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Tuesday, November 11, 2008

Fifteen to a Boat

I’ve been reading the various blogs and journals about our economic situation.  There are a number of conflicting opinions about what should be done, but there is certainty around the idea that raising the capital gains tax would be a disaster.  The problem with all of these plans/schemes is that they’re not sustainable.  And as the recent bailout has shown, there comes a tipping point. 

If we look at the situation as a lifeboat, I think it illustrates that problem we’re in.  If there is a lifeboat and 15 people are in it, it will do just fine (assuming that we have a 15-person lifeboat).  The boat will be able to sustain the weight of the people in it.  If, however, we have 17 people, we’re going to begin to have problems.  Now we might stay afloat for a while, but if we experience any type of surge (such as a storm), we’re going to take on water.  We have 17 people, but only 9 of them can bail water.  That keeps us ahead of a medium storm, but a strong one is going to cause us to make a horrible decision.

Two people have to go.  How do we go about picking the two that have to go?

Two might be able to hang on to the sides, until the storm passes.  That will reduce the weight a bit, but they’re not going to be able to survive for very long.  What we might try to do is take turns, in rotation, but that, too, is not sustainable forever.  The eight elderly and children in our boat can’t bail or hold on to the sides, but if we take any of the nine who can bail water, we’ll sink.  What do we do?

The above is the situation we were in after 9/11.  We had a series of storms (the dot bomb and the terrorist attacks), but we were able to bail water, because there will still enough people willing to help to do it, only half in our boat, but half was enough to keep everyone alive, even if half were doing all the work.  But there was a huge storm coming, the one that put Fannie Mae and Freddie Mac in the charity business, rather than loan business, and that storm hit a few months ago.  Changes to the tax code also required that businesses show their true debt picture, and those restatements caused a number of financial institutions to fail.  And we have a death spiral.

A few weeks ago, one of my nephews sent me an article about The Great Depression.  It was an old article, but terribly relevant to our situation today:

Two UCLA economists say they have figured out why the Great Depression dragged on for almost 15 years, and they blame a suspect previously thought to be beyond reproach: President Franklin D. Roosevelt.

After scrutinizing Roosevelt’s record for four years, Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.

“Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump,” said Ohanian, vice chair of UCLA’s Department of Economics. “We found that a relapse isn’t likely unless lawmakers gum up a recovery with ill-conceived stimulus policies.”

Liberals would have us believe that “FDR got us out of the depression” because there were numerous attempts to try to fix things.  What is not always talked about is that their “fixes” actually made things worse.

As I mentioned above, if we’re talking about a minor overload, such as two extra people in our lifeboat for fifteen, we’re going to be able to weather storms reasonably well, but anything beyond two extra, and our lifeboat will sink, especially if only a few of the people are willing to help bail water during a storm.  We have to shed the extra weight (or get a bigger lifeboat). 

On the horizon there is a Perfect Storm, one that I wrote about long ago.  That storm is Social Security, when the Baby Boomers begin collecting in greater numbers.  They just started collecting now, but as more of them move from the workplace to the retirement villa, things are going to get worse, very quickly.

That is when our lifeboat problems take on an entirely new dimension. 

If we think of our lifeboat as our economy, with the majority of people in the boat earning wages and paying taxes, that boat begins to get smaller, as the Baby Boomers retire, but the number of people who want in the boat grows.

As I wrote the Social Security post, the Social Security system was a Ponzi scheme from its inception (by law/design).  Ponzi schemes (aka Pyramid schemes) work as long as there are people at the bottom, feeding the bottom tier.  It doesn’t take long to run out of people.  Our population has not doubled and re-doubled, sufficient to keep the bottom tier of the Society Security system going.  We need something close to a 15 to 1 ratio of people paying into the system to people receiving benefits for it to be sustainable.  At about 15:1, each person who pays-in contributes about 7% to a person receiving benefits, but that percentage grows (exponentially) as there are fewer people paying in:

15 to 1:  7%
14 to 1:  7%
13 to 1:  8%
12 to 1:  8%
11 to 1:  9%
10 to 1:  10%
9 to 1:  11%
8 to 1:  13%
7 to 1:  14%
6 to 1:  17%
5 to 1:  20%
4 to 1:  25%
3 to 1:  33%
2 to 1:  50%
1 to 1:  100%

Keep in mind that there is no Social Security “savings account.” There can’t be.  It is against the Charter.  The system was always designed to be a welfare system, where taxes are collected and then paid out in the same year, to those receiving benefits.  As long as the number of people paying in remains at about 15:1, it works out great for the government, because they take in more than they have to pay out in benefits.  The remainder was used to increase the size of government, giving the illusion that taxes weren’t high.

