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Confusing Deficits with Surpluses and Train Wrecks

Thursday April 10th, 2014   •   Posted by Craig Eyermann at 6:25am PDT   •  

image003 When politicians start confusing deficits for “surpluses”, can a train wreck be far behind?

Before we go any further, for the sake of avoiding any confusion, let’s define exactly what a deficit is. A deficit is the amount by which cash expenses exceed cash income or revenue. That makes a deficit the exact opposite of the situation that exists when there is a surplus.

In fact, if what you spend in cash is greater than the amount you collect in income or revenue, the only way you can possibly get to a surplus is to borrow the difference and then some. That borrowing however doesn’t change the fact that you really have a deficit. And if you keep running a deficit like this, you will eventually experience a fiscal train wreck.

Saying you have a surplus when you’re really running a deficit, as some leading politicians in California are doing right now, doesn’t change that outcome.

Last year, California’s Governor Jerry Brown proclaimed an end to the state’s worrisome and persistent deficit. How did he do it? In the 2012 election he had fed voters the notion that a proposed income tax increase would be spent on education. California voters treat education as a sacred cow, even though the state ranks near the bottom in test outcomes. They passed the ballot issue.

On January 31 last year, the state’s General Fund had a deficit of $15.7 billion. The higher tax rates brought in new money. This, along with internal and external borrowing, made it look as if the deficit had gone with the wind, but it hadn’t. Brown called it a surplus, amid much cheering by the spendthrift legislature.

Fast forward to the end of January this year. The deficit had been whittled down to $12.6 billion. Some surplus!

That’s quite a lot different from the story that Governor Brown was telling just several weeks earlier, as reported by the Wall Street Journal:

On Thursday, Gov. Jerry Brown called the improvement in the state’s fiscal house “good news,” and he proposed spending an additional $10 billion annually for California’s schools. But anticipating calls for further increased spending and preparing for a likely re-election bid, he also urged fiscal restraint as he officially proposed a $154.9 billion budget.

“By no means are we out of the wilderness, we have serious issues before us in terms of long-term liabilities, debts, and we must be very prudent in the way we spend public funds,” Mr. Brown said. However, “after years of drought, and cutbacks and pink slips for the teachers, we are finally able to provide a substantial amount of new money for all the schools of California.”

In the eyes of a politician, a smaller than expected deficit really means that they now have extra money to spend, because they will not consider reducing how much they are planning to borrow.

So how does Governor Brown propose to spend this newfound windfall?

Mr. Brown’s proposed budget increases kindergarten through 12th grade public education spending by $10 billion, sends new money to colleges and universities, and allocates money to expand health-care coverage to millions.

That sounds more impressive than it really is, which becomes clear in the next paragraph:

Mr. Brown also seeks to pay money owed to state schools but deferred during the years of crisis as well as pay back bonds sold to balance the budget 10 years ago, and make some infrastructure improvements. In addition, the budget endorses a plan to strengthen the rainy day fund through constitutional amendment.

In other words, most of the money for K-12 education in California will really be going to partially reset the fiscal shell game that the state government was playing with the state’s public school system in trying to make it appear that the state government was solvent, when it was really running larger deficits. But wait, there’s more!

It also reflects the governor’s commitment to a troubled $68 billion plan to bring high-speed rail to the state by proposing to help finance the project using $250 million in proceeds from selling cap-and-trade pollution credits.

And so, the inevitable fiscal train wreck, when it comes, will be a high speed one!

State Department Missing $6 Billion

Wednesday April 9th, 2014   •   Posted by K. Lloyd Billingsley at 7:30am PDT   •  

StDept_200As we have noted the federal Department of Defense wastes plenty of money and even spends on hardware that the military doesn’t need or want. Likewise, Obamacare has been incredibly wasteful but according to this report, taxpayers should also be looking at the State Department, which can’t seem to find how they spent $6 billion.

A March 20 “management alert” from the Office of the Inspector General says that “Specifically, over the past 6 years, OIG has identified Department of State (Department) contracts with a total value of more than $6 billion in which contract files were incomplete or could not be located at all.” This “creates significant financial risk and demonstrates a lack of internal control over the Department’s contract actions.” Call that a stranglehold on the obvious.

