, optimal behavior).

After his party took control of Congress, I would have expected my own Congressman, Jim Cooper, to start handing out favors to constituents in exchange for campaign contributions. Instead, he is acting...irrationally. And I am delighted. He is making it harder for his colleagues to spend our money on their pet projects.

PORKBUSTERS UPDATE: The Club for Growth has put up a Congressional Pork Scorecard tracking members' votes on all 50 anti-pork amendments that have been presented.

Highlights:

* Sixteen congressmen scored a perfect 100%, voting for all 50 anti-pork amendments. They are all Republicans.

* The average Republican score was 43%. The average Democratic score was 2%.

* The average score for appropriators was 4%. The average score for non-appropriators was 25%.

* Kudos to Rep. Jim Cooper (D-TN) who scored an admirable 98%-the only Democrat to score above 20%.

* Rep. David Obey (D-WI) did not vote for his own amendment to strike all earmarks in the Labor-HHS appropriations bill. Rep. Obey scored an embarrassing 0% overall.

* 105 congressmen scored an embarrassing 0%, voting against every single amendment. The Pork Hall of Shame includes 81 Democrats and 24 Republicans.

* The Democratic Freshmen scored an abysmal average score of 2%. Their Republican counterparts scored an average score of 78%.

A far bigger problem with the politicians' incentives is that old people vote in greater proportions than young people. This creates incentives for politicians to delay addressing our entitlement problem, likely the most pressing issue of our children's generation. Fortunately, however, our irrational Jim Cooper has been the driving force behind the adoption of accrual accounting by the US government, so we can see how badly we are screwing our kids. Each working family would have to come up with about $400,000 in today's dollars to pay off the Medicare and Social Security promises our politicians have made to old people. Before this bill comes due, teach your kids to speak Danish so they can move to a country that has addressed its entitlement problem.

Only 25% of voters approve of the job that Congress is doing--I say lets hunt down the 25% and exile them as they are obviously part of the problem.

We will have to tell our children that we received fair warning

Our entitlement problems are becoming too big to comprehend. This must be how the Romans felt just before the barbarian horde crossed the Rhine. From MSNBC:

"Our government has made a whole lot of promises in the long-term that it cannot possibly keep," Comptroller General David M. Walker, the head of the Government Accountability Office, said Monday.

Members of Congress said the increase in the unfunded liability for Social Security and Medicare underscored the critical urgency to do something in light of the looming retirement in coming years of 78 million baby boomers.

"The longer we delay action on the issue of entitlement reform, the more difficult the solution will become," said Sen. Judd Gregg, the top Republican on the Senate Budget Committee.

Rep. Jim Cooper, D-Tenn., said the new report emphasized the need to enact legislation he is supporting that would create a bipartisan commission to make recommendations on overhauling benefit programs and then submit those recommendations to an up-or-down vote in Congress.

"If we don't take action now, it threatens to destroy our social safety net and ruin our economic prosperity," Cooper said in a statement.

Allowance teaches kids about opportunity cost

[This essay was written more than a decade ago by the late Steve Dalton to teach kids the purpose of an allowance.  Its lesson could have come straight out of Chapter 3.]

"We cannot always build the future for our youth, but we can build our youth for the future." Franklin Delano Roosevelt

Why give an allowance?

For one big reason: To help your youngsters learn how to manage money. An allowance is not to relieve you of paying for some of your children's wants or needs. It is the best and most hands-on method of teaching your children how to spend and save. By using their own funds, their limit becomes real and tangible to them- -they only get a certain amount each week, rather than having your seemingly infinite wallet--and it will quickly become obvious that they can't have everything they want. Picture your child as an adult (18) and how do you want them to view and handle money- now is the time to start.

One of the biggest misconceptions about an allowance is that some parents cannot afford to give their children "extra" money. However, if you look at an allowance from a different angle, every parent can afford it. An "allowance" is basically money that you're going to spend on your child anyway, just given in a different form. Instead of paying for things at the time your children want them, you pay them an allowance and let them decide how to spend the money. The ultimate goal of an allowance is to teach children to distinguish between needs and wants and to prioritize and save--a difficult lesson that will be needed throughout life.

1. It's never too early to start.
If you've hesitated because you don't think your child is old enough to handle money, keep in mind that recent studies have shown that most 3 year-olds are ready and eager to learn about money and how things are bought and sold. By the time they're 5, many already have started to save.