At the time the Social Security Act was passed, the average life expectancy was 65, which is why the age for collecting benefits was set to 65.  It was supposed to go to a small number of people.  We haven’t adjusted the retirement age to keep up with the increased life expectancies.  In addition, the amount people received was just enough to keep them from starving to death, but it was never intended to support middle class lifestyles, or anything close to it.

Today, one-fifth of the population is collecting.  In three decades, it will be one-third of the population.

Our average life expectency is now 78 (77 for men, 79 for women).  If someone starts collecting benefits when they are 65 and lives to be 78, $955 a month would be a total payout of $148,980, for 13 years. 

When 86 million people are collecting (an average of $955 a month in today’s dollars), the annual payout each year will be:  $985,560,000,000.  That’s close to a trillion dollars a year the taxpayers will have to fund.  That isn’t going to be covered in the FICA deduction, at the current rate.

The current Federal budget is $2.5 trillion, which includes $.5 trillion in current Social Security payouts.  We’d be adding an additional $.5 trillion to the Federal budget, each and every year, and the $.2 trillion the government has been spending on other programs will no longer be available.

If we stopped Social Security today, meaning that we said that no new people will be added to the Social Security lifeboat, that would be a total debt of $13 trillion, just to pay off the Baby Boomers, and that’s assuming that they only live 13 years, and that we don’t increase other medical benefits for them, such as the idiotic prescription drug program.  Divide that $13 trillion by two-thirds of the workforce and you can begin to see how dire the picture is.  We’re paying about 15.8% FICA today (the wage earner and employer portion).  That will have to nearly double in order to meet the demands.  In addition, the extra $.3 trillion the government has been collecting and spending on whatever they want, will no longer exist.

The Neaderpundit has a post about the GM/Ford/Chrysler problems, and a bailout of that industry.  Og opines that car manufacturing is complicated and specialized, and that the suppliers of the auto industry would go out of business if we didn’t bail out the auto-industry.  But for how long? 

The problem with Og’s proposal, the bailout of Fannie Mae/Freddie Mac, the secured loans to the financial industry, etc., is that they are not sustainable, especially when they happen all at the same time.  How long do we continue to bail out the auto industry?  Is there any reasonable expectation that they’ll totally rethink the way they do business, build safe/reliable/economic cars, and do so in a fashion that appeals to the American auto buyer?

That’s the problem with EVERYthing I read about.  We don’t make financial decisions because we want to be nice and help people.  We make loans with the expectation that they’ll be paid back, not to delay the inevitable.

We want to help people stay in houses they can no longer afford, hoping that good times are on the horizon, and all will be hunky-dory next year.  We want the auto-industry to stay afloat, keeping those people employed, until all the rest of us have enough money and lust for American cars, so we’ll run out and buy those, too.  While we’re doing that, the stock market is supposed to recover, restoring our IRAs and 401Ks, but that comes at the cost of bigger deficits, which always drives the market down and causes inflation to rise… and the American people want government to do something about their retirement savings.  What, for heaven’s sakes?  Investment is a risk.  Mortgages are a risk.  Auto-industries and those who supply them are a risk.

Who is assuming the risk for all of this?

The taxpayer, and Obama is proposing that we drop off another 40% from the tax rolls, and starting PAYING 50% of us for not paying taxes.  And THAT is not sustainable.

Everyone wants everything to be safe… their mortgages, other people’s mortgages, every industry (regardless of how bloated and mismanaged they are or how little market demand there is), and their investments (without having to do one second of research on their own), and their jobs.  Well, it is NOT going to be safe… and things are going to get pretty ugly, very fast.

There are 100 people in a lifeboat built for 15. Only 5% of the 100 people in our lifeboat are going to be paying taxes, under Obama’s plan.  We either reduce taxes to those who are paying them, so they can make our economic lifeboat big enough to sustain the other 95 people who are no longer bailing out the storm surge, or we have to start throwing them overboard.

This economic recovery is going to HURT and millions of people are going to be impacted, in the extreme.  We’re in a recession now, and with the way Congress has handled this (and plans to handle it), we will be in a full-blown depression by next year.  Sure, they’ll do a good jig, and convince people that they’re doing stuff to make it better, but everything they’ll do (akin to FDR’s socialist policies), will make it worse and last longer.

The piper is at the door and this is NOT the time to talk about bailing out any other industries or protect the stock market with MORE protectionist regulations.  It is time to pay the penalties for 50 years of socialist/progressive legislation, and get the government out of the protection and welfare business.

It will not happen, because the American people just elected the Goon Squad to manage things.  There’s a Perfect Storm coming, and we’re lost at sea, with NO HOPE of rescue, with 100 people in the lifeboat for 15, and only 5 are willing to bail water.

We’re so screwed.  I see nothing but misery and disaster looming. 

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