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New Bomber Soars $27 Billion Too High

Tuesday September 1st, 2015   •   Posted by K. Lloyd Billingsley at 9:46am PDT   •  

USAFb_200As we noted in 2013, politicians seemed intent on buying 280 more M-1 Abrams tanks the U.S. military didn’t want or need. The M-1 Abrams is a formidable machine but not really suited for counterinsurgency operations, and the tanks run $8 million each. Last year we alerted taxpayers to the new fleet of presidential helicopters, each at $400 million, with the entire fleet coming in between $10 billion and $17 billion. That is hard to top, but the United States Air Force is making a gallant effort.

As Jonah Bennett explains in the Daily Caller, “Air Force leaders didn’t seem fazed recently when lawmakers pointed out that the service completely miscalculated the cost of its secretive Long-Range Strike Bomber program to the tune of $27 billion.” Last year Air Force leaders pegged the cost of the bomber at $33.1 billion from 2015 to 2014. This year it’s $58.2 billion for 2016 to 2015, an increase of 76 percent, which Rep. Jackie Speier, ranking member of the House Armed Services Committee’s Subcommittee on Oversight and Investigations, called “alarming.” In fact, according to the Air Force, the real cost for both fiscal periods is $41.7 billion. Air Force Chief of Staff Gen. Mark Welsh told reporters he was “surprised by the number” and that “it looked like the number had grown.” Air Force Secretary Deborah Lee James said someone in the process simply did the math wrong.

The Air Force may purchase between 80 and 100 bombers at a per-unit cost of $550 million. But that figure is a “wild fantasy,” according to T.X. Hammes, a U.S. National Defense University research fellow cited in Bennett’s piece, and the real per-unit cost of the bomber may rise to $3 billion. Bennett concludes that “cost-overruns are often a common feature of weapon acquisitions, mostly because providing low estimates and fast-paced schedule increase the likelihood of purchasing the weapon.” For taxpayers that’s only part of the story.

Whether tanks, ships, or planes, weapons systems always cost more than what their backers claim. Politicians may complain, but they usually go along if contractors for the projects are in their district. So military spending is a convenient conduit for pork. And the process continues whether or not the weapons system is suitable for the nation’s defense needs.

The Bureaucrat Who Hardly Ever Worked

Sunday August 30th, 2015   •   Posted by Craig Eyermann at 1:12pm PDT   •  

Capture In this latest episode of our occasional series Bureaucrats Behaving Badly, we’ll focus on “the case of the federal worker who hardly ever worked,” to borrow the Washington Post‘s own headline! Lisa Rein reports:

A federal patent examiner racked up more than 18 weeks of pay last year for work he didn’t do, but his manager didn’t notice until he received an anonymous letter claiming the employee only showed up for his job sporadically and turned in work that was “garbage.”

The letter turned out to be spot on, according to an investigation released this week by the watchdog for the U.S. Patent and Trademark Office. The examiner, a poor performer for years who was never disciplined, came and went as he pleased, swiping his badge through the turnstile at the patent office headquarters in Alexandria, Va., where he was assigned to work.

He frequently told colleagues he was leaving work to go to the local golf driving range, play pool or grab a beer—then claimed a full day on the job on his time sheet. On most of the days when the examiner was gaming the system, “there was no evidence” he even went to the office or did any work on his government-issued laptop, investigators found.

The article goes on to describe the unidentified patent examiner’s case as “the most egregious example to surface so far of an examiner defrauding the government for work not done.”

But it’s not the worst ever. For that story, we’ll return once again to the halls of the poorly-led and ethically troubled Environmental Protection Agency. Michael Isikoff of NBC News reports on the December 18, 2013, criminal sentencing of John C. Beale, formerly the EPA’s highest-paid employee and also its leading expert on climate change:

John C. Beale’s crimes were “inexplicable” and “unbelievably egregious,” said Judge Ellen Huvelle in imposing the sentence in a Washington. D.C. federal court. Beale has also agreed to pay $1.3 million in restitution and forfeiture to the government.

Beale said he was ashamed of his lies about working for the CIA, a ruse that, according to court records, began in 2000 and continued until early this year.

“Why did I do this? Greed – simple greed – and I’m ashamed of that greed,” Beale told the court. He also said it was possible that he got a “rush” and a “sense of excitement” by telling people he was worked for the CIA. “It was something like an addiction,” he said.

Beale pled guilty in September to bilking the government out of nearly $1 million in salary and other benefits over a decade. He perpetrated his fraud largely by failing to show up at the EPA for months at a time, including one 18-month stretch starting in June 2011 when he did “absolutely no work,” as his lawyer acknowledged in a sentencing memo filed last week.

