4 Ways to Solve the Budget Deficit and National Debt

President Obama submitted his budget proposal to congress this week.  Here are some of the highlights or lowlights (depending how you look at it):

1) $3.7 trillion in spending is forecasted for next year’s fiscal year, which runs from October 1, 2011 through September 30, 2012

2) $2.6 trillion in revenue is forecasted for the same fiscal year

3) $1.1 trillion budget deficit is the result

4) $15+ trillion national debt by late 2012

2012 Budget

In short, the budget calls for a freeze on federal spending for five years, which means that spending levels stay as is and cannot increase, but it doesn’t cut the spending in general.  The administration sees this as a spending cut as they claim it will save the U.S. tax-payer about $400 billion over 5 years.  The majority of the ‘savings’ will come from tax increases on the wealthy, by letting the current Bush tax cuts expire in two years for the wealthy.  Then on top of that, discretionary spending is being cut for such programs as heating assistance for the poor.

What’s wrong with this budget?

1) It’s a political move by the President.  Rather than leading as a President and setting a good example, the President is banking on the Republicans having to make the next move, which will be more dramatically in the sense that they will need to cut deeper as they face enormous pressure from the Tea Party constituents.

2) It doesn’t touch the entitlement programs, which need to be looked at if we’re serious about reducing the budget deficit and the national debt.  Again, it’s a political move by the President so that he can blame the Republicans in 2012 if they went ahead and cut the entitlement programs too deep.

3) It doesn’t address Defense spending seriously and again it leaves out spending for Iraq and Afghanistan.  If a U.S. tax-payer left out part of his income or debt to the IRS he or she would face jail time, but apparently it’s okay for the U.S. government to omit this $100+ billion annual spending bill from the budget entirely.

4) It doesn’t even mention paying down the national debt of $14+ trillion.  It’s probably because in the plan it’s dumping another $1.1 trillion on top of it.

Will the Republicans counter with a better budget?

The short answer is probably not.  I guarantee you they won’t cut the spending down to $2.6 trillion, which is the magic number to close the budget deficit.   Remember, even at that level the government won’t pay down the national debt.

Entitlement Spending

The Republicans want to cut $100 billion from 2011 fiscal year.  So far, they’re close to $60 billion, but I doubt it they’ll be able to get the full $100 billion.  Even that is just a symbolic move as it does nothing to our long term debt obligations as a nation.  The idea that the Republicans will be able to come up with $1.1 trillion in spending cuts for 2012 is next to impossible.  You would have to cut every budget by 42.3% in order to have a balanced budget.

Bill O’Reilly even suggested last week that we should go back to pre-recession spending levels, but here again that would still leave us with a $400 billion budget deficit.  Okay, so let’s try some drastic austerity measures and see if we can close the gap by spending cuts alone…

Defense

The Defense spending is 19.27% of the budget or $712.99 billion.  Cutting it by 42.3% would mean that the defense department would have to cut its budget by $301.59 billion.  Yeah, good luck on that one at Capitol Hill.  At most the Pentagon will be able to come up with $78 billion (Robert Gates has the report he submitted not too long ago).  We can talk about pulling our troops out of Iraq and Afghanistan, but there again, we don’t account for that spending in the $712.99 billion…!  So let’s be optimistic and we’re going to tighten our belts for real and get the Robert Gates’ number up to $150 billion in spending cuts.  Sorry Boehner, your jet engine ‘pork’ project is out the door.

Social Security

20.04% of the budget is spent on social security or $741.48 billion.  One problem about this program; it’s a self-sustaining program, at least that’s how it was designed by FDR’s administration.  In other words, we cannot cut this program to pay for other programs, we can only cut it to keep the program itself alive.  Changes are needed to keep it solvent, but the taxes taking out of everyone’s paycheck for social security are meant for social security and not for other programs.

Medicare / Medicaid

22.62% of the budget is spent on Medicare / Medicaid or $836.94 billion.  Cutting back by 42.3% would mean a cut of about $354.02 billion.  It’s not a big secret that that there are two huge savings to be made in this program.  The first one is regarding the fraud committed on an annual basis, which adds up to about $60 billion annually.  The second one is automation of the system, which could add another $10 billion to the savings, but that’s only 20% of the cuts needed to the program.  Cutting it any deeper will put an enormous burden on the States, who already face budget deficits of their own.  But, let’s compromise, and let’s say we’re going to cut it even more by doing away with the prescription program that Bush enacted without paying for it during his administration.  This will save the tax payer an additional $100 billion per year for a total savings of $170 billion.

