2010 April 29 Thursday
Bureaucracy Enables Conquest

The expansion of the world's first states was made possible by bureaucracy.

"Bureaucracy is the death of all sound work," said Albert Einstein, sharing a popular view about bureaucracy grinding progress to a halt.

But it now appears that the organizing functions of bureaucracy were essential to the progressive growth of the world's first states, and may have helped them conquer surrounding areas much earlier than originally thought. New research conducted in the Valley of Oaxaca near Monte Albán, a large pre-Columbian archaeological site in southern Mexico, also implies that the first bureaucratic systems may have a lasting influence on today's modern states.

The research by the American Museum of Natural History (AMNH), funded in part by the National Science Foundation (NSF) through its Social, Behavioral and Economic Sciences directorate, is published in this week's Proceedings of the National Academy of Sciences (PNAS).

"The earliest evidence of state organization is contemporaneous with the earliest evidence of long-distance territorial expansion," said lead researcher Charles Spencer, curator of Mexican and Central American Archaeology at the AMNH. "This pattern was consistent with the territorial-expansion model of primary state formation, which I have proposed in a number of publications over the years."

Spencer's territorial-expansion model argues that states arise through a mutual-causal process involving simultaneous territorial expansion and bureaucratization. Spencer's model breaks with previous ideas that suggest states rise through a protracted, step-by-step process--first the state forms, then an organizing bureaucracy takes hold, and sometime later, the state begins to expand into other regions in an "imperialistic" fashion, thus giving birth to an empire.

Whatever genetic variants enabled the formation of bureaucracy probably have been under positive selective pressure. The expanding states captured more resources that helped feed the bureaucrats. So attributes that helped a person become an effective bureaucrat probably provided reproductive advantage. Don't like bureaucracy? It is probably a product of human evolution.

By Randall Parker 2010 April 29 11:20 PM  Civilizations Formation
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Doctor Anger With Insurance Companies

In a New York Times article medical doctor Pauline Chen describes the frustration and anger of doctors with the current health care system. A lesson I take from reports like this one: avoid health insurance for routine care.

For nearly three decades, editorials, online posts and surveys have noted this rising frustration and anger among practicing physicians. But over the last two years, the pot of emotions seems to have boiled over. In all the recent discussions about health care reform, what had heretofore played out only beyond earshot of the exam room suddenly was very public: the tangled, uneasy and often antagonistic relationship between practicing doctors and the insurance companies who pay for the services they deliver.

As a primary care doctor posted recently on Sermo, the nation’s largest online community of physicians: “We are our own worst enemies, as we have allowed insurance companies and Medicare to set the value of our services. Clearly those values they impose have nothing to do with our contribution to the health of our patients or the cost savings we bring about.”

Is this just doctors complaining? Nope. Think about when a doctor calls up an insurance company or submits a form to get approval for some treatment. Do you think the insurance company staffer reading the form or listening to a doctor on the phone understands as much as the doctor? Unlikely. Yet that insurance company staffer can just say no. What if your doctor is right? What about your health?

My advice is to save up for serious medical problems. When the stakes are high pay cash for the best advice. Find out who is great at their specialty that pertains to your problem. Go and see them and pay cash for tests and diagnosis.

I've got a Health Savings Account and a high deductible medical policy because I'd rather directly pay and get services from someone who only has to cater to my needs and desires, not to the demands of insurance companies or government agencies.

I do not see the point of getting a medical insurance policy that co-pays visits to a doctor. You are better off just saving up in advance for future medical problems. Sure, you could get a serious illness that costs hundreds of thousands of dollars. An insurance policy can help you there. But even in the middle of having a very expensive illness you'll be better off if one of the doctors you are seeing is getting paid directly by you to manage your overall care and to evaluate treatments proposed by other doctors. You need an objective viewpoint from a first class medical mind. Your own cash can help you get that when it really matters.

On the New York Times site a discussion related to the article about includes a medical office worker who describes some of the insurance company overhead associated with long term medical treatments.

I work in an internist’s office, and all too often patients who are on a specific medication that best treats their particular chronic condition, one that is Never Going To Change (e.g., Chronic Renal Failure) are required to obtain Prior Authorization for the same medication every six months (sometimes even more often!) This is the height of absurdity. If the medical review by the insurer indicates this patient is best served by a specific medication, that should be the end of it. One “Prior Authorization” and Done should be the goal.

While not always the case, many times a single Prior Authorization call to an insurer can easily eat up 30 minutes of one staffer’s time; fighting through the long-winded automated greetings, voice-response unit selections, more recordings, on-hold time, finally speaking to a breathing human being can make what ought to be a simple transaction an obstacle course. The result over a year? Endless staff time is wasted in jumping through the insurer’s hoops, to the frustration of the patient, and cost to the doctor.

“Step Therapy” requirements, whereby a patient must try and fail two other drug therapies before being permitted to take the medication originally prescribed and denied by insurer, places the insurer’s medical judgment ahead of the primary care physician, and some states are wisely prohibiting this practice.

If you can afford to avoid the insurance companies and government you will be better off.

By Randall Parker 2010 April 29 10:59 PM  Economics Health
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2010 April 27 Tuesday
South Park Super Best Friends Without Muhammad

Ross Douthat says South Park's attempt at revisiting the "Super Best Friends" great religious figures as characters this time met with far more censorship by the Comedy Network. The Comedy Network has become more scared of Islam.

These gimmicks then prompted a writer for the New York-based Web site revolutionmuslim.com to predict that Parker and Stone would end up like Theo van Gogh, the Dutch filmmaker murdered in 2004 for his scathing critiques of Islam. The writer, an American convert to Islam named Abu Talhah Al-Amrikee, didn’t technically threaten to kill them himself. His post, and the accompanying photo of van Gogh’s corpse, was just “a warning ... of what will likely happen to them.”

This passive-aggressive death threat provoked a swift response from Comedy Central. In last week’s follow-up episode, the prophet’s non-appearance appearances were censored, and every single reference to Muhammad was bleeped out. The historical record was quickly scrubbed as well: The original “Super Best Friends” episode is no longer available on the Internet.

If we are going to live in fear of an immigrant group then we should not let that group into the country. Shouldn't our right to freedom come before their right to repress us?

Cowering before Islam and even Western governments persecuting critics of Islam is far too common and pervasive.