Beale would appear to still be serving his sentence at the Federal Correctional Institution Cumberland, where he is scheduled to be released on June 1, 2016. The facility has been described in the Washington Post as follows:

The Federal Correctional Institute in Cumberland, Md. is the go-to for white-collar Washington criminals. Disgraced lobbyist Jack Abramoff and former Clinton administration official Webb Hubbell served time at Cumberland, where prisoners are free to leave the premises to do yard work and the like, as long as they return.

One top D.C. defense attorney said his clients describe Cumberland as a “boys dormitory” with food that’s “nothing to write home about.” It’s got a commissary (where canned tuna—which, oddly, is used as a kind of currency in the camp—is sold) and a bare-bones fitness facility. The biggest perk, though, is that prisoners tend to be on their best behavior for fear of being sent somewhere rougher. “Nothing bad happens to you there,” said the attorney.

If you know of a more egregious story involving a federal government bureaucrat who hardly, if ever, works, please share it in the comments!

Audit Tees Off on Statewide Waste

Friday August 28th, 2015   •   Posted by K. Lloyd Billingsley at 9:21am PDT   •  

Seal_of_California_200As we recently noted, the California Department of Transportation (Caltrans) pays 3,500 full-time employees to sit around at their desks, as one legislator put it. According to Investigations of Improper Activities by State Agencies and Employees, a new report by state auditor Elaine Howle, they were doing much more than that.

One Caltrans engineer, unnamed in the report, played golf on 55 workdays between August 2012 and March 2014. As Jon Ortiz of the Sacramento Bee noted, the unnamed Caltrans engineer fessed up that he played golf “as much as possible,” but only if he had worked at night or had already run up 40 hours for the week. But according to his time sheet, he worked only days, and all his time was spent working, not playing as much golf as possible. The unnamed Caltrans engineer was not fired or suspended. He was reassigned and went on medical leave. A Caltrans boss had signed off on his timesheets. According to the report, the Caltrans engineer has conveniently retired and his supervisor also plans to retire. Caltrans claims to be monitoring the pair, should they apply for other state jobs.

The investigation, auditor Howle notes, identified more than $4.2 millions in wasted funds, improper payments, and misuse of state time involving several major government departments. According to the report, the California Correctional Health Care Services wasted $3.2 million of a $17 million procurement, “because it paid the contractor to do nothing more than process invoices of the subcontractor, who performed all of the work.”

Rather than perform work at the Department of Industrial Relations, one supervisor peddled DVDs and music CDs. At the Employment Development Department, an accounting officer adjusted a family member’s tax account. Department of Corrections bosses continued to give extra pay and leave credits to chief psychologists, even after being informed that this policy was incorrect. And over at Caltrans, an engineer played as much golf as possible when he was supposed to be working. California’s embattled taxpayers are supporting a wasteful, pampered and indolent ruling class.

Government Tunnel Vision Versus Drought Solutions

Tuesday August 25th, 2015   •   Posted by K. Lloyd Billingsley at 5:44am PDT   •  

CA_Coastal_200California borders the Pacific Ocean, the largest body of water in the world, so desalination is a no-brainer for the Golden State. But as Dan Walters of the Sacramento Bee shows, government is not exactly eager to slake the parched state’s thirst.

The San Diego County Water Authority is building a desalination plant near Carlsbad. The company in charge of the project, Poseidon Resources, is planning another at Huntington Beach in Orange County. As Walters notes, “Last week, a scientific panel gave a positive nod to the state Coastal Commission for Poseidon’s plan to draw in seawater, which has been a sticking point in its permit application. There was no particular reason why it should have been, other than that some folks in the environmental community reflexively oppose any project to increase California’s water supply, even in the midst of a historic drought.”

San Diego County has an elected government and so does the city of Carlsbad. But the desalination plant must bend the knee to the California Coastal Commission (CCC) an unelected body that overrides the elected governments of coastal counties and cities on land use and property rights issues. The CCC started as a temporary body during the first reign of Jerry Brown, and in typical style the state made it permanent. Headed and staffed by regulatory zealots, the CCC combines Stalinist-style regulation with Mafia-style corruption. In the 1990s, Commissioner Mark Nathanson served prison time for shaking down celebrities for bribes.

A scientific panel may have given the CCC the nod for seawater induction, but that is no guarantee the CCC will approve further plans. It does not need to face the voters, and it now has power to levy fines directly. Worse, the CCC serves the interest of those who, as Walters says, oppose “any” project to increase the state’s water supply.