A recent OIG audit of the closeout process for contracts supporting the U.S. Mission in Iraq revealed that contracting officials were unable to provide 33 of 115 contract files requested in an audit. “The value of the contracts in the 33 missing files totaled $2.1 billion.” Similar lapses with the Bureau of International Narcotics and Law Enforcement Affairs involved “in excess of $1 billion.”

It wasn’t all bungling.In another investigation, OIG found “falsified” technical review information in a contract “valued at $100 million.” As the alert says, “corrupt individuals may attempt to conceal evidence of illicit behavior by omitting key documents from the contract file.” But no word on who, exactly, falsified the information or what happened to any corrupt individuals. So this is all aftersight not oversight.

State Department spokeswoman Marie Harf said “this is an issue of which the department is aware and is taking steps to remedy.” She didn’t say which steps, exactly, they were taking. “It’s not an accounting issue,” she said, “I think it’s more like a bureaucratic issue. But it’s not that we’ve lost $6 billion, basically.”

Basically they have lost $6 billion and no surprise that they are trying to play it down. Marie Harf, by the way, is the person who announced that president Obama’s ambassadorial nominees were all highly qualified. As it turned out they couldn’t answer basic questions about countries such as Norway and Argentina where they have been tapped to serve.

The Cost of Obamacare’s Regulations

Tuesday April 8th, 2014   •   Posted by Craig Eyermann at 6:37am PDT   •  

6761569_S What happens to the price of a product for consumers when the government imposes new regulatory burdens and taxes on those who provide it?

If the product is health insurance, where new regulatory burdens have been imposed by the Affordable Care Act (a.k.a. “Obamacare”), the answer is that the cost to consumers rises substantially. Brianna Ehley of the Fiscal Times reports:

The price of health insurance premiums on plans purchased outside of the federal and state exchanges are much higher than expected, a survey of brokers found.

A proprietary survey of 148 brokers conducted by Morgan Stanley analysts revealed the largest acceleration in small and individual group rates in the survey’s history, Forbes contributor Scott Gottlieb of the conservative American Enterprise Institute first noted.

The survey found that the prices for off-exchange plans in the small group market increased by an average of 11 percent, while off-exchange plans on the individual market increased by an average of 12 percent. Analysts noted that the prices tended to vary by state, with some states showing increases 10 to 50 times that amount, Gottlieb wrote.

According to the latest Census data, about 14.5 million—or 5 percent of the U.S. population gets health insurance on the private exchange.

The Morgan Stanley report attributed the increases to “changes under the ACA” including the new excise taxes being levied on insurance plans, and the new requirements that plans provide more robust coverage.

Looking to see how the price of health insurance has changed for policies purchased outside of the federal and state-government run “marketplaces” provides one of the best apples-to-apples measure of the effects of the law that is available to us.

The reason for that is very straightforward—regardless of where health insurance policies are purchased by consumers, they are combined into the same risk pools by the insurers, which are governed by the same regulations. We should note that the only reason consumers have to shop for policies on the federal and state-government run exchanges is because that is the only way they might obtain subsidies against their premiums to purchase them.

The difference is that for the policies that are available to be purchased outside of the Affordable Care Act’s government-run marketplaces, the costs of the policies for consumers is fully reflected in the reported premiums, with the differences in the before-and-after cost of insurance policies largely being able to be attributed to the changes imposed upon insurance providers by Obamacare.

Scott Gottlieb provides more numbers:

The average increases are in excess of 11% in the small group market and 12% in the individual market. Some state show increases 10 to 50 times that amount. The analysts conclude that the “increases are largely due to changes under the ACA.”

The analysts conducting the survey attribute the rate increases largely to a combination of four factors set in motion by Obamacare: Commercial underwriting restrictions, the age bands that don’t allow insurers to vary premiums between young and old beneficiaries based on the actual costs of providing the coverage, the new excise taxes being levied on insurance plans, and new benefit designs....

