When You Find Yourself In A Hole, Stop Digging

There has been a lot in the news lately regarding the national debt.  Suffice it to say it is staggering.

The amount of debt is in fact so staggering that the interest payments alone are the third-largest item in the federal budget.  Only Social Security and the Department of Defense are larger.

Said a different way:  the United States spent almost $414 Billion in fiscal year 2010 on interest on the national debt.

Compare this $414 Billion in interest payments to:

  • Department of Education – $47 Billion
  • Department of Veterans Affairs – $53 Billion
  • Department of Energy – $26 Billion
  • NASA – $19 Billion
  • Small Business Administration – $0.7 Billion

And it gets even better:  roughly one-half of the national debt is owed to the Federal Reserve.  This presumably means that roughly one-half of that annual interest payment is also owed to the Federal Reserve.

So…why does the United States government owe money to the Federal Reserve in the first place?

Because the Fed prints our money, that’s why.  Here’s how it works:

Say the government needs $XYZ dollars in currency printed.  The Fed first charges the government for each bill it prints to fill this order.  The Fed then lends the government the money it just printed, at interest.  Additionally, the government has to take out a bond for $XYZ to secure the loan.

In essence, the government accrues three charges for this transaction, two of which contribute to the national debt, both as principal amounts and interest accrued.

OK, you say, that’s not such a good deal for the government but we have to have money so our hands are tied, right?

Wrong.

From the United States Constitution, Article I, Section 8:

“The Congress shall have power to…coin Money, regulate the Value thereof…”

The power to produce currency is constitutionally granted to Congress and no one else.  The U.S. Mint was created using this constitutional power and is still handling the production of our coinage today.

But with the creation of the Federal Reserve in 1913 the power over our paper currency was stripped from the U.S. Mint and granted to the Federal Reserve.  At interest.

There are lots of theories in circulation as to why this happened, ranging from believable to ludicrous.

Without delving into all of that, however, we are still left with the simple question:

Why?

Why pay for something that can be done for (practically) free?

Why transfer the Constitutionally granted authority to an organization that isn’t part of the government?

Why c0ntinue to do this with the national debt spiraling to dizzying (and dangerous) heights?

Whether there is something sinister at work here or this is just another example of government buffoonery doesn’t matter.  What matters is that a stop be put to it, for the sake our the country and its citizens.

Stop willfully digging us into a deeper hole, Washington.  It is past time.

 

 

 

Sources:

http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm

http://en.wikipedia.org/wiki/2010_United_States_federal_budget

http://en.wikipedia.org/wiki/United_States_public_debt#Estimated_ownership

http://archives.gov/exhibits/charters/constitution_transcript.html

“Cents” – less

I read an article recently (link below) that talked about how it costs more to make pennies and nickels than they are actually worth.

A nickel, which is 75% Copper and 25% Nickel, currently costs 5.79 cents to produce.

A penny, which is 2.5% Copper and 97.5% Zinc, currently costs 1.62 cents to produce.

This means that you could melt $100 worth of nickels and sell the metal for almost $116.  Not too overpriced but still not what I’d call a good business plan.

Pennies are much worse:  $100 worth of melted pennies would sell for $162.  This is downright awful.  Could anyone stay in business selling a product for roughly 60% of what it cost to make it?

(By the way, don’t melt US currency.  It’s against the law and any metal recycling facility worth their salt knows what melted coins look like and will report you.)

With all the talk about reducing government expenses and waste I think every little bit helps and this is an easy fix.

For the nickel the simplest thing to do would be to change the blend of its component metals.  Nickel (currently $11.78 per pound) is very expensive relative to Copper ($4.34), Aluminum ($1.07), and Zinc ($1.04) and I cannot help but think that a good metallurgist could develop a new alloy for our 5-cent piece that costs less than five cents to produce.  A Zinc base (97.5%) with Aluminum flashing (2.5%, and it will be shiny) sounds like a cost-effective starting point.

Due to the recession, the US Mint slowed production of nickels in 2008 and halted altogether in April 2009 for the rest of 2009 since more people were spending their loose change and there was a surge in nickels “in circulation” versus “in someone’s piggy bank”.  Production of nickels resumed again in 2010, albeit at a reduced rate.  Even so, we are still upside-down on the cost-versus-value spectrum.  Producing less doesn’t solve the problem, it only reduces the amount of money lost per unit produced.

In 2007 (the last “normal” production year) the US Mint coined a total of 1,197,840,000 nickels with a face value of $59,892,000.  Using the cost figure of 5.79 cents to produce one nickel means it cost the US Mint $69,354,936 to make those same nickels.  This is a loss of $9,462,936.