Governor Jerry Brown wants to drill two massive tunnels under the SacramentoSan Joaquin River Delta at an estimated cost of $25 billion. If the governor supports the southern California desalination plants, Walters explains, “he would be undercutting the tunnel project, which he clearly sees as completing the State Water Project his father began and adding to his own political legacy.” San Diego County’s desalinated water, meanwhile, will cost $2,000 an acre-foot, but as Walters observes, that is scarcely a half-cent per gallon. Therefore, “It makes a lot of sense – perhaps more sense than spending billions of dollars on a couple of pipes that won’t increase supply.”

Straight Outta Incompetence

Monday August 24th, 2015   •   Posted by Craig Eyermann at 6:27am PDT   •  

A century ago, Americans going to the recently invented movie theater would often be entertained by short comedy films, such as Mack Sennett’s Keystone Cops series.

Aside from the visual gags, many of these early films drew their humor from depicting people employed in a government profession as being something other than competent in their jobs, which in real life, was something that nearly everyone believed to be the opposite of what was true. Americans had considerable confidence in their public officials in those days.

A century later, stories of competence on the part of government bureaucrats are the exception and not the rule. That is a major reason why the average of Americans’ confidence ratings of the three branches of the U.S. government is currently tracking near its all-time lows.

As a case in point, just consider the following headlines from just the last two weeks for just the Environmental Protection Agency. Which of these stories gives you the greatest confidence in the ability of EPA officials to protect the environment?

It certainly hasn’t been a good August for the EPA and the reputation of its employees, has it? Then again, perhaps no month is a good one for the troubled agency.

And unlike the misadventures of the Keystone Cops, none of what they do is funny.

Fed Loses Grip on Debt Markets?

Friday August 21st, 2015   •   Posted by Craig Eyermann at 5:57am PDT   •  

39891165_S Bloomberg‘s Lisa Abramowicz is asking the question, “What happens when the Federal Reserve loses its stranglehold over debt markets?” Which after having order break down in the U.S. stock market yesterday, after having held for the previous four years, is a pretty good question to ask.

More specifically, she’s looking at the nation’s corporate debt markets, where she identifies a growing cause for concern:

The selloff in corporate bonds is deepening and investors are seeking safety in the longest-dated government debt, which does best when the economy does worst. Defaults are rising as oil tumbles and investors are looking for the best ways to hedge against credit losses.

All this comes as the Fed does, well, nothing much. Instead, it’s China that’s taken the lead with new rounds of financial stimulus in the face of slowing growth. But some days it’s a free for all, with even Kazakhstan wielding its influence....

Investors have sent yield spreads on U.S. junk bonds up 0.64 percentage point this year to 5.68 points, according to Bank of America Merrill Lynch index data. Those on speculative-grade energy securities have surged to 9.64 percentage points, close to the most since 2009.

Instead, investors are piling into Treasuries that mature in more than 15 years, with that debt returning 2.1 percent so far this month and yields falling toward the lowest since April. BlackRock Inc.’s $5.5 billion exchange-traded fund that focuses on longer-term U.S. government bonds received $447.7 million of deposits in the past week, the most among its fixed-income peers, data compiled by Bloomberg show.

Recall that the yields, or interest rates, that investors receive when they loan money to corporations or governments through the bonds they issue rise when the likelihood of a default increases, which is what we’re seeing in the corporate bond market, particularly with the bonds issued by energy-producing firms.

At the same time, when investors come to expect that the overall economy is worsening, instead of seeking out places in the private sector to invest their money, they will simply park it in bonds that they believe have near-zero risk of default. In this case, U.S. government-issued debt securities, where the longer-terms of the bonds they’re buying suggests that they don’t expect a better opportunity for investing for another 15 years or longer.

Mike Shedlock looked at the impact of the Fed’s apparent loss of control over the U.S. Treasury’s yield curve, where he notes that rising short-term rates and falling long term rates are a pattern that is consistent with a growing risk for recession.

Rate Hike Odds Shift to December

The Fed has been trying for months to convince the markets that rate hikes are coming in September. On Thursday the market took another look and came around to my point of view “I’ll believe it when I see it”....

Synopsis Since January 2014

The short end of the curve (2- and 3-Year) acts as if hikes are coming.
The middle of the curve (5-year) seems ambivalent.
The long end of the curve (10- and 30-year) acts as if rate hikes are not coming or alternatively a recession approaches.

For the U.S. government, that’s a mixed outcome because while it reduces the amount of money that it costs to borrow in the long term, rising short term rates will cost the government more. With nearly 72 percent of its publicly held debt maturing in less than five years, it’s likely that the total amount of interest it pays on the debt securities it issues will increase.

