Unfortunately, the MMM unscientific economic indicators are proving to be true. The horrible economic activity I wrote about two weeks ago is showing up in the main stream indicators. Unemployment is up, inflation is up, the stock market is retreating.
Barack Obama is shaping up to be Jimmy Carter. Will a Ronald Reagan show up to replace him?
Maybe it’s gasoline prices. Maybe its the weather. We’re not hearing about it yet in the mainstream media, but among Main Street businesses it seems like everyone is talking about it. In the last few weeks it’s as if a switch was flicked and economic activity was turned off.
I just got off the phone with a friend who has two businesses; a law firm and a retail store. The retail store should have done $50K in sales this weekend. It did $11K. Last month’s sales were off 25% from April of last year. The law firm is quiet. New clients don’t have cash for retainers and long term clients are falling behind on their bills.
Over the weekend my friends with restaurants and hotels were complaining about what a slow start they are having to the season.
Landscapers and contractors are not working because of the weather. They don’t have much of a back log anyway.
My friend with an auto repair shop and a lock smith business offered that there is a great deal of maintenance being deferred on cars, causing major breakdowns for some customers who are paying cash when they have to. There is more cash business than credit cards or checks, even for big tickets.
Hopefully it is just my circle of friends and the slow down we’re alarmed by is not a broader trend that will show up in monthly and quarterly government reports in the next few weeks.
At the GOP finance gala last week I needed change for a $100 bill. I was shocked by how little cash was in the room. I asked 10 or 15 people to break the bill before I found someone who could.
Does anyone have some good economic news to share? Please do so in the comments.
New Jersey’s millionaires are sending an unexpected $913M to Trenton between now and July 2012, even though Governor Christie said no to the reinstatement of the millionaires income tax surcharge.
State taxes are expected to exceed Governor Christies projections by $430 million in the current fiscal year that ends June 30th, and another $484 million in the next fiscal year, according to an Office of Legislative Services analysis obtained by Gannett.
The money is coming from Wall Street millionaires’ income taxes.
As the stock market has risen broadly, the state saw an additional $633.9 million in income tax collections this fiscal year, and it is expected to reap another $811.7 million above expectations in the next fiscal year.
However, New Jersey’s Main Street economy is lagging behind expectations:
However, corporate business taxes are off early projections by $190.1 million and are expected to track $252.5 million below estimates next year.
Sales and other tax collections are flat or down and are expected to continue to be lackluster.
Naturally, Trenton Democrats are scrambling to find ways to spend the unexpected cash, rather than use it to shrink New Jersey’s huge deficits in the pension and health benefits system, the transportation trust fund or the unemployment trust fund. The State Supreme Court could order all the money be wasted in Abbot Districts.
Government Reaches Debt Ceiling. Treasury Secretary Tells Congress He’ll Keep Borrowing By Withholding Pension Payments and Accounting Tricks
By Art Gallagher
Treasury Secretary Timothy Geithner is taking a page from the States playbook and balancing the federal books by delaying pension payments.
In a letter to Congress, Geithner he will immediately halt investments in two big government pension plans so the government can continue to borrow money even though the $14.3 trillion dollar debt limit was reached yesterday, according to an Associated Press article.
Even though the government has reached its official borrowing limit, Geithner said unexpected revenue and bookkeeping maneuvers will allow the Treasury to continue auctioning debt for another 11 weeks.
What would our governments do if they didn’t have pensions to play with? What would be the consequences of a private sector CFO making a similar move?
Stanley Druckenmiller, a “legendary investor” who was once a fund manager for George Soros, told the Wall Street Journal that a “technical default” or short term delay in government debt payments would be preferable to the status quo of continually raising the debt limit without fundamental reform of how the government spends money.
“Here are your two options: piece of paper number one—let’s just call it a 10-year Treasury. So I own this piece of paper. I get an income stream obviously over 10 years . . . and one of my interest payments is going to be delayed, I don’t know, six days, eight days, 15 days, but I know I’m going to get it. There’s not a doubt in my mind that it’s not going to pay, but it’s going to be delayed. But in exchange for that, let’s suppose I know I’m going to get massive cuts in entitlements and the government is going to get their house in order so my payments seven, eight, nine, 10 years out are much more assured,” he says.