In 2009 the US per capita income was $39,626.  Simply changing the composition of a nickel to where it costs five cents to produce (i.e. break-even) it the loss is equivalent to almost 239 jobs at this per capita rate.

Say just for a moment that the new alloy only costs 2.5 cents to produce one nickel.  Using the 2007 production figures this would save $39,408,936 as compared to the 5.79 cent production cost – an equivalent to almost 995 jobs at the 2009 per capita rate.

(By the way I do realize that there is no direct correlation between reducing government expenses at the US Mint and jobs but that seems to me to be a comparison that “hits home” in today’s environment.)

With a new alloy it would of course be inaccurate to call it a “Nickel” if no Nickel metal was used to produce it but in the interest of saving millions I think we could collectively get over it.

The solution for the penny is even easier:  stop minting them altogether and remove the penny from circulation.

The first thing I ever read when this idea is brought up is that “the stores will figure out a way to make every price end in ‘3’ or ‘8’ so they get to round up two cents on everything.”

Well, I suppose they might try.  But they really could only make it work in instances when you were purchasing one single item.  Buying multiple items, or even several of the same item, would make this impossible to do.  There are so many product combinations at most stores that the law of averages would prevail and half the time you’d owe an extra cent or two and the other half of the time you’d get one or two cents knocked off your bill.

However, even if this weren’t true you have to remember that this would only apply when you were paying cash for your purchases and there were no pennies in the till to make change.  For credit and debit card purchases there is no reason that the prices can’t be calculated just as they are today because there is no change to be made.  Ring up the total, swipe the card, and write a check at the end of the month (or click a few times if you pay bills online) – no hard currency is used for these transactions so not having a penny makes no difference.

The financial argument to eliminate the penny is even more compelling:  in 2009 the US Mint produced 2,038,000,000 pennies at a face value of $20,380,000 (and this was a down year for penny production – in the year 2000 over 14 billion pennies were minted).

Using the figure of 1.62 cents required to produce one penny yields a total cost of $33,015,600, all of which (every cent, pun intended) would be saved if production was stopped completely.

Using again the 2009 US per capita income of $39,626 the elimination of the penny equates to over 832 jobs.

TO SUMMARIZE:

Developing a new alloy to make nickels that reduces the cost of production to 2.5 cents per nickel would save $39,408,936.

Eliminating the penny altogether would save $33,015,600.

Combined this is $72,424,536.  Over seventy-two million dollars saved.  Every year.

(And maybe more – remember this is a small sample size.  There are plenty of years in which many more nickels and pennies were produced.  Additionally, remember that the savings on the penny will only grow as the price of the base metals increases.  Nickels might end up in the same boat again when this happens but we’d at least be stemming the tide now.)

This is the equivalent of over 1,827 jobs at the per capita rate – enough jobs to fully and easily support a town of 4,000-5,000 population.

I know that seventy-two million dollars is not the break point for balancing the federal budget.  With an annual budget deficit somewhere around a trillion dollars (that’s $1,000,000,000,000) you could argue that it’s not even close.

But I don’t think that detracts from the principal of eliminating waste and reducing costs, both of which are accomplished by making these changes.  At this point we don’t have the luxury of picking and choosing where the cuts are to be made (remember the number of zeroes in that trillion-dollar deficit).  This is an easy, quick, and painless way to get started on the road back to fiscal responsibility.

It also would send a clear message:  we are no longer going to spend tax dollars on blatantly wasteful things.

Overall, it only makes good cents.

 

 

Sources:

http://finance.yahoo.com/banking-budgeting/article/111756/when-it-comes-to-the-penny-washington-makes-no-sense

http://en.wikipedia.org/wiki/Nickel_(United_States_coin)

http://www.bestcoin.com/lincoln-cent-mintage-two.htm

http://bber.unm.edu/econ/us-pci.htm

Killing The Goose That Lays The Golden Eggs: A Case Study

When I read about how the NFL owners are seriously considering a player lockout for the 2011 season it makes me say just one thing:

Really?

Granted, I completely understand that NFL franchises are business entities that are in existence to make a profit.  Yes, I know that the athletic goal is winning the Super Bowl but in reality that is, at its base level, just another way for the franchise to make money (more popularity = more tickets and merchandise sold = higher profit).

I don’t think this is a cynical viewpoint or detracts from the integrity of the sport in any way.  After all, this is a professional league and therefore a money generator by definition.

The bottom line is that the owners are in it to make money and therefore they have the right to structure their business in such a way as to maximize their profit.

However, in this instance, the owners would be wise to come to their senses before they bring a disaster (financial, public relations, and otherwise) down on themselves.