For the individual insurance market (plans sold directly to consumers); among the ten states seeing some of the sharpest average increases are: Delaware at 100%, New Hampshire 90%, Indiana 54%, California 53%, Connecticut 45%, Michigan 36%, Florida 37%, Georgia 29%, Kentucky 29%, and Pennsylvania 28%.

For the small group market, among the ten states seeing the biggest increases are: Washington 588%, Pennsylvania 66%, California 37%, Indiana 34%, Kentucky 30%, Colorado 29%, Michigan 27%, Maryland 25%, Missouri 25%, and Nevada 23%.

Regulations, just like taxes, cost real people real money.

Government Motors Protection Racket

Monday April 7th, 2014   •   Posted by K. Lloyd Billingsley at 7:05am PDT   •  

NHTSA-Logo_200General Motors knew about faulty ignition switches that could cause vehicle engines to turn off, disabling air bags with deadly results. Federal government investigators with the National Highway Traffic Safety Administration knew about this problem but as this report notes the NHTSA “twice passed on investigating” the faulty switches that “led to at least 13 deaths and more than 2.6 million recalled vehicles.” As one independent investigator put it, “the revelation that NHTSA had teed up an investigation and deep-sixed it is very troubling.”

The GM problems were apparent in 2007 but the NHTSA declined to investigate. Then in 2010, after another accident, the NHTSA’s Office of Defects Investigation said the data “did not show a trend” and backed off. The timing is certainly of interest. Recall that in 2009 the federal government bailed out General Motors to the tune of nearly $50 billion, losing at least $10 billion on the deal. With so much “invested” no surprise that government bureaucrats opted to go easy on Government Motors, as GM was accurately called. Contrast that leniency with government treatment of Toyota, a foreign automaker that did not need a bailout and did not take government money.

The government brought a criminal investigation against Toyota for defects such as sticking gas pedals and floor mats that trap the accelerator. The settlement allowed unlimited criminal and civil penalties and Toyota agreed to pay $1.2 billion, the largest penalty ever for an automaker and 35 times the maximum penalty the NHTSA can impose. FBI bosses railed against Toyota for putting sales over safety and profit over principle.

General Motors did the same thing but government bureaucrats twice declined to investigate. At least 13 people have died due to the defective switches and GM only began recalls in February. The NHTSA and the Justice Department are now reportedly looking into the matter but one doubts they will take draconian action as with Toyota. And a key problem should already be apparent to taxpayers and motorists alike. When government investigates Government Motors it lowers the bar on safety standards.

Meanwhile, for the possibilities of fakery involving automobile safety, see this article.

Rolling Over Taxpayers

Friday April 4th, 2014   •   Posted by Craig Eyermann at 8:43am PDT   •  

Tax DayIf you have an Individual Retirement Account (IRA), and particularly if you have more than one IRA, you need to be aware that a recent U.S. Tax Court decision has opened the door to allow the IRS to nail you for taxes if you attempt to rollover money from more than one of your IRAs into another in a given year. That is despite the information that the IRS has been providing to people who own IRAs in Publication 590 over the past 20 years that says otherwise.

CBS Marketwatch’s Robert Powell reports on the recent U.S. Tax Court decision that affected Alvan and Elisa Bobrow:

In 2008, Alvan rolled over two distributions from his IRAs and took the position that the rollovers were valid because they were done in a timely manner, and involved different IRAs, Appleby wrote in her analysis of the court case. His position was that he had not broken any rules, as explained by the IRS in their publication for the past 20 years.

The IRS disagreed and determined that only one of the two rollovers was valid. So, Uncle Sam and the Bobrows went off to court. And the Tax Court—much to the surprise of all IRA experts—agreed with the IRS.

The mistake cost the Bobrows an additional $51,298 in income tax and a penalty of $10,260. Maybe they should be thankful; it could have cost them $31,000 more, according to Appleby. You can read the gory details in Bobrow v. Comm’r, T.C. Memo. 2014-21.

So what was the bottom line? In essence, only one of the Bobrow’s distributions was eligible for rollover during the 12-month period. In fact, that Tax Court concluded that the Internal Revenue Code Section 408(d)(3)(B) limitation—the relevant section of the federal tax code—applies to all of a taxpayer’s retirement accounts and that regardless of how many IRAs he or she maintains, a taxpayer may make only one nontaxable rollover contribution within each one-year period.