In a way, the muzzling of “South Park” is no more disquieting than any other example of Western institutions’ cowering before the threat of Islamist violence. It’s no worse than the German opera house that temporarily suspended performances of Mozart’s opera “Idomeneo” because it included a scene featuring Muhammad’s severed head. Or Random House’s decision to cancel the publication of a novel about the prophet’s third wife. Or Yale University Press’s refusal to publish the controversial Danish cartoons ... in a book about the Danish cartoon crisis. Or the fact that various Western journalists, intellectuals and politicians — the list includes Oriana Fallaci in Italy, Michel Houellebecq in France, Mark Steyn in Canada and Geert Wilders in the Netherlands — have been hauled before courts and “human rights” tribunals, in supposedly liberal societies, for daring to give offense to Islam.

I can understand the fear of network executives or publishing house editors. But for governments such as those in the Netherlands, Italy, France and Canada to actively prosecute and persecute critics of Islam is just a total moral outrage. Western governments should be on our side, not on the side of religiously motivated repression.

Islam is not compatible with our civilization. Islam is unique today in the extent of repression and intolerance we can expect from a sizable fraction of its believers.

By Randall Parker 2010 April 27 12:33 AM  Civilizations Clash Of
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2010 April 25 Sunday
Inevitable Bankruptcy Seen For Los Angeles

California politicians see the public pension system as unsustainable. A couple of generations of politicians were bought by the public sector unions and signed union contracts that are going to bankrupt some California governments.

"The single biggest threat to our fiscal health and California's future is our public pension system," Schwarzenegger said at a Capitol news conference, declaring the growing costs a "crisis."

"Here in Sacramento, pension reform must be our No. 1 priority," he said.

Earlier in the day, Villaraigosa declared in Los Angeles that the city's "pension system is no longer sustainable.''

Retirement benefit costs will consume 19% of the city's general fund budget in the coming fiscal year, he said.

Former Mayor Richard Riordan says bankruptcy for Los Angeles is inevitable.

Mayor Antonio Villaraigosa and the City Council have said repeatedly that, come what may, declaring Los Angeles bankrupt is not an option.

But with city leaders avoiding the tough decisions to mend L.A.'s financial health - opting instead for easy fixes that allow the city to limp along for another month or two - some are saying bankruptcy is just the ticket.

For one thing, it could lead to speedier reform of the pension system, which many economists and politicians say is necessary if the city is to prosper long term.

"I've suggested it since 2005," former Mayor Richard Riordan said. "The city, the way it is going, is unsustainable. If they don't do it this year, they are going to have to do it in the next four or five years."

That's Richard Riordan saying it. Wow.

Jerry Brown, former governor of California, former mayor of Oakland, current state Attorney General, and Democratic candidate to be the next governor says defined benefit pension plans should not be scaled back. He's beholden to the public employee unions.

Public pensions came up. The current system, reported by nearly all responsible officials and media, is either bankrupt or on the verge of bankruptcy because it promises specific amounts to retirees. That is a "defined benefit" plan. Brown stated that he “supports a defined benefit plan,” (which is the current system), but was quick to add that “pension spiking-we need to curb that.” "Pension spiking" is the practice of promoting a public employee at the end of his or her tenure or assigning more overtime in order to increase the amount of pension paid during that person's lifetime in retirement.

The problem goes much deeper than pension spiking.

Back in 1978 Jerry Brown signed the law that gave public employee unions the power they used to win the pension benefits that are helping to bankrupt state and local governments in California.

Crane traces the political takeover by the unions to the Dill Act signed by Governor Jerry Brown in 1978 giving the public unions collective bargaining. As the unions power over the legislature has grown the concern is reform on the pension front will be more and more difficult to accomplish.

California used to be the dream state. Somewhere alone the way it became the nightmare state.

Writing for the City Journal Steve Malanga explains just how beholden California governments have become to the unions.

Consider the California Teachers Association. Much of the CTA’s clout derives from the fact that, like all government unions, it can help elect the very politicians who negotiate and approve its members’ salaries and benefits. Soon after Proposition 13 became law, the union launched a coordinated statewide effort to support friendly candidates in school-board races, in which turnout is frequently low and special interests can have a disproportionate influence. In often bitter campaigns, union-backed candidates began sweeping out independent board members. By 1987, even conservative-leaning Orange County saw 83 percent of board seats up for grabs going to union-backed candidates. The resulting change in school-board composition made the boards close allies of the CTA.

But with union dues somewhere north of $1,000 per member and 340,000 members, the CTA can afford to be a player not just in local elections but in Sacramento, too (and in Washington, for that matter, where it’s the National Education Association’s most powerful affiliate). The CTA entered the big time in 1988, when it almost single-handedly led a statewide push to pass Proposition 98, an initiative—opposed by taxpayer groups and Governor George Deukmejian—that required 40 percent of the state’s budget to fund local education. To drum up sympathy, the CTA ran controversial ads featuring students; in one, a first-grader stares somberly into the camera and says, “Pay attention—today’s lesson is about the school funding initiative.” Victory brought local schools some $450 million a year in new funding, much of it discretionary. Unsurprisingly, the union-backed school boards often used the extra cash to fatten teachers’ salaries—one reason that California’s teachers are the country’s highest-paid, even though the state’s total spending per student is only slightly higher than the national average. “The problem is that there is no organized constituency for parents and students in California,” says Lanny Ebenstein, a former member of the Santa Barbara Board of Education and an economics professor at the University of California at Santa Barbara. “No one says to a board of education, ‘We want more of that money to go for classrooms, for equipment.’ ”

Government bankruptcies. They'll start out local, move up to the state level, and eventually the US government will face a sovereign debt crisis. What I want to know: Will the feds use inflation to do a de facto default on US sovereign debt? How will the US government respond when world oil production goes into permanent decline and pulls economies down with it?

Update: See this Barrons chart of state credit ratings and pension funding. California has the lowest credit rating followed by Illinois. If you are thinking of moving consider states that have high credit ratings and no income taxes. Florida, Tennessee, South Dakota, and Washington state are all candidates. In the Barrons table the column for percent funded is misleading. The states all have unrealistically high assumptions for the rates of returns on their pension investments. Best to choose a state that provides low public employee retirement benefits. I'd like to know the details on that issue.

By Randall Parker 2010 April 25 12:00 AM  Economics Sovereign Crises
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2010 April 24 Saturday
Pat Buchanan: The Chinese Century

Move over Rover, the Chinese are taking over.