Net Interest

This accounts for 6.31% of our budget or $233.47 billion.  Problem of course is that we can’t cut here since it’s our debt obligation, so no savings here.  As a matter of fact we’d actually have to increase this budget if we want to pay down our debt, but we’ll save that for 2013 and beyond for now…

Discretionary Spending

31.76% or $1.175 trillion is spend on everything else (housing, education, unemployment, subsidies, transportation, Veterans, etc.).   Let’s jump on the Tea party bandwagon for a second and cut this budget by 42.3%.  So we’re going to save $497.03 billion across the board.  We’d probably have to do away with programs such as farm subsidies, oil industry subsidies (a.k.a. tax credits), heating assistance, etc., but let’s assume the politicians are able to bite the bullet and manage to save us $497.03 billion.

Total Savings

Add all the savings up from above and we come to a total savings package of: $817.03 billion.  I bet you this savings total will be much more than the Republican’s plan that we’re going to see here shortly.  However, we have a $1.1 trillion budget deficit, which means we’re still short by $282.97 billion in order to close the gap.  See the dilemma?  Either way you’re going to slice it, we have to make some tough decisions and that means that tax increases are going to have to be on table as well…

Problems with this Plan?

1) Cutting defense, Medicare/Medicaid and discretionary spending will put a few more million people on the street as they will become unemployed.  Defense contractors will have to lay off people.  Hospitals, nursing homes, etc. will have to lay off people.  Dept of education, veterans affairs, etc. will have to lay off people.  Since we’re cutting off farm subsidies, some farmers will go out of business.  In other words, we run the risk of throwing this country back into a deep recession.

2) It doesn’t address the long term debt issue of $14+ trillion

What are the solutions?

Compromise is the only way.  Tea party members don’t like it, Republicans won’t like it and Democrats won’t like it, but we need to make tough choices.  If we’re going to cut our spending dramatically and still aren’t able to close the gap it would leave us with no other choice but to raise revenues.

1) Targeted budget cuts.  Instead of maybe cutting the budget by $812.03 billion, you’d cut it be $550 billion instead.  Remember, we have to compromise…

2) Revenue increases.  Instead of increasing revenues by $312 billion, you’d have to increase it to over $550 billion instead.

3) Run a small budget deficit for a couple of years to use the money for targeted infrastructure spending to put people to work and to get the U.S. economy in shape for future growth.  Remember, the drastic cuts are putting a few extra million Americans back to the unemployment line.

4) Once the economy picks up steam the revenues will only increase, but congress needs to keep the spending levels down.  This way you’ll be in a budget surplus by 2015 and then can start using the surplus to pay down the debt

Share your thoughts

Should the U.S. Electric Grid be Underground?

Have you ever wondered why the power seldom goes out in Manhattan, New York City?  It’s because the power-grid, including phone/internet, gas and cable is buried underground!

I used to live in Oakland Park, Florida and it pretty much guaranteed that my power would go out every time a summer thunder-storm would roll through the area.  I can’t count the number of times I sat without power; sometimes even for days during hurricane season.  For those people who’ve never lived in the south, it sucks to be without A/C in July or August.  My friends living further out west in Weston, Florida never had these types of issues.  Why?  You guessed it, their power-grid was completely buried underground.

U.S. Power Grid

So why with all the hurricanes that strike the Gulf Region, all the Tornadoes that strike the Midwest and all the ice/snow storms that strike the Northeast aren’t we burying all utilities underground?

Very simple, it costs a lot of money to change the existing above ground system to an underground system.  Yet, many regions across the country are slowly adapting to underground services, especially in new construction communities and in heavily congested areas such as downtown areas of larger cities.  So let’s take a look at the disadvantages versus advantages of underground utilities with the emphasis on the electric grid to keep it simple for argument sake.

Advantages for Underground Utilities

1) Eye-sore is gone.  Let’s face it; nobody wants to look outside their window and look at an ugly utility pole with wires hanging across your backyard or front-yard.

Underground Grid

2) Power is more likely to stay on during weather related events such as wind, ice and snow.  Trees won’t fall on power-lines and ice/snow can’t form on the lines, thus keeping your power on; even during a hurricane.