In other words, we’ve all been operating under the impression that what was written in Publication 590—you know, the IRS’ very own publication—was correct. But it’s not.

This outcome is a new example of how the IRS’ bureaucrats can provide misleading information to U.S. taxpayers. Misleading information that puts ordinary Americans at direct risk of having the federal government punish them with major financial losses if they make the mistake of trusting it.

That situation is made worse because of deliberate decisions by the government agency’s leadership in recent years to dramatically cut back on providing assistance for U.S. taxpayers with tax questions to focus instead on developing a more intrusive role in the lives of ordinary Americans through the implementation of the Affordable Care Act (a.k.a. “Obamacare”), the politically-motivated scrutiny of opponents to President Obama’s policies and lavish expenses for employee conferences.

Providing timely and accurate information to U.S. taxpayers would not appear to rank very highly in their list of priorities.

Boondoggles Bloat Government

Wednesday April 2nd, 2014   •   Posted by K. Lloyd Billingsley at 7:30am PDT   •  

CAHSRlogo_200California’s punitive tax structure virtually guarantees high volatility in state finances, particular during times of boom and bust in the economy. But through thick and thin some things never change. As this report notes, the state’s payroll and the size of the state workforce hold steady, and there’s always more to that story.

Consider, for example, California’s high-speed rail project, unpopular with Californians but a big hit with politicians. As the report notes, last year California’s High-Speed Rail Authority nearly tripled its staff to 116 employees and payroll soared from $2.5 million to almost $7 million. The budget provides for 60 more employees next year. The staff and payroll figures exclude “a variety of consultants,” who don’t work for a song.

The “bullet train” has yet to transport a single passenger at any speed. But the bullet train has already succeeded at bulking up government and giving politicians a new place to spend. Consider also Covered California, the state’s wholly-owned subsidiary of Obamacare.

It has almost 900 employees and a payroll of $22.8 million. Former state finance director Ana Matosantos is bagging $20,000 a month. Covered California is spending tens of millions on promotion and $80 million on television, radio and internet marketing. But on all counts actual performance remains lethargic, with numerous IT problems, and young people remain wary. But Covered California succeeds as a way to bulk up government and spend money.

The same is true for the $3 billion California Institute for Regenerative Medicine. It has yet to deliver the life-saving cures, therapies and ensuing royalties it promised voters in 2004. But CIRM pays its bosses whopper salaries in the $500,000 range and succeeds as a soft landing spot for washed up politicians.

The patterns are clear. What the people want is not the same as what government wants. Government usually promises more than it can deliver. Government agencies and programs keep getting bigger, regardless of performance. Even in a weak economy government will keep hiring and usually gives priority to ruling-class retreads.

U.S. Embassy Solicits Fiberglass Camel

Tuesday April 1st, 2014   •   Posted by Craig Eyermann at 6:53am PDT   •  

camel_s640x426Before we go any farther, no, this isn’t an April Fool’s Day joke....

And while we’re at it, no, we’re not making this up. This really is a real life example of your tax dollars at work:

The State Department wants to plunk down $400,000 in taxpayer money for a camel sculpture at the new U.S. Embassy being built in Islamabad, Pakistan, according to a report Monday.

“Camel Contemplating Needle,” created by American artist John Baldessari, depicts a 500-pound white camel made of fiberglass staring at the eye of an oversized needle, Buzzfeedfirst reported.

Officials explained the decision to purchase the sculpture in a four-page document justifying a “sole source” procurement.

“This artist’s product is uniquely qualified,” the document states. “Public art which will be presented in the new embassy should reflect the values of a predominantly Islamist country.”

Follow this link to see the Napa Valley version of “Camel Contemplating a Needle”.

Now, here’s where we can point out how incredibly stupid the people who work in the U.S. State Department can be. We were particularly curious as to what exactly a camel might symbolize in a predominantly Islamist country like Pakistan, so we did a quick Google search to find out.