“Thank you, Hu Jintao, and thank you, China,” said Hugo Chavez, as he announced a $20 billion loan from Beijing, to be repaid in Venezuelan oil.

The Chinese just threw Chavez a life-preserver. For Venezuela is reeling from 25 percent inflation, government-induced blackouts to cope with energy shortages and an economy that shrank by 3.3 percent in 2009.

Where did China get that $20 billion? From us. From consumers at Wal-Mart. That $20 billion is 1 percent of the $2 trillion in trade surpluses Beijing has run up with the United States over two decades.

Beijing is using its trillions of dollars in reserves, piled up from exports to America, to cut deals to lock up strategic resources for the coming struggle with the United States for hegemony in Asia and the world.

Yes, we are providing the Chinese with the cash and technology they are using to out-compete us for a dwindling supply of oil and minerals. Our living standards will decline as a result.

America was once like today's China.

The Chinese of 2010 call to mind 19th century Americans who shoved aside Mexicans, Indians and Spanish to populate a continent, build a mighty nation, challenge the British Empire — superpower of the day — and swiftly move past her in manufacturing to become first nation on earth. Men were as awed by America then as they are by China today.

America seems a declining superpower. She cannot defend her borders, balance her budgets or win her wars. Her educational system at the primary and secondary level is a shambles. In the first decade of the century, she lost one of every three manufacturing jobs. In this second decade, she is looking at trillion-dollar deficits to 2020. The world is losing confidence in her ability to manage her surging national debt.

America is not going to get a grip on the situation. People want stuff now. The welfare state is too mature. Unfunded entitlements, government worker pension plans, Peak Oil, and demographic decline doom America to a sovereign debt crisis and lower living standards. Debt is going to drive up interest rates. Households with heavy credit card debt will be especially hard hit. Note the heavy indebtedness of renters in that last link. That's probably mostly credit card debt. Credit cards are a major cause of America's decline in my view. Though mortgage debt is much larger.

By Randall Parker 2010 April 24 09:10 AM  China
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2010 April 23 Friday
Russia Bribes Ukraine With Cheap Natural Gas

$40 billion for Ukraine. 30% off. From Russia with love.

“It looks like a peace treaty after a war,” said Mikhail Korchemkin, director of East European Gas Analysis in Malvern, Pennsylvania. “This deal will be valid as long as Ukraine behaves. If they do something the Kremlin doesn’t like, the discount will be canceled.”

Russia gets to keep the Black Sea Fleet in Crimea longer. One wonders what else Ukraine has agreed to do or not to do. Russia does not want Ukraine to fall under EU and NATO influence.

This agreement won't last because eventually Russian natural gas production will go into decline and the Russians will need money more than influence.

By Randall Parker 2010 April 23 10:18 PM  Russia
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US Base In Kyrgyzstan And Family Businesses

The Nation has an interesting article about corruption at the highest levels in Kyrgyzstan and how the US military uses newly created companies to provide fuel to US bases in the stans. Turns out subcontractors to these companies are owned by the sons of the rulers.

It was all cozy until violence hit the streets of Bishkek in 2005, foreshadowing what was to come five years later. The "Tulip Revolution" forced Akayev to flee and abdicate, and then the secrets of the Akayev regime began to tumble out, in scandal after scandal. The new government, headed by President Kurmanbek Bakiyev, even asked the US government for help investigating the former regime. The FBI's Eurasian Unit churned out an extraordinary report that laid bare a "vast amount of potential criminal activities associated with the Akaev Organization." The president and his family were accused of "siphoning off at least $1 billion from the Kyrgyz state budget." It was as if the Kyrgyz government had been some kind of criminal enterprise within which the United States ran a military base.

The article is focused on how two secretive corporations (that sound like CIA front companies to me) which apparently were created to supply petroleum products to US bases in Kyrgyzstan and Afghanistan. One of those companies apparently also was the conduit thru which the US government bribed the last two ruling families in Kyrgyzstan to allow the US to use the bases. Okay everyone, feign outrage.

The FBI helped Bakiyev investigate the previous regime of the Akayev family. The results of this investigation helped Bakiyev construct a similar web of corruption. Imagine that. Criminal investigation are more like stealing trade secrets from competitors.

After the revolt, people thought things might be different. The new government seemed to bring a fresh sense of integrity for a short while, before it began to stack its own skeletons in the closet. Despite his claims to be a reformer, Bakiyev appeared to go about replicating the patterns of his predecessor in a deliberate manner. "He really didn't think twice. They inherited this," says one consultant who dealt with Bakiyev shortly after the revolution. "We really in great detail uncovered the scheme. And I think the moment they figured out how it worked, they went and did it."

I read an account of the latest revolution where the writer claimed Russian government agents played a role in overthrowing the latest regime in order to push out the US. But this report in The Nation says at the end that the new Kyrgyz government has asked the US government for help investigating the crimes of the previous government. The new rulers need another guide book.

The new Kyrgyz government has already agreed to let the US base stay. But will some Congressional committee mess up the new deal with an awkward investigation?

(April 23) -- Days after the ouster of the country's president, the interim government of Kyrgyzstan has reassured Washington that the U.S. will maintain access to a key airbase in the former Soviet republic. But a congressional panel is probing allegations of shady contracting at the base, an important hub for supporting troops in Afghanistan.

A Kyrgyz writer describes how bad things decayed under the Bakiev regime. He describes how lots of opponents of the regime started visiting Moscow. The Russians had multiple reasons for wanting an overthrow, the US military base just one of them.

As a result of mismanagement in the energy sector, in 2006 (Bakiev's second year in power) people in Kyrgyzstan began experiencing regular blackouts, which made their lives even more miserable. Kyrgyzstan has plenty of water and hydroelectric potential, so the people could not believe that they were suddenly having electricity shortages.

Nepotism and other corruption within Bakiev's government were additional irritants. Bakiev appointed his second son, Maksim, as chief of the newly created Agency for Investment and Economic Development. This agency accumulated most of the money coming into the Kyrgyz economy -- including foreign investment and social and pension payments. Bakiev's eldest son, Marat, and several brothers were appointed to high government posts.

Maksim Bakiev's agency misused a Russian loan provided to the Kyrgyz government to bridge the state budget deficit, according to a representative of the Russian Embassy in Bishkek. And Maksim's financial adviser, Yevgeny Gurevich, was accused by an Italian judge in March of embezzling some $2.7 billion from telecom companies.

