Economy

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The Problem with Defined Benefit Plans is the same as the Problem with Defined Contribution Plans

The problem with both the defined benefit and defined contribution plans is that we do not put enough money in them. The primary difference between the plans is who we blame for not having enough funds.

EVEN WITH ROSY ASSUMPTIONS, public pensions are deep in the red. “A 2010 Pew study on public pensions nationwide put the funding gap at about a half-trillion dollars based on states’ own assumptions. But Novy-Marx and North western University’s Joshua Rauh say it’s $3 trillion using a risk-free discount rate.” I think a 4% rate is realistic. But note how bad things look assuming even a 6% return.

EVEN WITH ROSY ASSUMPTIONS, public pensions are deep in the red. “A 2010 Pew study on public pensio…
Glenn Reynolds
Sun, 27 Mar 2011 01:55:48 GMT

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Rose Bowl preliminary rating down 15 percent – College Football – Rivals.com

 

TCU’s 21-19 win over Wisconsin on Saturday earned an 11.7 overnight rating, down 15 percent from the 13.8 for Ohio State–Oregon on ABC last year. ESPN is available in about 13 percent fewer homes than ABC.

I do not have cable so I was somewhat surprised when I could not find the Rose Bowl on over the air television. It was one of the few bowl games I was interested in seeing. What I didn’t know was that ESPN and the bowl games decided to be shown exclusively on cable. This resulted in a smaller audience and probably smaller advertising revenue. Now this is an interesting business decision.

Rose Bowl preliminary rating down 15 percent – College Football – Rivals.com

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Small-Biz Killers – Michelle Malkin – National Review Online

Michelle Malkin in the article, Small-Biz Killers – Michelle Malkin – National Review Online, says:

State unemployment benefits last up to 26 weeks. Bipartisan-supported Washington mandates have raised that to 99 weeks. The current proposal would raise the total to 155 weeks

In this article, Calculated Risk: Tax Negotiations: No help for 99ers, the author says:

Just to be clear, the "extension of the unemployment benefits" is an extension of the qualifying dates for the various tiers of benefits, and not additional weeks of benefits. There is no additional help for the so-called "99ers".

Who’s right?

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A Good Deal for Democrats on Tax Cuts and a Missed Opportunity to Stop Emergency Legislating

This would have been a great time for Democrats and Republicans to come together and forge a "budget neutral" compromise of spending cuts to offset lower tax revenues. For two years we have been living under “emergency” exemptions from the PAYGO law. I think the voters showed they are equally concerned about the jobs and the deficit issues. It is about time we get a pledge from Congress to stop using “emergency” exemptions from the PAYGO rules. Extending the Bush tax cuts and unemployment benefits are issues with enough political leverage to force legislators to make hard compromises on spending cuts. There is probably the easiest political opportunity our legislators will find to cut spending.

I’m puzzled on both counts.  Let me get the personal stuff out of the way: I think this is a terrible deal.  I was rooting for gridlock to cause the tax cuts to expire entirely, which would probably have a moderately negative impact on the economy, but would at least somewhat forestall a devastating fiscal crisis down the road.  If it was politically necessary to do tax cuts, I wanted them to be as small as possible, not $900 billion over two years.

A Good Deal for Democrats on Tax Cuts – Megan McArdle – Business – The Atlantic

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Hey Barry, here is the specific spending cuts you were asking about!

Recently I went to Committee for a Responsible Federal Budget site, Budget Simulator | Committee for a Responsible Federal Budget, and ran the budget simulator. The objective is stabilize the U.S. Debt at 60% of GDP by 2018. I think I came up with budget cuts and tax increases that amounted to 58% of the GDP. It is amazing how many of the programs listed in the simulator do not personally affect me, my extended family, or my friends. I kept the troop deployment amounts for Iraq and Afghanistan since these troop deployments are winding down but I let the Bush tax cuts expire. This simulation which appears to mimic the opinions of the voters in the last election is a particularly bad omen for our politicians trying to protect special interests like labor unions, education, farm subsidies, and advanced weapon programs. A roll back to spending levels we had in 2008 or earlier would work for me, too.

My Stabilize the debt results

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Things that make me go hmm…. job attitudes?

I work at a small business that sells over the Internet. The operation of the business is pretty simple. We get an order over the Internet, one of our employees picks the items on the order, another employee packs the items, and finally another employee labels the package and loads it onto the truck. Like most small businesses that have seen their sales drop 20% to 30%, we have reduced employees hours during our off season months. This caused one of our productive employees to seek employment elsewhere early this year. A little while later two employees crossed the line of what you can do at work and were let go. We noticed something interesting. Our business seemed to be working very smoothly with less employees.