3) Safer – for the environment and people.  No more need for cutting down trees for the thousands of utility poles that are needed to replace broken ones and people don’t have to worry about the electromagnetic fields surrounding electric cables.

Disadvantages of Underground Utilities

1) Cost of Repairs – if something does go wrong with the underground cables then the cost is much higher versus above ground and it takes longer to fix.

2) Doesn’t work well in flood prone area – it’s a fact that if an area regularly floods during rain storms or flooding due to excessive snow melt, etc. the underground system tends to break down a lot more.

From the above it would seem that it would make sense to bury everything underground.  If your power goes out 4 – 6 times per year (average for above ground utility) and then compare it against it only going out once every 2 years (average for underground utility) then most people would prefer an underground utility in their neighborhood; even if it meant that if the power goes out it may take a few extra hours to get the power back on.

So why aren’t all municipalities switching to underground utilities?

It makes financial sense to bury everything underground when constructing a new community.  The cost per household on average goes up by $500 for new construction.  So a $175,000 home construction would cost an extra $500 to construct in order to have underground utilities or add about 0.3% to the cost.  Needless to say, this makes sense.  Not only for the city and the citizens, but for the utility company as well since it reduces maintenance costs over the long run.

The problem arises when cities want to switch from existing above ground utilities to underground utilities.  The rough cost is about $1 million per mile to bury it underground.  To give you an idea, FPL (Florida Power & Light) has a total of 64,000 miles of distribution lines.  A little over a third, 24,000, is buried underground.  Therefore, if FPL had to bury everything underground they would look at a total cost of 40,000 x $1 million = $40 billion!  That’s roughly $15k per customer or $9.5k if you want to split the cost amongst all customers, which needless to say is a huge amount of money.  Even if you divested the cost over ten years for the consumer it would still add $79 – $125/month to their electric bill.  Not many customers will opt for that, I can guarantee you that…

Blackout

One may argue that if you take into consideration the cost annually associated with repairs to the system that it should pay for itself over an extended period of time, but that’s not really the case.  Case studies in North Carolina, Florida and Seattle have shown that it would only cover 15% in a worst case scenario and up to 38% in a best case scenario.  So in Florida’s case it would only save FPL about $15 billion, thus leaving them with a $25 billion gap.

Is there any solution that could make financial sense to bury utilities underground?

Most of Western Europe and most of Japan has gone underground in the past few decades, so why them and not the U.S.A.?  The reason is that most countries in Europe heavily subsidized the construction of the underground utilities during the 70s and 80s and in today’s political and financial climate there isn’t going to be an appetite in the U.S. to spend tens of billions of dollars every year for this massive undertaking.

Going back to the FPL example; hypothetically for a 15 year project, FPL could cover the $15 billion in cost as that’s the amount of money it’s going to save in repairs/maintenance anyway, so in essence it doesn’t cost them a dime.  In other words the $1 billion per year they would spent on construction is earned back in a reduction of repairs.  However, somebody will still need to cover the difference, which is $25 billion.

Power Failure

If you were to cut it in 3 parts then the Federal government would subsidize about $8.5 billion of it.  The State would contribute another $8.5 billion and the consumer would have to cover the remaining $8 billion; again, all this spread out over 15 years so about $530-$565 million per year.  This adds up to about $126 per FPL customer per year or about $10.50 per month extra in the electric bill.

Bear in mind that the State would have to come up with half a billion dollars per year as well, so it’s likely they would need to raise revenues through the form of added utility taxes, unless of course they can find the money by cutting spending.

For now, it’s more likely that municipalities will continue to force utilities and contractors to bury utilities underground for new construction projects, but existing above ground utilities are going to stay until a better financial/economical climate starts taking hold.  Even then it’s going to be an uphill battle for proponents to get this approved, but maybe another catastrophe will push the public and political appetite in that direction.  Also, bear in mind the number of outages, including massive blackouts, has been going up by 9.5% per year since the early 1990s.  The main reason for this is that the U.S. power grid is outdated.  It was built over half a century ago, so maybe it may not be a bad idea to upgrade the system and bury the cables underground while we’re at it…

Share your thoughts

If Egypt goes, so may the rest of the Arab world…

The United States government has for decades allowed autocratic regimes to rule the Arab world, provided they were supportive of U.S. foreign policies in the region.  In return for their support, the U.S. would provide military and economic aid, which in turn helped keep these regimes in power.