2. Establish who gets what.
Develop a consistent system that pays more to older children. But keep it flexible until you hit on the right formula. In general, your plan should be more generous with older children because their needs tend to be greater. Many parents seem to favor a plan that increases at the start of each new school year. It's a good idea to present your proposed plan in written form and seek input from all members of the family. Then, make adjustments accordingly.

3. Describe the rules.
Each child should understand why she is receiving an allowance and what expenditures it's supposed to cover. If you've decided to pay an allowance to your children because they are members of the family tell them so. But also remind them of the general responsibilities they have as members of the family. If the allowance is tied to household chores, describe those assignments in detail.

4. Pay on time.

Paying on schedule will subtly teach your children the value of honoring one's obligations.

5. Allowance is not a control device.
Unless the allowance is tied to specific work assignments, you should avoid threatening the withhold payments. If the allowance is related to work, from the beginning of the program be sure to indicate in writing that the allowance may be withheld if the related jobs aren't completed.

6. Develop accountability.
Some parents require their child to account for how the money was used. This kind of activity can prepare a child to handle larger sums and manage a checkbook. As a rule, you should avoid questioning the purchasing decisions of the child. However, you many want to offer helpful advice on how the money can be spent more productively

 There are several approaches:

1. Hands Off. Once you've given an allowance, walk away from it. The money is no longer yours, therefore you no longer control it. It is now up to your child to decide how it should be spent or saved. Kids will learn from their mistakes at a younger age and at a time when the costs are substantially less. ($5.00 mistake versus $50,000) We give our children parameters on what they can buy.

2. Chores for Pay. Many parents believe that their kids should complete chores in order to receive their allowances--they don't want their youngsters to view an allowance as an entitlement. However, some experts don’t buy that. They feel that children should understand that doing chores is part of membership in a family. In healthy families, all members contribute and all contributions are valued. The grownups don't get paid for doing family chores--why should the kids? And a share of the family income is an entitlement, just as food, clothing, and shelter are entitlements to any family member.

3. Compromise: Hands Off/Chores. With this approach you give children a basic allowance, but attach no responsibility for household chores. Instead, make sure you provide regular employment that will allow your kids to earn additional money: raking leaves, washing windows, mowing the lawn, washing the car, or doing heavy-duty cleaning in the cellar or garage.

Only you can decide which approach--hands-off, chores for pay, or compromise-is the best for your children and your family. But whatever you decide, it is important to remain consistent.

Keep in mind the fact that kids have three uses for their money - spending, saving and sharing. We do $5.00/week[$3.00 spending, $1.50 savings-goes to the bank and not touched, $.50 to Church]

How much should I give?

When coming up with the amount, try this:

• Determine how much money you already give them. If your kids don't get allowances, you are managing their money for them by deciding what they will buy and what they will do. Their role is salesperson and manipulator. Let them learn to manage their own money. Stop doing all the work. Total up the amount you are giving them now. Give that to them as an allowance and let them make their own decisions. You'll save money and avoid some of life's major battles.
• Make a list of what they are expected to pay for with their allowance. Once you have the amount, sit down with your child and make a list of everything they are expected to pay for. This solves the conflicts that may come up in stores and as they walk out the door to go to the movies. The total required becomes their allowance. As their needs change, so can the amount. Be open to reviewing it when appropriate.

Examples:

Early Lesson: styrofoam airplane purchase at Target purchased for $8-10. flown once and it crashed and broke.  The wing would not stay in place.  Donna gave child choice, live with it or take it back.  The child took it back and got his money back.  

Recent Purchase: spending money for snacks, “like- Mike” CD used at Blockbuster for $15($20-25 new), Michael Jordan Wizards jersey for $33 at Sports Seasons.

Contest Announcement: Plan B

The fiscal future for young people in the United States is bleak. The promises we have made to retired people (through Medicare and Social Security) are going to swamp the federal budget in a short time. The rating agencies will eventually downgrade US government debt because we have no plans to pay for our entitlement programs; and long term interest rates will rise as markets punish our inaction.

I will award $100 to the best "plan B"--identify the best country or location to wait out the decline and fall of the US Empire. Post your (less than 100 word) entry as a comment to this post, and my Managerial Economics students at Vanderbilt will select a winner. A winning country will not be facing the same kind of fiscal disaster that awaits young workers in the US; and be a good place to live and work.

DEADLINE: 1 December 2009.

What is Nancy thinking?