That dynamic means that less money will be available for U.S. politicians and bureaucrats to spend as they like. And because they would really like to spend more, that means that they’ll be looking to either hike more taxes or borrow more so they can. Especially if they can exploit the onset of a new recession they helped ensure through their past policies to justify new spending.

Obamacare Excise Tax Inflicts Increasing Misery

Thursday August 20th, 2015   •   Posted by K. Lloyd Billingsley at 4:57am PDT   •  

Covered-California-logo-Best_200As we have noted, Emily Bazar of the California Health Care Foundation’s Center for Health Reporting has been working three shifts documenting the abuses of Covered California, a wholly owned subsidiary of Obamacare. These abuses include a dysfunctional computer system that cost nearly $500 million, cancellation of health insurance without notice when people report changes in income, difficulties leaving Covered California when people go on Medicare, and so forth. For Bazar, this added up to “widespread consumer misery” that doesn’t stop when people die. Covered California places some enrollees in Medi-Cal, which runs an “Estate Recovery Program” that seeks repayment of medical cost, even from family members after a patient dies. Under Obamacare, Bazar writes, this recovery program “just got bigger and its reach broader.”

But the reach does not stop there.

As Bazar now warns, “a hefty Obamacare excise tax – known informally as the ‘Cadillac Tax’ will target high-cost health insurance plans offered by employers. Don’t be fooled by the 2018 start date. Some employers are taking steps now to avoid the tax.” It sets the threshold at $10,200 for individual coverage and $27,500 for families, and it counts both your share of the premium and your employer’s share. It also targets health reimbursement accounts (HRAs) and health savings accounts (HSAs). The Obamacare excise tax will apply to employers of all sizes and includes no adjustment for geography. Therefore, plans in regions with high health costs, such as the Bay Area, are more likely to be hit with the tax. As one Obamacare expert told Bazar, “if someone is part of a workplace that has sicker employees, premiums are likely to be higher and the plan is more likely to be taxed.” And as Bazar explains, “opposition to the tax crosses party lines, but getting Congress to act on anything related to Obamacare is a tall order.”

So Obamacare misery is going to get worse, but if you don’t like the plan, you’ll have to keep it. Under Obamacare, you don’t get what you want. You get only what the government wants you to have. That’s the “transformation” the president was talking about.

When a “Great Deal” Turns Bad

Tuesday August 18th, 2015   •   Posted by Craig Eyermann at 8:37pm PDT   •  

15233320_S One of the biggest news items in the past week was the Chinese government’s surprise devaluation of the nation’s currency, the yuan. This week, Bloomberg‘s Mark Whitehouse reports on the fallout, and the potential disruption it will have on the ability of the businesses and governments of other nations to pay their debts:

The yuan’s depreciation—by almost 3 percent against the U.S. dollar—triggered instability and exchange-rate declines across emerging markets. As of Friday evening in Asia, the Malaysian ringgit was down 3.8 percent from a week earlier. The Turkish lira, Mexican peso and Russian ruble also fell sharply....

The depreciations might help the countries’ exports remain competitive. But they also expose a vulnerability: Over the past several years, borrowers in emerging markets have built up more than $2 trillion in dollar-denominated debt. When the U.S. currency was cheap and the Federal Reserve was holding interest rates close to zero, that debt seemed like a great deal. Now, with the dollar getting stronger and the Fed set to start raising rates, it’s becoming more of a burden....

If investors decide the debts aren’t sustainable, they could pull out en masse, starting a dangerous spiral of declining exchange rates and financial stress that could render otherwise viable companies and governments insolvent.

But surely if that were about to happen, wouldn’t there be lots of early warning signals? In December 2012, Marc Labonte of the Federation of American Scientists summarized what happened to the nations who borrowed more money than they could ever afford to pay back after the investors who loaned them the money decided that their debts were no longer sustainable in recent years, and found that when that happened, things deteriorated far more quickly than the governments and their central banks could move:

The experience of these countries demonstrates that a loss of confidence quickly leads to a vicious cycle—investors demand higher yields on government debt to compensate against the perceived higher risk of default, but these higher yields cause the deficit to spike suddenly, thereby undermining a government’s ability to continue to service its debt. This dynamic causes a country to swing from stability to crisis relatively quickly. Restoring stability has been difficult, and since 2008 GDP has shrunk for three or more years for most of the countries. Falling GDP exacerbates the budget deficit, and vice versa. [Emphasis ours.]

Labonte goes on to identify the similarities that these debt-distressed countries have with the United States.