Consider these points:

  • The NFL is so immensely popular right now that is really isn’t even competing with the other professional sports leagues anymore.  It is sharing the stage with things like politics, news, Hollywood, and so on.  It is THAT big.
  • The NFL has annual revenues in the neighborhood of $9 billion.  This would place it right around #260 on the latest Fortune 500 list (ahead of companies like e-bay and Nordstrom).
  • The NFL has its own channel on most cable/satellite packages.  All NFL, all the time.  No other sport has this.
  • The NFL draft has become a prime-time television event.  Yes, watching the commissioner announce names and shake hands with draftees has become must-see TV.
  • The NFL and ESPN are currently negotiating an extension on their current television agreement in which ESPN pays the NFL $1.9 billion per season for the right to broadcast 16 games of Monday Night Football.  That is over $118 million per game.

Clearly the NFL is in rare air at this point.  And that can change in an instant if the owners try to stare down the players via a lockout.

Baseball was crippled by the strike that cancelled the 1994 World Series.  The 1998 McGuire-Sosa home run race was the only thing that breathed some life back into the sport and even that was steroid-tainted.

Hockey lost the entire 2004-2005 season due to a lockout and in my opinion hasn’t been the same since (I am not a huge hockey fan but this is my general sense).

The NFL itself suffered through two strikes (1982 and 1987) that were extremely detrimental to the league to the point that its future was under debate.  Read about this in the book America’s Game by Michael MacCambridge if you think I am exaggerating.  Between the strikes and the threat from the USFL the NFL was on the ropes.  Looking at the NFL today it is obvious that it recovered – maybe 24 years of labor peace had something to do with that?

At any rate, my point is that an owner lockout right now, at a time when the NFL is so powerful and popular, will not be received well by the public, many of whom are suffering the effects of the economy and don’t have a lot of patience to watch wealthy owners and rich players squabble over how to divide up the millions of dollars in proceeds.

It would be a move of shark-jumping proportions.

And it is easily avoided.  Like so:

  • Maintain a 16-game regular season.  Player injuries are a substantial part of the game today and adding two more regular season games will only compound that.  No one wants the Super Bowl champion to be determined by attrition.  Additionally, the NFL has made numerous statements regarding its concern for the health of its players and this would be a concrete way to prove it.
  • Reduce the number of preseason games from 4 to 3.  This is a concession to season ticket holders who would only be required to purchase tickets for 9 games instead of 10.
  • Develop and implement a comprehensive policy regarding concussions.  This would include strict definitions on diagnosis, policies on how long a concussed player has to refrain from playing, continuing education for coaches and training staff for treatment and recognition of symptoms, and an extension of the insurance coverage to 15 years past retirement for concussion-related conditions (currently the coverage expires 5 years past retirement for any injury).
  • Reduce revenues allocated to player salaries to 50%.  Currently this number is 58% and the owners want a reduction to 42%.  I don’t think it is a coincidence that the midpoint between those two numbers is 50%.
  • Completely overhaul and tighten the steroid and PED policy.  350-pound men should not be able to run the 40-yard dash in 5 seconds.  Ever.  By choosing to look the other way on this the NFL is setting itself up for a fall, a la Major League Baseball and its (ongoing) steroid scandals.
  • Institute a player weight limit by position.  This would reinforce both the concussion policy (less mass = less force = fewer concussions) and the improved PED policy (less reason to take PEDs in order to “get big”).  It is simply not healthy for the players to be as big as they are and it sends the wrong message to kids watching them play in addition to all the on-field problems.

Clearly there would be some additional details to work out but in my opinion this addresses the major concerns of the owners and players and requires concessions from both sides of the table.  No one is getting the better of anyone else but everyone gets a part of what they want – a true compromise.

If the current course is not altered and a lockout actually does take place it will be an almost indescribable act of hubris on the part on everyone involved (owners, players, and the league brass).

Let’s hope cooler heads prevail as this situation unfolds.

Don’t mess with the goose.  Please.

Social Security: Abolition Is The Best Answer

Most everyone, including me, likes the concept of Social Security.

Every paycheck of your working career you have some of your earnings deducted and used to pay retirement benefits to retired workers older than you.  When you reach the age of retirement the younger people in the workforce are returning the favor and having their paychecks deducted in the same manner in order to pay benefits to you.

Nice.  Very warm and fuzzy.  Great concept.

However, I think everyone is aware that the practice of Social Security in the United States is radically different than the concept described above.