Our country is at war, the dollar is falling, and our out-of-control entitlement spending is mortgaging our children's future. So what is Congress doing? Investigating which tier (premium vs. basic) the NFL channel should go in. From CBS:

NFL Commissioner Roger Goodell said the cable operators "enjoy a high level of bottleneck power" and treat the NFL Network in a "sharply different and clearly less favorable" way than networks they own a stake in.

Democracy is the worst form of government except for all the others that have been tried.--Winston Churchill

I hope no one responds to these incentives

President Obama’s spending proposals are encouraging individual states to add more families to their welfare rolls; the more Americans sign on to the dole, the more state budgets will benefit from US Treasury payouts. This policy essentially undoes the policy changes passed a decade ago by Republicans and President Clinton, over the objections of liberal Democratic legislators:

Despite dire warnings that reduced benefits for single mothers and deadlines on entitlement would create a social calamity – one liberal senator warned at the time that children would be “sleeping on grates” – the 1996 reforms cut welfare rolls from more than 5m families in 1995 to below 2m a decade later without a discernible increase in hardship.

The changes that Obama has proposed will undue one of the "few undisputed triumphs of American government in the past 20 years.

Douglas Besharov, author of a big study on welfare reform, said the stimulus bill passed by Congress and the Senate in separate votes on Friday would “unravel” most of the 1996 reforms that led to a 65% reduction in welfare caseloads and prompted the British and several other governments to consider similar measures.

Though some researchers have questioned the true impact of Clinton’s “workfare” reforms, they were wildly popular with millions of US taxpayers tired of subsidising what many saw as a generation of slackers.

“They have completely overturned the fiscal and policy foundations of welfare reform,” Rector complained.

When spending other people's money, who cares about price?

Never mind our huge entitlement problem that we are mortgaging our children's future on items like erectile pumps, The NY Times reports that Medicare is also paying way too much:

...last year Medicare spent more than $21 million on pumps to help older and disabled men attain erections, paying about $450 for the same device that is available online for as little as $108. Even for a simple walking cane, which can be purchased online for about $11, the government pays $20, according to government data.

The basic problem, which we have noted before (In praise of irrational politicians), is that old people vote in much greater numbers than young people. This makes political reform very difficult.

...when officials and politicians have tried to cut these costs, they have often encountered a powerful foe: the companies that sell these devices, who ask their elderly customers to serve, in effect, as unpaid lobbyists, calling and writing to their representatives in Congress, protesting at rallies, and even participating in political attacks against individual lawmakers who take on the issue.

“These industries rely on a basic threat: If you mess with us, we can turn the seniors against you,” said former Senator Alan K. Simpson, Republican from Wyoming.

We knew this already--but keep reminding us

Anyone who reads this blog knows about the US entitlement problem. Treasury Secretary Paulson took the first of twelve steps by recognizing that the problem exists:

The Social Security program is financially unsustainable and requires reform...[and] the Medicare program poses a far greater financial challenge than Social Security.

Not exactly a rousing call to arms. I prefer Cato's characterization as it comes close to using what is known as the "dead baby defense". If you can link a policy to infant mortality, you win the debate.

...It cannot pay future benefits without drowning our children and grandchildren in a sea of debt and taxes.

You are not rich because...

Becoming a millionaire has less to do with how much you make, it's how you treat money in your daily life

1. You care what your car looks like
2. You feel entitlement
3. You lack diversification
4. You started too late:
5. You don't do what you enjoy
6. You don't like to learn
7. You buy things you don't use
8. You don't understand value
9. Your house is too big
   
10. You fail to take advantage of opportunities

If the Swedes can do it, why can't we?

Everyone but us seems to be addressing their entitlement problems.

For decades, Sweden maintained a conventional, pay-as-you-go, defined-benefit public pension, not unlike Social Security. By the late 1980s, it was apparent that rapid population aging would force tax hikes to an extent that even Swedish voters would find unacceptable. Pushed to act by a faltering economy, Sweden's leading political parties joined together in the 1990s to pass and implement a sweeping overhaul. Benefit payments under the new system began in 2001.

The Swedish reform introduced a new concept--"notional defined contribution" accounts, assigned to every worker participating in the public pension system. These notional accounts look like 401(k)s. They track worker "contributions," assign "investment earnings," and report "account balances"--except there are no financial resources in them. They're tracking devices. Pensions are still financed on a pay-as-you-go basis, with payroll taxes collected today to cover monthly benefits for current retirees.