So as we entered our peak season we hired replacement employees.  Not surprisingly we were swamped with job applications. So after going through the job interviews, we hired a packer and customer service representative. The packer did not work out and left after two weeks. Since everyone is working more that a full week, we hired two more packers. On the Friday before Memorial Day one of our long term employees decided to quit. She had a variety of answers including that the commute was too much, she was not getting enough hours, and her husband almost burned down the house. On the same day our new customer service representative decides to quit. Although she was productive, she still had more training to complete before she could handle all of the issues a customer service representative is expected to handle. Mondays are our busy days since we have to pack and ship the order from Friday afternoon, Saturday, and Sunday. When we have a three day weekend we have an extra day to pack and ship. We had over 640 orders to pack when a typical Monday is about 500 orders. So I was quickly trained and spent the day packing orders. Every available management person was helping out with picking, packing, and labeling. After a very long day all of the orders shipped. Every business makes promises to the customers. In our case we promise to ship orders made before 3 pm. Our promise was fulfilled.

What I find very interesting that these employees are leaving on their own and cannot claim unemployment insurance. A Wall Street article, Employers on Strike, and the BLS report shows that businesses are leery about hiring employees. There is a consensus of opinions amongst the economic pundits that the job market is not going to improve for several years. Yet the attitudes of the employees are those that we see in a more robust job market. Business owners have a completely different viewpoint. Since our business is now over the peak selling season, the business strategy is that we add temporary employees and overwork our employees for the next month or so. It is a done deal that we will not be adding permanent employees this year.

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Germany Was Out-Voted And Forced To Bail Out Europe

I guess the European Union politicians did not learn anything from the political ramifications of TARP in the United States. First there was TARP. Then there was the Stimulus package. Then there was high unemployment and a stagnant economy. Once you start down the bailout path there are few options available. One option is always available, the politicians can retire. This says a lot about the people who want to server our country.

Angry German

It increasingly looks like Germany is simply being out-voted and  out-maneuvered, thus forced into effectively bailing out the Eurozone as the largest and strongest Eurozone economy.

In regards to the latest European plan:

Telegraph:

It is clear, however, that the two German members of the ECB’s council voted against the move, a revelation that may cause a catastrophic political backlash in Germany.

Axel Weber, ultra-hawkish head of the Bundesbank, told Boersen-Zeitung that the emergency move over the weekend had been a mistake. "The purchase of government bonds poses significant stability risks and that’s why I’m critical of this part of the ECB’s council’s decision, even in this extraordinary situation," he said. The rebuke is devastating. The ECB draws it authority from the legacy and aura of the Bundesbank.

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The European Commission made matters worse by announcing the decision in the small hours of Monday morning before the ECB had spoken, fueling suspicions that monetary policy is being dictated by the political authorities. French President Nicolas Sarkozy further enraged Berlin by claiming that 95pc of the $1 trillion "shock and awe" rescue package was based on French proposals.

There even doing regulatory back-flips to avoid German opposition:

The eurozone will create a Special Purpose Vehicle able to marshal a further €440bn. This is to be a outside the EU institutions on German insistence in order to circumvent the EU’s "no bail-out" law. The hope is to head off trouble at Germany’s constitutional court, though it is certain to be challenged anyway.

Read more here >

Join the conversation about this story »

Germany Was Out-Voted And Forced To Bail Out Europe
Vincent Fernando, CFA
Tue, 11 May 2010 07:25:00 GMT

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The Deadly Embrace – The Goldman Sachs/SEC Affair

I find the Goldman Sachs/SEC affair to be an intriguing affair. In a very public display the SEC alleges Goldman Sachs of fraud. Here are some of the more interesting facts I have collected so far:

  1. Although the information released by the SEC is impressive the SEC opts for a civil fraud case.
  2. Despite lots of former Goldman Sachs employees in the Obama administration and large Democratic campaign contributions, Goldman Sachs is blind sided by the announcement.
  3. Steve Liesman of CNBC appears to have identified significant exculpatory information in SEC testimony that weakens the SEC case.
  4. The primary victim of the fraud case is a German bank, IKB. The Business Insider highlights the facts that this bank thought they were an expert in the CDO market. From 2000 this bank had been successfully selling these risky investments to its clients. In a trial currently underway in Germany, IKB’s former chief executive Stefan Ortseifen, stands accused of misleading investors about the perilous state of IKB’s finances in the summer of 2007.

What was the SEC doing?

The SEC was arguably asleep at the wheel in both the Madoff scandal and the Stanford scandal. This week we find out that the SEC had an attorney who spent most of the day watching porn. For an organization that is bereft of positive publicity, this news story should have been a shining light of good government in action. However, this story seems to have avoided the high road, too.