Did the US government know about the latest putsch in advance? If so, did the CIA help or oppose the uprising? Read the full story at the last link. The protestors did not appear to start out aiming to overthrow the government. It sounds like they suddenly got more ambitious when the bullets started flying.

By Randall Parker 2010 April 23 10:13 PM  Regions Central Asia
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2010 April 21 Wednesday
New Disincentive For Buying Medical Insurance

Insurance broker Tim Tracy of Fairfield Connecticut points out that the new health reform measure in the United States passed by the Democrats provides incentives for some people to actually drop their medical insurance coverage.

I currently pay about $700 per month for health insurance for me and my wife, for an annual cost of $8,400. Under the new law, if I choose not to carry health insurance I would a penalty of 2.5% of my income -- that's only $3,750. It will save me $4,650 a year to go without health insurance.

It doesn't take a math wizard to figure this stuff out; it's really a no-brainer. If I get sick I can just purchase a policy when I need it because pre-existing conditions won't matter. As it's written now, the mandate is unworkable. I think this bill will actually make more people drop their coverage because that's the cheaper option.

A lot of people aren't going to be smart enough to figure this out. But some will. Pay the 2.5% until you get sick. Save your money until then. Once you get some serious illness buy medical insurance. The law (amazingly) forces medical insurers to sell you a policy even if you've just gotten diagnosed with kidney failure, cancer, or multiple sclerosis.

In a nutshell: This new "reform" provides new incentives for irresponsibility.

Update: On the other hand, medical care has very little influence on life expectancy for most people. Still, whether people buy medical insurance or not, they'll end up getting lots of expensive services done on them when they get diseases of old age.

By Randall Parker 2010 April 21 07:30 PM  Economics Health
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2010 April 18 Sunday
The VAT Tax Battle Looming

In order for the Leviathan to maintain its present bloated size new kinds of taxes (not just higher levels of existing taxes) must be enacted. So battles for the Value Added Tax and Carbon Tax are basically battles to ensure that the Leviathan can stay at its current expanded size and even grow. Since I do not want to see America become more like Europe (we already have Europe to act like Europe and need no further exampes) I am not keen to see either a VAT or a carbon tax enacted. Recent the US Senate voted against the VAT in a resolution and this great result disappoints Derek Thompson of The Atlantic.

The Senate overwhelmingly voted 85-to-13 on Thursday to reject the idea of a value-added tax in a resolution proposed by Sen. John McCain. All six of the senators on the president's bipartisan commission on the deficit -- three Democrats and three Republicans -- voted with the majority.

Sad. The resolution isn't even close to binding, and the VAT could live yet, but it's dispiriting that Sen. McCain would force the Senate to vote on this issue based on his emotional reaction to a Wall Street Journal editorial on the subject.


George Will argues that passage of VAT should only be done as part of a move to revoke the constitutionality of an income tax. I like this idea.

When liberals advocate a value-added tax (VAT), conservatives should respond: Taxing consumption has merits, so we will consider it -- after the 16th Amendment is repealed.

A VAT will be rationalized as necessary to restore fiscal equilibrium. But without ending the income tax, a VAT would be just a gargantuan instrument for further subjugating Americans to government.

The sovereign debt crisis of the 2010s is going to be used by the Left to try to solidify their gains in making the Leviathan bigger. The Right needs to follow Arnold Schwarzenegger's playbook in California where each year's budget crisis gets settled mostly with big cuts in spending. The crisis will hit with each oil price spike and recession that will knock down tax revenues and increase demands for unemployment and other welfare transfer payments.

People who have been living in California for the last 10 years know what it is like to live under a continual government debt crisis. You'll hear a continual drum beat of claims that spending must not be cut, that taxes must go up. Demand the opposite. If the crisis gets resolved with an expansion of the Leviathan then your disposal income is going to take a really big hit. Higher income taxes and VAT taxes on products and services will lower your living standard.

By Randall Parker 2010 April 18 11:52 PM  Economics Tax Revenue
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2010 April 17 Saturday
VA Patients Get Fewer Treatments Than Medicare Patients

Are VA patients undertreated or Medicare patients overtreated?

INDIANAPOLIS – Patients seen at private facilities reimbursed by Medicare were more than 550 percent more likely to have routine cataract surgery than those who received their care from the Department of Veterans Affairs, a strong indication that the frequency of cataract surgery may be responsive to financial incentives to either or both the medical facility and the physicians who perform the procedure.

These findings from a large eight-year study are reported in the March 2010 issue of the American Journal of Medical Quality.

The authors are uncertain of the cause of the disparity in cataract surgery given that the vast majority of older veterans are enrolled in both Medicare and the VA health system, both government-funded systems.

The VA system is more like the UK National Health System with lots of doctors hired by the government. If people on the political Left who prefer a UK NHS style of medical system got their way the frequency of many treatments would drop. How much would health suffer as a result? The answer would depend on what illness you got, where you happened to live (some government-funded medical centers are more overburdened), and whether you had cash to pay for your own treatments.

Since I expect the US government to hit a severe funding crisis I expect enormous pressures to cut Medicare, Medicaid, VA, and other programs for funding health care. My advice is to save for your own medical treatments in case the need arises to pay for your own treatments in your old age.

By Randall Parker 2010 April 17 06:02 PM  Economics Health
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$22k Per Student In Newark New Jersey Schools

Why do you suppose money doesn't improve academic performance?

According to Mr. Christie, New Jersey taxpayers are spending $22,000 per student in the Newark school system, yet less than a third of these students graduate, proving that more money isn't the answer to better performance. He favors more student choice is, which is why he's ramping up approvals for charter schools.

$22k per kid is a lot of money for grade school or high school kid. Imagine you have a class of 16 kids. That's $352 thou for a class. The school buildings tend to be owned by the school system. So there's not a lot of rent cost. Electric power and heating do not add up to all that much. Where's the money going? Probably administrators, specialists, and really good pay and benefits for the teachers.

The teachers unions and members of the press who keep crying out for more money to fix education need to explain why more money does not work. Now, I think I know the (unspeakable, taboo, beyond-the-pale) answer. But what's their answer?

While I'm asking questions: Which city spends the most per student? Which city best demonstrates the limits of money for boosting intellectual performance?

By Randall Parker 2010 April 17 12:44 PM  Education
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Jim Chanos: Greece Is Prelude For Other Governments

Hedge fund billionaire Jim Chanos says the financial crisis in Greece is a prelude to what's in store for other governments which have promised far more than they can deliver.