What's different is the pension calculation at retirement. New Swedish retirees get a pension based on the balance in their own notional account, which is converted into a monthly benefit much as the balance in a 401(k) could be used to purchase an annuity. The retirement benefit is set at the amount that would, when drawn monthly, deplete the worker's "account" over his or her expected remaining life span.

More on Kidney Donations

The low supply of donor kidneys relative to demand is a recurring theme on our blog. Here's Virginia Postrel in The Atlantic on the need for more creative solutions. An excerpt on the issue of paying donors:

The obvious solution to the problem of barter is, of course, money. Altruistic blood donors often receive freebies like movie tickets or paid vacation hours that would be illegal for kidney donors. Plasma and sperm donors routinely receive cash, as do egg donors and surrogate mothers, who get tens of thousands of dollars.. If transplant centers could pay $25,000 or $50,000 to each living kidney donor, many more people would line up to contribute.

Such payments could even save taxpayers billions of dollars. Long-term dialysis is a federal entitlement. Under a special law, Medicare covers everyone, regardless of age, who has made minimal Social Security tax payments—about 319,000 of the country’s 400,000 dialysis patients. Compared with dialysis payments, every transplant from a living, unrelated donor saves an expected present value of almost $100,000 in medical costs, according to a 2003 American Journal of Transplantation article by Matas and Mark Schnitzler, an economist then at Washington University in St. Louis and now at the Saint Louis University Center for Outcomes Research.

Eliminating the waiting list would thus save taxpayers $8 billion, or $4 billion if each living donor received a lump-sum payment of $50,000.

The Scandinavian Model

We have blogged about the Scandinavian success stories before (Grow a pony tail and cut taxes,
Now that we have a European style welfare state, lets learn how to run it efficiently,

What can we learn from Chile, Sweden, and Hungary?, What can we learn from Sweden?)

The Economist has an update on how well the Scandinavian model is working. 

 Government’s share of GDP in Sweden, which has dropped by around 18 percentage points, is lower than France’s and could soon be lower than Britain’s. Taxes have been cut: the corporate rate is 22%, far lower than America’s. The Nordics have focused on balancing the books. While Mr Obama and Congress dither over entitlement reform, Sweden has reformed its pension system (see Free exchange). Its budget deficit is 0.3% of GDP; America’s is 7%.

On public services the Nordics have been similarly pragmatic. So long as public services work, they do not mind who provides them. Denmark and Norway allow private firms to run public hospitals. Sweden has a universal system of school vouchers, with private for-profit schools competing with public schools. Denmark also has vouchers—but ones that you can top up. When it comes to choice, Milton Friedman would be more at home in Stockholm than in Washington, DC.

All Western politicians claim to promote transparency and technology. The Nordics can do so with more justification than most. The performance of all schools and hospitals is measured. Governments are forced to operate in the harsh light of day: Sweden gives everyone access to official records. Politicians are vilified if they get off their bicycles and into official limousines. The home of Skype and Spotify is also a leader in e-government: you can pay your taxes with an SMS message.

FINALLY!!!!

Paul Ryan makes "Republican" more than a punch line to some derogatory joke:

He does this without, on net, raising taxes. By closing loopholes, he would pay for a cut in the top personal and corporate rates. So how does he shrink the deficit? Through an eye-watering assault on entitlement spending, in particular health care. Mr Obama’s health care reform would be ditched, Medicaid would be converted to block grants, and traditional Medicare would be replaced with vouchers.

Scotland is taking our best and brightest

From a serial entrepreneur who is moving his company to Scotland:

• We will reincorporate the company in Scotland- form a new Scottish entity and have it acquire 100% of the US entity.
• I will remain in the States, but we will pass all of the revenue through Scotland to avoid the higher US corporate taxes.
• The Scottish government has 35 'recruiters' on the ground in the States (10 in Boston, 5 in NYC, and 20 in Silicon Valley). Their purpose is to recruit entire companies or specific operations of existing companies to Scotland. They are doing a roaring business.
• Scotland has decided that they are going to create a knowledge-based workforce and economy. They have allocated a significant amount of grant money to attract companies to 'Silicon Glen'.
• We are qualified for $2+ million in grants. This is a prime reason for us to consider Scotland.
• Another reason is that Scotland's high tech expertise in display and voice recognition technology is ahead of the States. Both technologies are key to our product.
• Another reason is that the Scots allegedly have a much higher work ethic than the Americans do. I am extremely put off by the entitlement mentality that grips the upcoming generation of Amwerican workers. I don't want to hire any of them.
• Another reason is that the 'Card Check' legislation is very likely to pass. Moreover, the unions are planning to specifically target the high tech sector. I do not want to ever deal with that issue. It will kill many businesses - especially in the tech fields - where you have to be able to change strategy and direction quite quickly.
• Finally, our current administration is highly anti-business, which is the best reason for me not to bother starting a new company based in the States.