  1. As Ben Stein remarked on a recent Wealthtrack episode, the SEC has all of the laws it needs to prosecute fraud as a criminal case. Yet the SEC chose to pursue a civil case. Shouldn’t it be IKB pursuing the civil fraud case?
  2. The timing of the SEC disclosures appears to be politically motivated. A finance reform bill is pending in the Senate and these disclosures and the subsequent public outrage appear to be a political gambit designed to raise political pressure on the bill’s opponents and to expedite the bill’s passage.
  3. As the Washington Post and Rush Limbaugh pointed out, The White House appears to have successfully used “insider information” on the Goldman Sachs news release to raise campaign contributions via targeted web searches.

My theory is that Goldman Sachs and the SEC are involved in a deadly embrace. Despite this being a lose-lose proposition, I am afraid they won’t settle any time soon. Although the Democratic pundits will claim a major victory when the Senate passes the finance reform bill, there is bad blood brewing on Wall Street over the handling of this affair. I doubt the voter cares too much about a civil fraud case involving a German bank heavily involved in speculating on US real estate.

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Confessions of a Health Insurance Scofflaw

Back in 2000 when I moved from Texas to Ohio I was given the opportunity to buy health insurance at what I thought was an exorbitant price of $350 per month. I declined. On Friday I commented on a post that about the insurance mandate that the insurance mandate is very expensive option for me for what I consider to be a hospital billing problem. Today I calculated about how much I saved by not having health insurance or having a low cost high deductable plan. Just for the health insurance premiums alone I would have spent $52,970. I used this slide from the Kaiser Family Foundation and its 131% increase to estimate my health insurance premium increases. This looks like a pretty conservative number since it assumes I can get a comparable low deductible policy today for $457 per month. From Quicken I can say that my medical and dental costs over this time period was about $37,900. Based on my ten year experience you can save a lot of money by being a savvy health care buyer.

Yesterday Ann Althouse and Les Jones both commented on an interview in the Wall  Street Journal with the Nobel economist, Gary Becker. They focused on his comment:

Here in the United States,” Mr. Becker says, “we spend about 17% of our GDP on health care, but out-of-pocket expenses make up only about 12% of total health-care spending. In Switzerland, where they spend only 11% of GDP on health care, their out-of-pocket expenses equal about 31% of total spending. The difference between 12% and 31% is huge. Once people begin spending substantial sums from their own pockets, they become willing to shop around. Ordinary market incentives begin to operate. A good bill would have encouraged that.

Although I agree with that statement I am most concerned about the following statement in the article since it links a bad health care policy with aggravating our current economic malaise. The next logical step for people frustrated with the current health care policy is to “game the system” and watch the legislators fumble around trying to explain how the policy is actually working quite well. Already we are seeing several unintended consequences such as, “AT&T Sees $1 Billion Charge Tied to Health”. There is definitely some passive-aggressive behavior going on here. You might call this scenario the sequel to “Jobs saved or created”.

Bad legislation, maintained by self-seeking interest groups. Back in 1982, I remind Mr. Becker, the economist Mancur Olson published a book, "The Rise and Decline of Nations," predicting just that trend. Over time, Olson argued, interest groups would form to press for policies that would almost invariably prove protectionist, redistributive or antitechnological. Policies, in a word, that would inhibit economic growth. Yet since the benefits of such policies would accrue directly to interest groups while the costs would be spread across the entire population, very little opposition to such self-seeking would ever develop. Interest groups””and bad policies””would proliferate, and the nation would stagnate.

Gary Becker: ‘Basically an Optimist’—Still
Sat, 27 Mar 2010 03:48:35 GMT

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The Long, Painful Road to Austerity

Despite the drama about the health care debate the country continues down its path to austerity. The only way we can get off the path is if the economy shows a robust, vigorous recovery of permanent employment and consumer spending. The states, counties, and cities desperately need more tax revenue. It is not surprising that this week Arizona’s governor signed a budget-balancing bill that cuts benefits immediately and threatens to cut even more benefits if a sale tax increase is not approved. Like most states Arizona has been trying to develop a budget to deal with the shortfall in tax revenue. It is ironic that one of the major spending cuts is a $385 million cut in the state’s Medicaid program. For many states the growth in Medicaid has become too large a burden for a weak economy. When it comes down to laying off teachers, police men, or cutting Medicaid, Medicaid is going to get cut. Many states view the Medicaid expansion as an unfunded mandate. So Congress votes to expand Medicaid coverage and Arizona cuts it.

Governor signs Arizona budget-balancing bills