You know they came in and discovered the hole in the budget deficit and discovered a lot of the off balance sheet stuff that was not of their doing. And he's taking the politically unpopular step of extending the retirement age and cutting government wages not knowing if it's going to be enough and so far the market is pretty skeptical, but I think the Greek government is being more courageous than some of the other western-European governments who aren't addressing these issues and are going to be facing these same problems like Greece down the road. So Greece is a prelude to the problems that a lot of other countries will face that have made promises to their people without the ability to pay for them.

Not just other countries. The Pew Center on the States finds that the US states have $1 trillion in unfunded pension and health care liabilities. The states are in worse shape than they officially state because they assume ludicrous rates of return on their investments. The lowest assumed annual return rate is 7.25% for North Carolina and South Carolina. The highest at 8.5% is used by 5 states (CO, CT, IL, MN, NH). This is delusional. Click thru on that link to figure out whether you need to plan to move to another state.

The interview with Chanos is worth reading for his comments about proper uses of credit default swaps.

States do not want to get realistic on rates of return because they can't afford higher pension fund contributions that would come from more realistic assumptions. This article reports that states are increasing their risks in order to try to get higher rates of return. This will end in tears for the taxpayers.

A growing number of experts say that governments need to lower the assumptions they make about rates of return, to reflect today’s market conditions.

But plan officials say they cannot.

“Nobody wants to adjust the rate, because liabilities would explode,” said Trent May, chief investment officer of Wyoming’s state pension fund.

The $30 billion Colorado state pension fund is one of a tiny number of government plans to disclose how much difference even a slight change in its projected rate of return could make. Colorado has been assuming its investments will earn 8.5 percent annually, on average, and on that basis it reported a $17.9 billion shortfall in its most recent annual report.

But the state also disclosed what would happen if it lowered its investment assumption just half a percentage point, to 8 percent. Though it might be more likely to achieve that return, Colorado would earn less over time on its investments. So at 8 percent, the plan’s shortfall would actually jump to $21.4 billion. Contributions would need to increase to keep pace.

More realistic assumptions lead one finance prof to estimate the states are $3 trillion underfunded. The article includes an estimate that the Chicago area government pension funds are underfunded by over $5800 per resident. So the potential obligations you can get stuck with in a high tax area are huge.

But as NPR and others noted, that $1 trillion figure is unrealistically low. Experts like Joshua Rauh, an associate professor of finance at the Kellogg School of Management at Northwestern University, say pension funds are using exaggerated assumptions about investment returns. "Our calculation is that it's more like $3 trillion underfunded," Rauh told NPR.

The 2010s will feature a series of financial crises that will intensify until the crisis is large and continuous. Peak Oil is going to cause tax revenues to decline and investments to produce negative returns.

What I want to know: Can US states cut benefits for people already retired? US cities can go bankrupt and get out of pension obligations that way. States can default on debt. But can states get out of retiree pension and health care obligations? Will Congress eventually pass legislation that provides a mechanism for states to shed obligations?

Update: Newly elected governor Chris Christie of New Jersey wants to figure out ways to cut retirement benefits for existing state workers.

Facing unfunded liabilities of $90 billion in pension and medical plans, Mr. Christie worked with lawmakers to change retirement benefits for new workers and to require all new state employees to pay 1.5% of their medical insurance costs. Until now they were paying nothing.

He wants to go further. "We need to move forward to try to make some changes in the pension system for current employees," he says. "There's all kinds of problems in doing that, some legal. . . . You can't take away vested benefits, but the argument of whether increases going forward are actually vested or not is an interesting legal issue that we're going to attempt to challenge. . . ." He adds that the current retirement age for state employees, 62, "needs to be moved up further."

The State of New Jersey is one of the fiscal basket cases. California gets more attention. But if you look at the Pew Center on the States pension fund report you will see that California gets higher grades on pension soundness than New Jersey. Pension costs are a major portion of total state costs. So this measure is a good indication of the fiscal soundness of the states.

By Randall Parker 2010 April 17 12:44 PM  Economics Sovereign Crises
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2010 April 13 Tuesday
School Spending Bubble In New Jersey

Another sign of how the public sector grew even as the private sector of the American economy was sputtering.

Given the state's chronic budget woes, the schools' hiring spree defies logic. Since 2001, just as budget problems began in earnest, public-school enrollment in Jersey has risen by less than 3 percent, or slightly more than 36,000 students. But total school hiring (full-time employees and equivalents) has jumped by 14 percent, or nearly 28,000 employees, according to federal Census statistics.

That's right: Jersey's schools have added three-quarters of an employee for every new student -- during a period of deep fiscal pain for the state. Most of the new hires were teachers -- which is more than one new instructional worker for every two new students.

The hiring spree, along with rich benefit increases, has fueled payrolls. Wage costs alone have increased 43 percent since 2001 -- well ahead of the inflation rate plus enrollment growth.

How much of this spending increase was driven by "close the gap" politics? How much was driven by naive belief even on the right side of the Bell Curve that higher spending can substantially boost student performance? The educational bubble still hasn't burst like the housing bubble. But the education delusion can't last forever - it is becoming too expensive.

By Randall Parker 2010 April 13 10:50 PM  Education
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2010 April 11 Sunday
Bulies Aim For Status And Affection

Does this model also explain the behavior of nation-states?

Bullying is common in classrooms around the world: About 15 percent of children are victimized, leading to depression, anxiety, loneliness, and other negative outcomes. What's driving bullies to behave the way they do? According to a new large-scale Dutch study, most bullies are motivated by the pursuit of status and affection.

The longitudinal study was conducted by researchers at the University of Groningen in the Netherlands. It appears in the March/April 2010 issue of the journal Child Development.

In their work, the researchers questioned almost 500 elementary-school children ages 9 to 12. Based on their findings, they conclude that bullies generally choose to gain status by dominating their victims. But at the same time, they try to reduce the chances that they'll end up on the outs with other classmates by choosing as victims children who are weak and not well-liked by others. In short, even bullies care a lot about others' affection and don't want to lose it.

Gender also plays a role. For example, the study finds that at this age, bullies only care about not losing affection from classmates of their own gender. So when boys bully boys, it doesn't matter whether girls approve or disapprove. The same holds for girls. Moreover, boys will bully only those girls that aren't well liked by other boys, regardless of what girls think about it, and girls will do the same in their bullying of boys.