Defined benefit pensions threatening civil order

We have previously blogged about looming defined benefits crisis:

• Just when you thought it was safe to get back into the market


• Entitlement train wreck is ahead of schedule


• Are we ready to take control of our pensions?


• If the Swedes can do it, why can't we?

And now, we discover how difficult this problem will be to solve:

State pension benefits are protected by law, and must be paid even if the fund is making a loss. Calpers, the largest fund, has lost $70bn in value in the past eight months, but still has to pay $11bn in benefits this year. Unless the fund starts recouping its losses soon, the California state government, which is already mired in a huge deficit, will have to lift contributions to Calpers starting from next year.

...According to the Pension Benefit Guaranty Corporation, which regulates and insures pensions, ...the current underfunding in public plans, which cover about 22 million workers, seems to be something north of a trillion dollars. And they're not insured.

The funds that are responsible are a different sort of headache; they'll be slapping heavy levies on local school districts and governments to shore up their capital. That will be a nasty burden on strapped local governments, particularly in places that are already in decline. ... In good years, the market booms, tax revenue soars, and not only does their mandatory pension contribution fall, but the state often offers extra help out of the tax windfall. In bad years, the state aid disappears, their mandatory contribution goes up, and the senior citizens on fixed incomes start assembling pitchforks and torches for the march on city hall.

Entitlement train wreck is ahead of schedule

First stop, Illinois:

A financial war is brewing -- and it's likely to pit these public employees against Illinois taxpayers who are responsible for paying those generous pension promises. There simply isn't enough money in all these retirement plans (see box) to send out the promised checks. If you think Bernie Madoff had a Ponzi scheme going, wait until the wave of boomer retirement hits the reality of pension underfunding.

Next stop could be anywhere

To be sure, Illinois is not alone. The Center for Retirement Research at Boston College estimates that state pension plans have losses greater than $865 billion, a loss of nearly 40 percent in just the last year.

The National Bureau of Economic Research says the value of pension promises already made by U.S. state governments will grow to approximately $7.9 trillion in just 15 years. And the report predicts that as much as $1.75 trillion of those benefits cannot be paid.

What's so funny about rationing care?

George Bush blew his chance to reform social security by proposing changes that did nothing to address the out-of-control costs of the program. His proposal for private accounts went down to defeat. Similarly President Obama’s (or Congress’) health care proposals do nothing to address the out-of-control entitlement programs (Medicare and Medicaid).

Either a European style system, where care is rationed by queuing or by treatment, or a market-style system with big deductibles or co-payments, where care is rationed by price, would control costs. The point is that we have neither. There is no mechanism in either the status quo or the various Congressional proposals to control costs, and this is the legacy of the Greatest (and now Obama's) generation: we lack the political courage to ration care.

Signs of intelligent life in DC

If the opportunity cost of your time is low enough to wade through a long and empty personality profile of Larry Summers, you will find this gem at the end of the article.

Summers's greatest test will be persuading Congress to vote for "entitlement reforms"—i.e., cutbacks and/or higher taxes on Social Security and health benefits for the poor and elderly. In his interview with NEWSWEEK, Summers made clear that he will urge the president and Congress to venture into an area where politicians have long feared to tread, the so-called third rail of politics (touch it and you're dead). Necessity requires it, he says—if the United States cannot curb its spending and debt, interest rates will soar and the economy will plunge once more.

UPDATE: this is what he has to overcome:

The president signaled in his campaign that he would support addressing the retirement system’s looming financing shortfall, in part by applying payroll taxes to incomes above $250,000. But that would ignite intense opposition from Republicans, especially with the economy deep in recession.

Liberal Democrats are already serving notice that they will be equally vehement in opposing any reductions in scheduled benefits for future retirees. But any solution, budget analysts said, must include a mix of both approaches, though current beneficiaries would see no change.