These countries that have required assistance to finance their deficits have some commonalities with the United States—projections of unsustainably large budget deficits under current policy, a large net foreign debt (with the exception of Italy), asset price bubbles that led to large losses in the financial sector, and large subsequent government outlays to cope with financial sector turmoil.

With those kinds of similarities, and also all of its debt denominated in U.S. dollars, it shouldn’t be much of a surprise that the U.S. government has already implemented the practices of financial repression to help ensure that its supply of “investors” in its debt doesn’t run dry.

Reducing the government’s spending to reduce its need to have such forced investment in the debt securities it issues, doesn’t appear to be an option that U.S. politicians and bureaucrats have seriously considered. Instead, it’s an indication that they’ve become more desperate in seeking to buy time that they hope won’t run out before their own great deal turns bad.

Compound Education Waste

Monday August 17th, 2015   •   Posted by K. Lloyd Billingsley at 10:35am PDT   •  

CAEduDept_200In recent years California has raised per-pupil education spending about 50 percent, to $13,000 a year. As Dan Walters of the Sacramento Bee shows, despite this increase, “national academic testing has found that California’s students rank near the bottom in achievement.” The response of the state’s education establishment is to attack the tests. As Walters notes, Governor Jerry Brown and other politicians “have strangled the test-based accountability system that California adopted in the late 1990s.” Also, the California Teachers Association “despised a system that not only graded schools on how well they were improving academic achievement, but provided the basis for ‘parent trigger’ actions to seize control of ill-performing schools. Nor did the CTA like the potential for using the data to judge teachers’ competence.”

But the CTA is getting what it wants. Brown is pushing a Local Control Funding Formula (LCFF) that gives extra money to districts with high numbers of English learners. As Walters notes, State Superintendent Tom Torlakson, “a close ally of the CTA, told school districts they could spend LCFF money on teacher salary increases, countermanding a directive from his own staff.”

In similar style, low academic performance is no barrier to pay increases for education bureaucrats, such as Steven Martinez of the Twin Rivers District in the Sacramento Area. His recent 8.3 percent increase boosted his pay to $260,000. The deputy superintendent and the two “associate superintendents” also get more than $200,000, plus generous benefits. But salaries are not the only issue. Diana Lambert of the Sacramento Bee writes that the Twin Rivers district and its allies have now paid off former deputy superintendent Siegrid “Ziggy” Robeson to the tune of $300,000. She had supervised the Twin Rivers police department, under fire for “police brutality, false arrest and towing an excessive number of cars for profit.” Twin Rivers has been shoveling out money in a series of legal settlements, including $400,000 to former facilities director Jeff Doyle and $150,000 to former director of visual arts Sherilene Chycoski.

Deputy superintendent Bill Maguire, salary $239,000, explains that mistakes were made and that the district needs to “hold firm in the interest of the children.” For taxpayers the lesson is simple. When tabulating the cost of government, always account for compound waste in the government monopoly education system.

The United Nations of Debt

Saturday August 15th, 2015   •   Posted by Craig Eyermann at 11:32am PDT   •  

Jeff Desjardins of Visual Capitalist has created a unique visualization of how the world’s nearly $60 trillion of money borrowed by various governments, at all levels, is distributed among the world’s nations:


Desjardins describes some of the bigger numbers and where they came from:

Today’s visualization breaks down $59.7 trillion of world debt by country, as well as highlighting each country’s debt-to-GDP ratio using colour. The data comes from the IMF and only covers public government debt. It excludes the debt of country’s citizens and businesses, as well as unfunded liabilities which are not yet technically incurred yet. All figures are based on USD.

The numbers that stand out the most, especially when comparing to the previous world economy graphic:

  • The United States constitutes 23.3% of the world economy but 29.1% of world debt. It’s debt-to-GDP ratio is 103.4% using IMF figures.
  • Japan makes up only 6.18% of total economic production, but has amounted 19.99% of global debt.
    China, the world’s second largest economy (and largest by other measures), accounts for 13.9% of production. They only have 6.25% of world debt and a debt-to-GDP ratio of 39.4%.
  • 7 of the 15 countries with the most total debt are European. Together, excluding Russia, the European continent holds over 26% of total world debt.

Combining the debt of the United States, Japan, and Europe together accounts for 75% of total global debt.

In February 2015, the McKinsey Global Institute reported that in the seven years from the end of the fourth quarter of 2007 to the end of the second quarter of 2014, the amount of debt accumulated by the world’s various governments increased by $25 trillion. Or rather, of all the public debt owed in the world today, around 42 percent of it has been borrowed in just the last seven years.

What could possibly go wrong?

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