"To understand the complex nature of acceptance and rejection, it's necessary to distinguish the gender of the bully, the gender of the target, and the gender of the classmates who accept and reject bullies and victims," according to René Veenstra, professor of sociology at the University of Groningen, who led the study.

Which foreign policies aim at raising status? Which policies aim and increasing affection? I'm thinking that foreign aid to really poor countries has as one of its aims to make the recipients like the donors. I doubt it delivers that benefit. Most likely the recipients feel resentment and a feeling of powerlessness. Some lose respect for the donors for being such gullible fools.

The French liked the United States was weak and needed France's help against the British. But once the US became strong enough to help the French then the French took to feeling resentment and looked for ways to look down on the US and feel superior to it. US help made the French feel lower in status.

By Randall Parker 2010 April 11 01:54 PM  Human Nature Status
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US States In Deeper Financial Trouble

California has 6 times more unfunded liabilities than debts just due to underfunded pension fund programs for state employees.

An independent analysis of California’s three big pension funds has found a hidden shortfall of more than half a trillion dollars, several times the amount reported by the funds and more than six times the value of the state’s outstanding bonds.

The Governator wants the California state legislature to face the problem. I'm pretty confident they won't. The crisis will get much larger.

The analysis was commissioned by Gov. Arnold Schwarzenegger, who has been pressing the State Legislature to focus on the rising cost of public pensions.

The guy at Stanford who did the study says California can't hope to meet these obligations. So Cal state employees aren't going to get as rich of retirement benefits as they have been promised.

"What is so alarming is there is no way that the state will be able to meet these obligations," Nation tells HuffPost. "The odds are so heavily stacked against the state on this one. The question is how we dig out of this."

Can the state legislature cut retirement benefits for those already retired? For those about to retire?

In New Jersey 2 successive governors have underfunded the retirement systems even as the retirement systems have lost money. The state is strapped for cash. The public doesn't want program cuts to pay for the state workers.

In New Jersey, Republican Gov. Chris Christie followed steps of his predecessor to address a budget gap for the coming fiscal year by proposing last month to skip a $3 billion payment to the retirement systems for teachers, state employees and other public employees, valued at $66 billion as of June 30.

New Jersey's prior governor, Democrat Jon Corzine, mostly missed a $2.5 billion payment to the pension system and allowed cities and other local governments to pay only 50% of their share of the pension contribution. The fund is one of the most underfunded in the country.

For many years public employee unions have funded and supported politicians who enact big benefits increases for state and local government employees. Basically the public got screwed for the benefit of well organized employees. As the US economy performs poorly in the 2010s the conflict between government employees and tax payers is going to get very intense. Will the governments need to declare bankruptcy in order to escape these costs? That's what Vallejo California did. Could be a model for other governments.

Many governments in the US have unfunded pension liabilities.

A think tank with ties to public employee pensions has released a study of state and local pension plans that may underestimate the unfunded liability by trillions of dollars.

The Funding of State and Local Pensions: 2009-2013 released Thursday by the Center for State and Local Government Excellence studied 109 state and 17 local government pension plans and came up with an unfunded liability of about $1.2 trillion by 2013. Overall, plans will be at funding ratios of 66 percent to 72 percent.

That figure does not include medical benefits for retirees. So the true total is much larger.

Slow growth means lots of US states become like Greece.

“If we ran into a situation where one state got into trouble, they’d be bailed out six ways from Tuesday,” said Kenneth S. Rogoff, an economics professor at Harvard and a former research director of the International Monetary Fund. “But if we have a situation where there’s slow growth, and a bunch of cities and states are on the edge, like in Europe, we will have trouble.”

Doug Bandow says we are living in the calm before the storm.

Unfortunately, TFD today is merely the proverbial calm before the storm. In a world of endless red ink and the coming debt tsunami, spending rather than taxing is the true measure of government's burden.

Explains the Tax Foundation: "Since 2008, however, deficits have been massive by any measure, and as a result Tax Freedom Day may give the impression that the burden of government is smaller than it really is. If the federal government were planning to collect enough in taxes during 2010 to finance all of its spending, it would have to collect about $1.3 trillion more, and Tax Freedom Day would arrive on May 17 instead of April 9 – adding an additional 38 days of work to the nation's work for government."

The 1990s were party time in the stock market. Lots of boats were lifted by the financial tides. But in the 2000s slower economic growth and the bursting of two financial bubbles brought many government financing problems to the surface. Those problems are going to get far larger than the American people think possible.

The 2010s will continue the same pattern of slow growth and worsening government finances. Expect higher taxes, wide ranging cuts in services, and fights over who pays and who gets less. The financial and demographic deterioration of America is going to make the politics very bitter and angry.

Update: Some states have higher rates for insuring their debt just like dodgy European countries

By Randall Parker 2010 April 11 12:04 AM  Economics Sovereign Crises
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2010 April 08 Thursday
Less Employer Health Coverage Under ObamaCare

Eugene Steuerle of the Urban Institute and Tax Policy Center says Obama's big health care change will cause a huge reduction in employer-provided health care to government-created insurance exchanges as the major sources of health care insurance for most workers.

We’ve updated earlier estimates of how the various subsidies in the health reform law affect the insurance market for both employers and workers. And the results remain quite dramatic: It appears that the new law will make it beneficial for many employers to drop their insurance coverage. In 2014 and beyond, once federal money is available through the insurance exchanges, switching from employer coverage to the exchanges may benefit both employers and workers in a wide range of income levels.

Of course Barack Obama said the new system wouldn't affect people who get health insurance thru their employer. And of course Barack Obama, who is not telling people what they need to know about health care, lied about how his new system would affect those with employer-provided medical insurance.

Employers and employees will have a financial incentive to end employer-provided health care. That's a revolutionary change.

How will the new law work? A worker whose household cash income is $60,000 in 2016 and who gets no health benefits from her employer would receive a subsidy equal to approximately $9,000. Because the firm provides no health insurance, it must pay a $2,200 penalty, leaving a net gain of about $6,800. By contrast, a worker earning equal compensation who receives employer-provided insurance would receive a subsidy around $3,500 from the exclusion of health benefits from his taxable wages, leaving him more than $3,000 worse off than his counterpart whose employer offers no insurance. This pattern holds until compensation reaches about $84,000, at which point the two subsidies are about the same. Workers earning more than $84,000 do better under the current employer-provided system than they will under the new system.