Then there’s “piece of paper number two,” he says, under a scenario in which the debt limit is quickly raised to avoid any possible disruption in payments. “I don’t have to wait six, eight, or 10 days for one of my many payments over 10 years. I get it on time. But we’re going to continue to pile up trillions of dollars of debt and I may have a Greek situation on my hands in six or seven years. Now as an owner, which piece of paper do I want to own? To me it’s a no-brainer. It’s piece of paper number one.”
Druckenmiller says the current market for government debt, and low interest rates are part of the shell game:
Some have argued that since investors are still willing to lend to the Treasury at very low rates, the government’s financial future can’t really be that bad. “Complete nonsense,” Mr. Druckenmiller responds. “It’s not a free market. It’s not a clean market.” The Federal Reserve is doing much of the buying of Treasury bonds lately through its “quantitative easing” (QE) program, he points out. “The market isn’t saying anything about the future. It’s saying there’s a phony buyer of $19 billion of Treasurys a week.”
It is comical to see our political class seized anew in a surreal debate about whether it is “possible” to cut $100 billion from an annual expenditure of $3.7 trillion without irrevocably harming babies or cratering the economy. It got me thinking about how we even arrived at this strange place where our elected representatives are spending 65% more than we are collecting in revenues every year. Somewhere along the way spending money in Washington DC became less about “necessity” and more about something else entirely.
So, here is another amazing fact to ponder: in the very near future we will be spending more virtual money in online fantasy worlds than will be spent by real consumers in the world formerly known as reality. Members of the online game FooPets breed and adopt dogs and cats and spend, on average, nearly as much money on their cyber puppies and kittens as actual pet owners in the real world. The nearly one million unique residents of a 3D virtual world called Second Life can buy everything from private islands to suggestive lingerie using a currency called Linden dollars. In an ominous development, Chinese authorities have recently barred a merger of their online and virtual economies. It seems that players who were particularly adept at accumulating wealth in the online world were selling this virtual game wealth for hard cash to rich players who would use the currency to boost their status and prestige in order to attract gorgeous pixel-based avatars.
But we know that you cannot really hold back the advance of technology. So, it got me thinking…how about this novel idea to solve our nation’s fiscal problems: for so long as is necessary to restore a balance between expenses and revenues, the Congress is only allowed to appropriate a new virtual currency called Fedbits? This new monetary unit, unregulated by annoyances like debt ceilings, interest rates, or the Federal Reserve, could be used to purchase an unlimited inventory of items in an online Congressionally-run supermarket. In order to secure passage of this landmark legislation, each Congressman would also be entitled to earmark a certain quantity of Fedbits to any constituent or special interest of his choosing.
Anyone want to buy a romantic lighted gazebo to go along with their private island?
Scott Sipprelle is the principal of Westland Ventures, LLC. Scott was the Republican nominee for Congress from New Jersey’s 12th congressional district in 2010.
Governor Chris Christie was featured prominently in the 60 MINUTES segment, State Budgets: Day of Reckoning last night. See InTheLobbyfor a synopsis and links to the broadcast and extra footage.
There were two key phrases Christie used that caught my attention when talking about the state’s pension and retiree health care obligations. 1) Christie said that most of the general public is incredulous that there are still people still getting pensions. Most of us have 401K’s that have been hammered and we don’t know how we are going to fund our retirements. 2) Christie said, as I have heard him say before, that while public employees are up in arms now, if he doesn’t take the necessary actions to reform the pension and benefits system, it won’t exist in 10 years.
I hope the second comment is not an indication that Christie is going to try to save the pension and benefits system. It is beyond saving and it is not appropriate to try.
As Christie’s two least favorite conservatives (besides Sarah Palin), Paul Mulshine and Rick Merkt wrote in September, if the state pension system was a private pension system the federal government would have shut it down already.
If the federal government is not going to do the right thing regarding the insolvent state pension systems throughout the county, New Jersey and Chris Christie should lead the way. Scrap the pension system. Distribute the money in the system equitably to its beneficiaries’ retirement accounts and let’s move on. Set up 401K type retirement programs for government workers and retirees.
The private sector has already handled this crisis and have given the states a model for how to do it. It’s not fair and it won’t be pretty, but it has to be done. All we need is a leader with the courage to do it.