There is a lot of information circulating about the numerous problems with Social Security but the core issue is that beginning in 2015 (current projection) the Social Security Trust Fund itself will have to be tapped in order to meet the expenditures required by the program.  In other words, payroll deductions from working individuals will no longer be sufficient to cover the required payouts and the Trust Fund will have to supplement that.

Think of it as having to spend part of the principal of your investment instead of being able to live off the interest.

Accordingly, the next year you have less principal invested which earns less interest which means you have to use more principal to supplement expenses.  And so on.

The projection is that the Trust will be fully depleted by 2037 and that payroll deductions going forward will only be able to cover 78% of required payouts.

Now, in the case of an individual, you might be able to cut expenses in order to not have to draw off your principal in coming years.  This is not the case with Social Security.  With an estimated 10,000 Baby Boomers per week for the next twenty years reaching retirement age the program’s expenses will be unavoidably growing in dramatic fashion.

The most common approaches discussed to covering this 22% shortfall are either (a) raise the payroll tax rate (currently 12.4% split evenly between employee and employer) or (b) fund the Social Security shortfall from the General Fund (income tax revenues – which would have to be increased in order to maintain current government services as well as cover the Social Security shortfall).

A few other facts about Social Security:

  • The original tax rate was 1% each from employee and employer.  The current tax rate is 6.2% each and still not near enough to make the program sustainable.
  • The 2010 tax cut reduces the tax rate to 4.2% for employees with no changes to employers.  While I personally like this bit of extra money in my pocket every two weeks it can only hurt the financial future of the program as a whole.
  • Social Security is the single largest item in the federal budget at 20.8%
  • In 2008 over $615,000,000,000 was paid out in benefits.  That is six-hundred-and-fifteen BILLION dollars (and increasing every year).
  • Social Security has been fraught with complications since its inception (the recession of 1937, mathematical errors calculating COLAs in the 1970s which almost led to complete insolvency, “reform” in the 1980s that in actuality accomplished nothing, and so on).

Add to all of this the fact that very few (if any) members of Congress want to seriously move forward with reform because it is political dynamite (i.e. increased taxes in one form or another).

When you bottom-line the entire topic it seems like we citizens are left with what appears to be an insurmountable issue.  Something that is almost too huge, too expensive, and too complex to solve.

Or is it?

Remember:  the Social Security Act was signed into law in 1935.  The first monthly payment was made in 1940.  This isn’t something that has been with us since Jamestown, or 1776, or even the Civil War.  Relatively speaking, Social Security is new.  Only two generations in American history have benefited from it (the GIs and the Silents, with the Baby Boomers on the cusp of mass enrollment with the system already in turmoil).

Instead of trying to prop up an unsustainable system for a few more years or playing a shell game with the finances or (even worse) raising taxes in some form or another, why not look at this as a chance to prune the federal tree and start on the road to reduced national debt, austerity, and a lower debt and tax burden for future generations?

Let’s abolish Social Security once and for all.  Here’s how to do it:

Envision everyone who is eligible for Social Security organized into five groups:

GROUP A:  Anyone who is already receiving Social Security retirement benefits.  Nothing changes for this group.  They continue to receive their benefits under the current rules of the system.

GROUP B: Anyone 45 years of age or older who is not currently receiving a Social Security retirement benefit.  Nothing changes for this group, either.  They continue to pay into the system and all of the current rules apply to them once they reach the age to begin receiving benefits.

GROUP C: Anyone between the ages of 25-45.  This is the major transitional group of this proposal.  People in this age group would be given a one-time opportunity to opt-out of Social Security.

If a person chooses not to opt-out then they continue paying into the system as they have been and will receive retirement benefits according to the current rules of the plan.

If a person chooses to opt-out several things happen:

(a)   They immediately receive a 12.4% pay raise because neither they nor their employer would be required to pay into Social Security on their behalf

(b)   All monies they have contributed to Social Security in their lifetime are returned to them over the course of a four-year plan.  These monies would have a calculated rate of return of 50% of the composite return of the DJIA for the years of the contributions (realize that the average Social Security investment historically returns only about 33% as compared to a conservative investment strategy so this feels like a fair compromise).

  • Year One:  payback of contributions made between the ages of 40-44
  • Year Two:  ages 35-39
  • Year Three:  ages 30-34
  • Year Four:  ages 25-29

The reason this works from the oldest age to the youngest is that presumably most people would have made larger contributions in their older years and therefore these larger sums need to get back to them quicker for maximum compounding on any investments they make with it.

(c)    They are no longer eligible for any Social Security benefits.  They are opted-out for life.