Many workers earning more than $84k will still lose employer-provided health care since employers will consider the wages of all their employees. An employer with mostly workers earning less than $84k will have strong incentives to drop their current coverage.

What I want to know: If we have to buy medical insurance thru the new system what happens to us under various illness scenarios? Also, will individual policies still be available outside of the exchanges? If so, how will those policies differ aside, perhaps, by price? Anyone know how the rules for those policies differ from various state-level rules for medical policies?

I am increasingly thinking that one should save up for medical problems whose ideal treatments might not be available in the future unless one can pay cash outside of the regulated system. Worsening fiscal conditions for the US government combined with a push for more equal availability of treatments and regulatory restrictions on treatments aimed at cost cutting could combine to make ideal treatments only available in another country and for cash.

By Randall Parker 2010 April 08 08:52 PM  Economics Health
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2010 April 07 Wednesday
Robert Barro Skeptical On Fiscal Stimulus Benefits

Harvard economist Robert Barro is skeptical that government spending provides a big stimulus to the economy.

In terms of the stuff that’s not wartime spending – which we’re probably most interested in in the current climate –it’s just hard to know from the history of the data and the time series. The New Deal is part of my research, and it’s bigger than the other non-defence expenditure in terms of stimulus, but it’s not enough to really sort it out.

So I don’t think you can reliably say what the effect is. But conceptually you’d expect the wartime spending to have a bigger effect for various reasons on the GDP than the equivalent amount of expenditure in a non-war situation. And the wartime effect you can estimate pretty precisely, and the multiplier is clearly less than one, even in World War Two – it’s in the order of 0.6, 0.7, something like that.

So your point is that even in the context of massive expenditures in a wartime situation, the multiplier effect of government spending on the economy is less than one – ie, it is not a multiplier at all. In other words, fiscal stimulus does not work. I read your WSJ editorial on this. Is that a good way for the layman to understand your arguments? Also this, on the “Voodoo Multipliers" and your September 2009 NBER working paper (most recent version available on the left)?

Yes, those articles refer to this kind of evidence, and I’ve been working more on it, trying to make it more precise. Some economists have argued that in a time of slack the multiple should be bigger, because there’s more capacity to respond to the extra demand. There’s a little bit of evidence that that’s right. A lot of that comes from the build-up in World War Two, because in 1941 the unemployment rate is still around nine per cent, so you can see what is the effect in that environment, in a high unemployment situation, of having a big expenditure increase. (Later in the war, the unemployment rate is close to nothing, so you don’t have that setting.) There’s a little bit of evidence from that that the multiplier is bigger when there’s more slack. But it doesn’t look like the multiplier gets up to one, even when the unemployment rate is nine per cent. It’s getting closer to that, but even then it is not one.

So the United States and some other countries are going deeper into debt in order to lessen the depth and length of the current economic downturn. But all that debt which will burden us in the future isn't delivering much benefit today.

Obama's economic advisers see government as more efficacious when it comes to boosting the economy. Barro thinks the evidence doesn't support their optimistic pronouncements.

And yet neo-Keynesians – which include White House economics adviser Christina Romer – often cite the number as being 1.5, and you say in your article that the Obama administration is using 1.5 as a basis for its fiscal stimulus policies. How do they come up with that then?

Oh they pulled that out of the air. I have the advantage of having at least a little bit of empirical evidence: as I said, it’s based particularly on military purchases. So even though that evidence is not that great, it’s infinitely better than the alternatives, which are no evidence. I think Valerie Ramey’s work is the best in terms of empirically trying to figure what the effect is of expenditure on the macro-variables. She has focused mostly on the post-World War Two period, but she’s looked somewhat at the earlier part.

I see a few of motives for why politicians support fiscal stimulus. First off, politicians can use stimulus packages as pork. Hand out goodies to favored constituencies. Second, during a recession politicians want to be seen as doing something to respond to the pain of their constituents. Third, politicians, especially on the political left, want to believe that government is an agent of positive change. All these factors make them choose economic advisers who look at the evidence of economic history with a bias toward finding benefits from fiscal stimulus.

The problem is that America can't afford to pile up more debts. We are headed toward a sovereign debt crisis.

By Randall Parker 2010 April 07 09:16 PM  Economics Government Intervention
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2010 April 06 Tuesday
Electronic Medical Records Provide Few Benefits?

A favorite among politicians for controlling medical costs does not substantially reduce costs or improve outcomes?

The implementation of electronic health record systems may not be enough to significantly improve health quality and reduce costs. In the April 2010 issue of Health Affairs, researchers from the Mongan Institute for Health Policy at Massachusetts General Hospital (MGH) report finding that currently implemented systems have little effect on measures such as patient mortality, surgical complications, length of stay and costs. The authors note that greater attention may need to be paid to how systems are being implemented and used, with the goal of identifying best practices.

"We are still in the early days of electronic health record adoption, and there's little evidence for how best to implement the technology to make the greatest gains," says Catherine DesRoches, DrPh, of the Mongan Institute, who led the study. "Hospitals may not see the benefit of these systems until they are fully implemented, or it may take many years for benefits to become apparent."

Yet a nation living beyond its means is throwing money at the idea anyway?

In recent years several initiatives have been taken to encourage adoption of electronic health records. The 2009 American Recovery and Reinvestment Act authorized approximately $30 billion in grants and incentives to support electronic health record implementation. But while several earlier studies suggested that specific aspects of an electronic health record – particular computerized physician order entry – could improve the quality and efficiency of care, those studies analyzed data from hospitals with customized systems and dedicated quality improvement staff. The current study is the first to examine the effects of electronic systems in a nationally representative group of hospitals.

I bet computers would make a more positive impact if medical expert systems were used more extensively for diagnosis and in choosing ideal courses of treatment.

By Randall Parker 2010 April 06 11:44 PM  Economics Health
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Doctor Surgical Center Ownership Increases Surgeries?

Are doctors humans or are they uninfluenced by financial incentives to practice more medicine?

ANN ARBOR, Mich. — When doctors become invested in an outpatient surgery center, they perform on average twice as many surgeries as doctors with no such financial stake, according to a new study from the University of Michigan Health System.

“Our data suggest that physician behavior changes after investment in an outpatient facility. Through what some have labeled the ‘triple dip,’ physician owners of surgery centers not only collect a professional fee for the services provided, but also share in their facility’s profits and the increased value of their investment. This creates a potential conflict of interest,” says study author John Hollingsworth, M.D., M.S., a Robert Wood Johnson Clinical Scholar at the U-M Medical School.