I believe Chris Christie is that leader. I hope I am right.
As the nation muddles through anxious days of economic uncertainty and rage-filled political arguments over tax policy, it would serve us all well to look back to an earlier time of similar malaise. The 1970’s in America were marked by high inflation and unemployment, rising taxes and a stagnant stock market that was eroding the well-being of the middle class. Recall this was also a time when marginal income tax rates rose as high as 70% and the effective capital gains tax rate was 50%.
But President Jimmy Carter had an idea. He believed an increase in the capital gains tax to match the marginal tax on income made sense not only as a matter of economic policy, but also as a matter of fairness in order to stop the giveaway to “fat-cats.” The President of the American Electronics Association had a different idea, grounded in his experience as an entrepreneur. He traveled to Washington looking for an advocate to embrace an entirely different approach. The way out, he believed, was to slash capital gains taxes in order to encourage risk-taking investments in innovative new companies that would capitalize on technical developments across a broad cross-section of American industry. Why would anyone invest under a regime where if you lose, you keep 100% of your loss, but if you succeed the Federal Government takes 50%?
A baby-faced young Republican Congressman from Wisconsin, Bill Steiger, eagerly took up the cause. Originally elected to the Wisconsin legislature at 22, he had been the youngest member of Congress when first elected in 1966 at age 28, and frequently mistaken for a page. Steiger was a conservative, but molded in the Lincolnian tradition that government needed to do the, “desirable things which the individuals of a people cannot do, or cannot well do, for themselves.” Steiger had sponsored the legislation which created the Occupational Health and Safety Administration (OSHA) in order to address the unacceptable rate of annual on-the-job deaths (14 thousand) and accidents (over 2 million) that characterized the American workplace of the early 1970’s.
Steiger embraced capital gains reductions with a passion, offering a counter-proposal to slash the capital gains tax by 50%. Despite harsh attacks that portrayed the proposal as a program to benefit the rich, Steiger fought back hard, not on ideological grounds but by the use of hard empirical data. Even President Carter’s Head of the Office of Science and Technology Policy admitted that more than 300 high-technology companies had been started in 1968, when capital-gains taxes were low, and by the mid 1970’s there were no similar start-ups whatsoever.
Against all expectations, the political climate on capital gains taxes changed dramatically. To even Steiger’s surprise, he was able to garner enough Democratic support that President Carter ultimately signed the Steiger Amendment into law in November 1978, effectively slashing the capital gains tax to 28%. Tragically, Bill Steiger died of a heart attack at age 40, a mere month after his legislative milestone became law.
Within several years America was experiencing an innovation boom of historic dimensions. Venture capital funding, which had bounced along at $50mm per year in the 1970’s exploded to over $1 billion per year. Iconic American companies like Apple Computer, FedEx, and Sun Microsystems were launched. America’s technology revolution, which would change the destinty of the nation and the planet, had as its seed the wise tax policy promoted by a forgotten Congressman.
Assembly Minority Leader Alex DeCroce raised an important issue this week—the insolvency of the Unemployment Trust Fund which is in debt to the federal government for almost $2 billion–and then promptly torpedoed his message with a poor choice of words when he called those collecting “those people.”
Now the story in the media has become DeCroce’s insensitivity, his apology, the six figures he and his wife are collecting from their state jobs and their pensions. My friend Bob Ingle points out that DeCroce is taking the heat from his Democratic colleagues by attempting to change the subject to dual office holding.
My experience as beneficiary of unemployment insurance is very limited. In the late 80’s, the last time the economy was this bad, I lost a high paying job “through no fault of my own.” I went to the unemployment office, was interviewed and filled out forms. This was my first, and only to date, experience seeking any government assistance. I didn’t like it. Fortunately I was young and single with responsibilities for no one but myself.
Rather than take the handout, even though I had paid into it, I downsized my lifestyle by moving into a smaller apartment and took a low paying job that I was over qualified for.
I didn’t consider that a major decision at the time, but in retrospect it was a pivotal decision in my life. I never went back to “the corporate world.” I was happy and thriving in the “small business world.” It took a long time to get my income back to the level I enjoyed in “the corporate world.” When I realized I was tapped out and wasn’t so happy any longer working at the small business I was employed by I found that I couldn’t go back to the corporate world. I was a “stray cat.” Even if I could have gotten such a job, I would have hated it. So I started my own small business.