GROUP D: Anyone under the age of 25.  This group is automatically removed from Social Security and any contributions they have made to the system are returned to them in one year, again with a calculated rate of return of 50% of the composite return of the DJIA for the years of the contributions.  No additional Social Security numbers are issued to minors that have not yet received them or children born after the abolition date.

GROUP E: Anyone receiving benefits from Social Security other than for retirement (i.e. disability).  This group would transition over a three-year period from the federal Social Security Administration to an equivalent state program in the state in which they reside.  The three-year transition period would allow for case reviews and cost forecasting by the state.  It would be mandated that any revenue shortfall would be fully funded by increases in sales taxes to the exclusion of creating a new tax or increasing current ones (income, property, etc).

The implementation of this plan would render Social Security a distant memory in the span of two generations and a historical afterthought in three.  At the same time this plan would allow the Social Security Administration to fulfill its obligations to those citizens who have spent the majority of their lives paying into the program.

Some additional benefits of abolition:

  • Eliminates of one of the single largest contributors to the entitlement mindset
  • Reduces fraud due to a shrinking number of active Social Security numbers
  • Reduces fraud due to a radically reduced bureaucracy from what is currently required to maintain the system.  Did you know that fraud is so prevalent that the Social Security Administration maintains its own investigative group known as Continuing Disability Investigations yet still has to request assistance from other federal law enforcement agencies?
  • Forces people to make plans for themselves and take personal responsibility for their financial future rather than allowing them to “plan” on a Social Security check that everyone knows will hardly be enough to feed and house them (if that).
  • Does away with the “fall-off-a-cliff” scenario which goes something like this:  a person works their entire life and then at an arbitrary age designated by the government they retire, regardless of their productivity or value within the workplace.  They then go home and sit in a rocking chair doing very little and actually “get old”, as in age dramatically beyond the actual passage of time.  This doesn’t have to happen.  I’m not suggesting that a 67-year-old should work fifty  hours per week every week but why not have a system which empowers them to decide for themselves how to manage their later years rather than forcing them into potential irrelevance on a fixed income?

Think about it:  why should a person who works their entire life (which is most people) need a monthly check from the government to survive in their old age?

Think about it:  you as an individual can earn a greater return on your money.

Think about it:  aren’t you giving the government a lot of control over your life if you allow it to tell you how much your paycheck is going to be in your later years?

Does this plan address every detail that would be required to implement it?  Certainly not, but it is complete as a concept.  All that remains is the fleshing out of the necessary administrative and procedural processes.

Is it possible that in the short-term (5 years) this plan might cost more than continuing on the current track?  Yes, that is quite possible, even probable.  However, this plan has an endgame in place that will reduce expenses to zero.  The current system has expenses spiraling out of control with no viable plan on how to fund them.  And even a casual observer will note that if the federal government has a need for funding they more often than not are successful in obtaining it (funding wars in Iraq and Afghanistan, funding the Economic Stimulus Package of 2008, etc).

Would this exercise in “Social Darwinism” negatively affect some people?  Without a doubt.  But ask yourself:  is the current system working for everyone?

Would the abolition of Social Security dramatically reduce the size, scope, and budget of the federal government while at the same time force people to take back personal responsibility and control over their own lives and futures?  Absolutely.

And that’s the point.

 

 

Sources:

http://en.wikipedia.org/wiki/Social_Security_(United_States)

http://en.wikipedia.org/wiki/Social_Security_debate_(United_States)

http://www.lp.org/issues/social-security

http://www.toberight.com/2010/08/the-case-to-abolish-social-security/

Welcome To The Jolt

Hello Readers,

I thought it might be wise to share with you what my intentions are for my first blog, “The Jolt”.

I am hopeful that this blog can be used as a forum to discuss some of the important issues that we are facing today as individuals, as a country, and as a planet.  A lot of the topics to be presented here are going to be about the government and the environment but those won’t be the only themes.

Some of these posts may be controversial, eye-opening, or otherwise “jolting”, but in my opinion this is all the more reason to discuss them.  Some of them may be informative or simply a new way to look at a particular subject.

You shouldn’t expect this blog to fit neatly into “Republican/Democrat” or “Liberal/Conservative” boxes either.  While there will certainly be leanings one way or the other from post-to-post I am not trying to base my ideas on one narrow set of ideologies.

We don’t all have to agree but I do hope we can keep things civil and open-minded while we exercise our right to free speech.

And just so you know, I’m not serious all the time so there will be some fun stuff to be found here too.

I also ask that you bear with me as well.  This is my first blogging attempt and while I have a pretty good idea of what I want to talk about I am still learning the ins and outs of WordPress and its mechanics.  Friendly comments and suggestions for improvement are always welcome.

I’m looking forward to it.  Talk to you soon.

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