It seems that just over a year ago, the Electoral Commission of Pakistan allotted a number of representative symbols to each of Pakistan’s political parties for the country’s general elections – kind of like how the Democratic Party in the U.S. is often represented by the symbol of a donkey and the Republican Party is represented by a symbol of an elephant.

It turns out that the symbol of a camel was assigned to Pakistan’s Balochistan National Party, which the country’s central government favors against separatist elements in the Balochistan province, who have fought to break away from the control of Pakistan’s central government.

By placing the $400,000 “inspirational” fiberglass statue of a camel on the grounds of the U.S. Embassy in Pakistan, the U.S. State Department would effectively be perceived as endorsing the Pakistan central government-supported Balochistan National Party. Because what could possibly go wrong for U.S. interests in Pakistan if it thoughtlessly appears to have taken a side in a long-running political conflict that has frequently been characterized by volatility and violence?

We’re pretty sure that this isn’t the most stupid thing that the U.S. State Department has proposed doing with taxpayer dollars, but we’re pretty sure it ranks pretty high on the list, right after similar exercises of “smart power” and perhaps the all-time classic: former Secretary of State Hillary Clinton’s mislabeled “Reset” button, meant to symbolize a new, friendlier relationship with the expansionist nation, but which when correctly translated from Russian, really said “overcharged”.

Why yes, the American people most certainly were for that boondoggle....

We did say we weren’t making any of this stuff up, right?

FDA Delays Burn Americans

Monday March 31st, 2014   •   Posted by K. Lloyd Billingsley at 8:15am PDT   •  

FDAlogo_200Summer will soon be here, and with all the fuss about global warming one would think Americans could avail themselves of the most protective sunscreens, like those used by their counterparts in Europe. They won’t be able to do that because, as this Washington Post report notes, “applications for the newer sunscreen ingredients have languished for years in the bureaucracy of the Food and Drug Administration, which must approve the products before they reach consumers.” Dermatologists find this delay distressing.

Darrell S. Rigel, clinical professor of dermatology at New York University and past president of the American Academy of Dermatologists, told the Post, “These sunscreens are being used by tens of millions of people every weekend in Europe, and we’re not seeing anything bad happening. It’s sort of crazy.... We’re depriving ourselves of something the rest of the world has.”

FDA bosses say the sunscreen issue is a high priority. If so, why must Americans make due with dated, inferior products? Doctors worry that FDA lethargy will have a chilling effect on innovation. Wendy Selig of the Melanoma Research Alliance told the Post, “We have a system here that’s completely broken down, and everybody knows that it has broken down.” And it’s not just broken down on the sunscreen issue.

The meningitis B vaccine Bexsero is approved in Europe, but the FDA approves it only on an ad hoc basis. Limited approval generally comes after an outbreak, such as those last year at Princeton and the University of California at Santa Barbara, where lacrosse player Aaron Loy had to undergo amputation of both feet.

The FDA should immediately approve the widely used MenB vaccine for general use in the United States while final testing proceeds. The FDA should also approve the more effective sunscreens already used in Europe. A pound of prevention is better than an ounce of delayed bureaucratic response.

The Federal Government: It’s a Lock

Wednesday March 26th, 2014   •   Posted by K. Lloyd Billingsley at 7:27am PDT   •  

Lock_200The Obama administration promised to be the most transparent administration in U.S. history, but according to a recent report by the Associated Press, the reverse might be true. More often than ever, the administration “censored government files or outright denied access to them last year under the U.S. Freedom of Information Act, cited more legal exceptions it said justified withholding materials and refused a record number of times to turn over files quickly that might be especially newsworthy.”

According to the government’s own figures from 99 federal agencies over six years, the administration made “few meaningful improvements in the way it releases records.” Last year the federal government showed the “worst” record on transparency since President Obama took office.

The government cited national security to withhold information a record 8,496 times, a 57 percent increase over 2012 and more than double Obama’s first year. The Defense Department, NSA, and CIA were the worst offenders but hardly alone. As the AP report notes, “the Agriculture Department’s Farm Service Agency cited national security six times, the Environmental Protection Agency did twice and the National Park Service once.”