As an employer I became acquainted with the unemployment fund again. I was paying into it. For the first 8-10 years of I didn’t even notice it. Business was great and growing. I was hiring, rarely firing. Contributions to the unemployment fund were an insignificant portion of my quarterly payments to the State.
Toward the end of the boom, my most valuable employee informed me she was pregnant. The news was not as life changing to me as it was to her, yet it was a significant and unexpected development. She had not had a child in 20 years and was not planning another. I relied heavily on her. She knew the administrative aspects of my business better than I did. I didn’t know them at all! This major personal development in my trusted employee’s life exposed a major weakness in my business that would require an expensive adjustment.
Assuming the economy would continue to boom and that business would continue to thrive, my plan was for my most valuable employee to spend her pregnancy training her replacement while herself training for the new job that I invented for her to come back to after her pregnancy leave. It was an expensive plan, but it worked. The administrative aspects of my business became documented with a manual that my new hire referred to often as she mastered her job. My long term employee spent months answering questions, documenting answers and taking business courses from Brookdale online, preparing for her return.
Given that I was expecting her back, and given that business remained strong, I carried the cost of my long term employee’s health care during her pregnancy leave. It was a good thing I did, as there were major complications, the baby (who is now a brilliant and delightful 4 year old who is terribly disruptive when she comes to visit the business) needed surgery and a long quarantine period. The maternity costs and the baby’s early care cost almost $400,000. The care they received probably wouldn’t have been as good and the taxpayers would have picked up the tab had I not carried the heath care premiums.
But the downside for me was that a 3 month maternity leave turned into an 8 month maternity leave. When my employee came back to work, she said she could only handle part time. The truth was she probably wasn’t ready to work, but the pregnancy disability benefits had run out.
After a couple of months on part time, I told my employee I needed her full time. She quit. This gets me back to the Unemployment Trust Fund and its management.
Unbelievably to me, and over my objections, she was granted unemployment benefits. Why did I object? Because I had offered her a full time job, the offer was still on the table, but the folks managing the Unemployment Trust Fund gave her benefits instead.
A quarter, two or three later I noticed that my payment to the State had increased substantially. Figuring it was a mistake, I asked my bookkeeper for an explanation. No mistake, my unemployment insurance premiums had skyrocketed due to claims history. A large portion of the cost was the premium on my own salary. As the owner of a corporation I couldn’t collect on “insurance” I was paying for. This would be illegal in the private market.
Now, a few years later with an even higher claims history, my contribution to the Unemployment Trust Fund is 3-4 X higher than the quarterly payroll taxes I pay to the State, though the actual number is a great deal lower. This cost is a major impediment to me hiring new employees, as it is for hundreds, if not thousands of other small business owners.
There are legal and illegal ways around having to pay high unemployment premiums. The legal way, starting a new company with no history to pay employees is probably the option I’ll follow, if I decide to grow the business again. Employee leasing is also an option. Both options are unproductive and costly, but probably not as costly as paying 5+% of payroll into the insolvent Unemployment Trust Fund. Closing the existing corporation is not an easy option for me, and many other businesses, as the existing corporation owns assets that could not be transferred without costly legal, accounting and tax consequences. Small businesses owners are confronted with a choice of having to create complicated and costly corporate structures in order to grow, not to grow, or to cheat. Many will choose to cheat, which is an impediment to growth in the long run, and costly to the State treasury in the short and long run.
Cheating is a major issue on the beneficiary side of the unemployment equation that no one wants to talk about. There is no accountability for those receiving unemployment benefits. There may be no way of knowing how many people are gaming the system, working “off the books” while collecting. We all know it is happening.
As indelicate as DeCroce’s words were, he point was accurate. We need to give the unemployed more incentives to make the difficult but inevitable lifestyle choice decisions and find ways to survive economically either by accepting jobs they once never would have considered or starting businesses. We also need to remove the disincentives from businesses who want to employ people but won’t because the risks are too high for the potential returns.
Most importantly and not yet addressed in a major way, we need to bring management and accountability to the administration of the Unemployment Trust Fund.