“To the extent that owners are motivated by profit, one potential explanation for our findings is that these physicians may be lowering their thresholds for treating patients with these common outpatient procedures,” Hollingsworth adds.

Oops, we could have had a lower cost health care system.

With the percentage of US GDP going toward medical costs headed for 20% and above something has got to be done. Business as usual (or business as usual plus another government expansion of medical entitlements spending) isn't sustainable.

By Randall Parker 2010 April 06 11:37 PM  Economics Health
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2010 April 03 Saturday
Lithuanian Cut Government Spending 9%

Necessity is a mother. Lithuania, like Greece, presages America's future.

Faced with rising deficits that threatened to bankrupt the country, Lithuania cut public spending by 30 percent — including slashing public sector wages 20 to 30 percent and reducing pensions by as much as 11 percent. Even the prime minister, Andrius Kubilius, took a pay cut of 45 percent.

And the government didn’t stop there. It raised taxes on a wide variety of goods, like pharmaceutical products and alcohol. Corporate taxes rose to 20 percent, from 15 percent. The value-added tax rose to 21 percent, from 18 percent.

The net effect on this country’s finances was a savings equal to 9 percent of gross domestic product, the second-largest fiscal adjustment in a developed economy, after Latvia’s, since the credit crisis began.

We'll know when Congress is serious about cutting spending when wages and benefits for federal workers cease being untouchable. That'll happen when US Treasury bond yields shoot up high, causing a liquidity crisis that forces massive cuts in outlays.

When the US sovereign debt crisis hits with full force federal worker wages and benefits are going to get targeted for big cuts. As things now stand US federal workers make more than their private sector counterparts in most occupations.

Overall, federal workers earned an average salary of $67,691 in 2008 for occupations that exist both in government and the private sector, according to Bureau of Labor Statistics data. The average pay for the same mix of jobs in the private sector was $60,046 in 2008, the most recent data available.

The biggest difference comes from richer benefits for federal workers. Medical and retirement are much richer for the feds.

These salary figures do not include the value of health, pension and other benefits, which averaged $40,785 per federal employee in 2008 vs. $9,882 per private worker, according to the Bureau of Economic Analysis.

America's demographics trends (less skilled, older), unfunded entitlements liabilities, reckless government from both political parties, and Peak Oil all make a fiscal train wreck inevitable. We can study events in Lithuania, Greece, Argentina, and other countries that have gone thru sovereign debt crises to see what's in store. Plan accordingly.

One of the big political conflicts of the next 10 years is going to be over how much of the response to the coming sovereign debt crisis will be dealt with by savage spending cuts versus brutal tax rises. Either way, living standards will decline when we are forced to live within our means.

Update: The same pattern of more rapidly rising public sector pay holds for Britain too. Well, the British are headed for their own sovereign debt crisis. So the public sector's wages and benefits are headed for big cuts there too.

The earnings of people employed by the state grew by an average of 2.3% a year between 2001 and 2005, compared with growth of around 1.5% for those employed by private firms.

But workers in the public sector saw their pay increase at nearly twice the rate as their private sector counterparts once pension benefits were taken into account, according to the Institute for Fiscal Studies (IFS).

By Randall Parker 2010 April 03 10:53 PM  Economics Sovereign Crises
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Obama Sees Overtaxed Claim As Misinformation

Barack Obama spent over 17 minutes telling a woman why she was wrong to feel overtaxed. Really.

Toward the end of a question-and-answer session with workers at an advanced battery technology manufacturer, a woman named Doris stood to ask the president whether it was a "wise decision to add more taxes to us with the health care" package.

"We are over-taxed as it is," Doris said bluntly.

Obama started out feisty. "Well, let's talk about that, because this is an area where there's been just a whole lot of misinformation, and I'm going to have to work hard over the next several months to clean up a lot of the misapprehensions that people have," the president said.

He then spent the next 17 minutes and 12 seconds lulling the crowd into a daze. His discursive answer - more than 2,500 words long -- wandered from topic to topic, including commentary on the deficit, pay-as-you-go rules passed by Congress, Congressional Budget Office reports on Medicare waste, COBRA coverage, the Recovery Act and Federal Medical Assistance Percentages (he referred to this last item by its inside-the-Beltway name, "F-Map"). He talked about the notion of eliminating foreign aid (not worth it, he said). He invoked Warren Buffett, earmarks and the payroll tax that funds Medicare (referring to it, in fluent Washington lingo, as "FICA").

If we aren't overtaxed now we are going to be. The US budget deficit is going be well over $1 trillion per year over the next 10 years and that is before Obama gets the government doing everything he wants the government to do. He's not done spending yet. He wants more spending programs.

The Democrats want to close the budget deficit with taxes. So it is not acceptable to Obama for someone to already feel overtaxed. He needs people to take on a 50% higher tax burden and still not feel overtaxed. So he feels a desperate need to convince people that they should not feel overtaxed. Yes, with taxes alone to close the deficit would require a 50% increase in federal taxes.

A solution that relied only on taxes would muzzle economic growth. To cover the costs of future spending — the retirement of the baby boomers and everything else — federal taxes would have to rise by almost 50 percent, immediately and permanently, according to a recent analysis by the economists Alan Auerbach and William Gale.

I do not think the vast majority of the public grasp the size of America's financial problems. After a slow growth last decade (about 2% GDP growth per year on average) we are now feeling the long lingering effects of a bank crisis. That's a really big deal. Bank crises have consequences that last far longer than recessions due to other causes. Plus, Peak Oil is approaching. The US economy is going to underperform the assumptions that go into current US government deficit projections. Far less tax revenue will flow in from an economy that will be smaller than business-as-usual economic modelers predict.

But business-as-usual modelers are already projecting deficits so large that we'll eventually hit a sovereign debt crisis. That next financial crisis will happen in part due to US Treasury bond interest rates too large for the US government to keep running deficits. The US is headed for a Greece-style crisis of confidence.

America's elites and populace act as if the United States is so rich and powerful that it is immune to a great reckoning. The current US fiscal course reflects their delusions. These delusions are headed for a collision with the limits of America's power. That collision is going to be ugly. Prepare yourself financially and emotionally.

By Randall Parker 2010 April 03 06:00 PM  Economics Sovereign Crises
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