The EPA denied 458 out of 468 expediting requests, and the State Department 332 out of 334. Homeland Security denied 1,384 such requests, a full 94 percent of the total. And more than ever the government censored materials it turned over or fully denied access to them. That happened in 244,675 cases or 36 percent of all requests. On 196,034 other occasions, “the government said it couldn’t find records,” and in some material it did release the government “completely marked out nearly every paragraph.”

Contrary to claims, the federal government is more opaque than ever, so citizens are less informed. The federal government is more intrusive than ever, but citizens are not more secure.

With all its mass surveillance, and even a tip-off from the Russian government, the U.S. government failed to prevent the attack on the Boston Marathon last April 15. Likewise, the government knew about the deadly plans of Major Nidal Hasan but did nothing to stop his deadly rampage at Ford Hood in 2009.

Broken Trust

Tuesday March 25th, 2014   •   Posted by Craig Eyermann at 6:30am PDT   •  

24928299_S Nate Silver is perhaps best known for being one of the most accurate election forecasters in the U.S., where he has applied statistical methods originally developed to analyze sports to determining the most likely outcome of elections.

Previously hosted by the New York Times, Silver has recently relaunched his FiveThirtyEight blog with ESPN, where he has also expanded the range of topics he covers. As a case in point, he recently focused on what is driving the growth of government spending over time. Here is what he found after surveying the data from 1972 through 2011:

Spending on infrastructure and government services, excluding defense, has kept pace with gross domestic product growth. (Spending on infrastructure and services by the federal government specifically has lagged gross domestic product growth somewhat, growing at 1.8 percent per year.) Also, most of the subcategories of infrastructure and services spending that tracks have decreased slightly as a share of the gross domestic product, including spending on transportation, education, science and technology. The major exception is spending on the category they describe as “protection,” reflecting the increase in the criminal justice apparatus, which has grown at 4.8 percent per year.


Another way to view these data is to allocate the increase in spending-to-G.D.P. between the different categories of expenditures. Total government spending — including federal, state and local spending — rose to about 39 percent of the gross domestic product in 2011 from about 30 percent in 1972. So we have a 9 percent increase to account for, which is equal to about $1.3 trillion per year in current dollars.

Spending on entitlement programs was about $500 billion per year in 1972 in today’s dollars. If it had increased at the same rate as the gross domestic product, it would now be about $1.4 trillion. Instead, it is now about $2.9 trillion per year. What this means is that there has been about a $1.5 trillion increase in entitlement spending above and beyond gross domestic product growth. This is actually slightly larger than the overall increase in government spending relative to gross domestic product. This results from the fact that spending on the other categories has been essentially flat relative to the gross domestic product (infrastructure and services), or constitutes a negligible part of the budget for the time being (interest), or actually decreased relative to gross domestic product over the 40-year period (defense).

To clarify: all of the major categories of government spending have been increasing relative to inflation. But essentially all of the increase in spending relative to economic growth, and the potential tax base, has come from entitlement programs, and about half of that has come from health care entitlements specifically.

To put it another way, in order to be able to actually afford the total increase in entitlement spending that occurred, the U.S. economy would have had to grow at a pace nearly twice as fast as it did in the forty years from 1972 through 2011.

Silver then goes on draw a correlation between the increase in the government’s social welfare entitlement spending and the growth of distrust in the government itself:

... the declining level of trust in government since the 1970s is a fairly close mirror for the growth in spending on social insurance as a share of the gross domestic product and of overall government expenditures. We may have gone from conceiving of government as an entity that builds roads, dams and airports, provides shared services like schooling, policing and national parks, and wages wars, into the world’s largest insurance broker.

Most of us don’t much care for our insurance broker.

In truth, most of us are really neutral toward our insurance brokers, at least those in the private sector, because unlike the government, we’re free to do business with them or not. The government, and the politicians and bureaucrats who run it, would prefer to deny us that kind of choice.

To actually build trust takes a combination of integrity, sincerity, reliability, consistency, commitment, and competence. All one has to do to understand why Americans have grown to distrust government so much, and are growing even more distrustful of it, is to consider the nearly complete absence of these factors from the President on down in the implementation of the latest expansion of unaffordable entitlement spending: the Affordable Care Act (a.k.a. “Obamacare”).

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