Arab World

Prime examples are Egypt, under autocratic rule of President Hosni Mubarak and Algeria under semi-autocratic rule of President Abdelaziz Bouteflika.   Syria, which is under autocratic rule of Bashar al-Assad, could be part of that group too, but they’re generally not very supportive of U.S. policies in the region, especially in relationship to its policies towards Israel.

After World War II, the cold war shaped the region as it pitted pro-western regimes against pro-Soviet regimes and the middle-east became a chess-board for Washington and Moscow.  However, after the collapse of the iron curtain focus started shifting from keeping socialistic ideals in check to keeping Islamic extremists in check.  This is where U.S. foreign policy started failing.

Egypt Protests

By openly supporting oppressive regimes that do not adhere to human rights, let alone democratic principles such as the cancelled democratic election results in Algeria and ignoring the fraudulent elections in Egypt, the U.S. was becoming an extension of the oppressive regimes it helped keep in power rather than being a shining example of freedom of expression and democracy.

Young and educated people started to turn against western ideals and organizations such as the Muslim Brotherhood were more than eager to take in the disillusioned crowd.  This shift in attitude by this large group of young people can have very dangerous consequences for the western world.  Ignoring them will only facilitate the growth of terrorist organizations.

This is the reason why the U.S. government under George W. Bush started openly promoting democratic change in the region.  We can debate as to why Iraq was invaded in the first place, but President Bush didn’t make it a secret that he wanted to replace Dictator Saddam Hussein with a democratically elected government.  Then President Barack Obama went to Egypt after he got elected President and gave a speech in Alexandria, Egypt that gave the impression to the rest of the Arab world that the U.S. may actually be serious about wanting democratic change in the region.

Sure enough, anti-government protests in Tunisia exploded, thanks in part to Facebook and Twitter and it helped in removing a corrupt President and his entourage.  But Tunisia is a small country in Northern Africa, so what’s the big deal?  Turn to today’s news; Egypt is exploding in protests, where for the first time the population from all social classes has turned to the streets and openly is protesting to have its government sacked.

President Hosni Mubarak

See the irony in all of this?

After decades of secretive supporting these oppressive regimes the U.S. finally came to the realization after 9/11 that it needs to help create a thriving middle class in the Arab world.  People with a roof over their heads, food on the table and with good paying jobs won’t become terrorists.  But try convincing the oppressive regimes to share their power and give up part of their wealth, that’s not easy, which is why the uprising in Tunisia and the street protests in Egypt are quite a dilemma for the U.S.  On one hand they want to support the people, but on the other hand the last thing it needs is another fundamental regime taken control over a strategic nation that may be adverse to the U.S.

George W Bush

The best the U.S. can hope for is that the transition will happen gradually and that whoever takes over will still want to be ‘friends’ with the U.S.  Of course, if Egypt goes and becomes democratic (and that’s still a big ‘if’), it may send a signal to other countries in the region to start making some drastic changes in order to avoid a street revolution.  At some point when you’re poor enough you just don’t care anymore and that makes it a volatile situation for governments in countries such as Yemen, Egypt, Oman, Syria, etc.

We’ll find out soon enough whether Bush’s call to democracy in the middle-east will turn out to be a historical game-changer.  Talk about giving credibility to a President ranked towards the bottom by many historians as one of the worst President in U.S. history.  Don’t be surprised his numbers will come up (talk about irony)…

Who will win the GDS Vs. American Airlines War?

If you’re familiar with the travel industry you probably heard about the lawsuits flying back and forth between American Airlines (AA) and Sabre.  To an outsider it may just seem like another squabble between two travel industry giants, but there’s a lot at stake here for the average consumer who travels for pleasure or work.

American Airlines

At stake is the fact that the traditional GDS’ are trying to hold on to their dominance in distributing airline tickets to consumers, but American Airlines is trying to steer both the end-consumer, and more importantly, the travel agent directly to its booking engine instead.  The jury is still out as to whether American Airlines will be able to drive the consumers to its Direct Connect portal as opposed to the traditional form of distribution (GDS).  Let’s examine the background first in order to answer the question as to who is going to win this war.

What is a GDS?

Global Distribution Systems (GDS) grew after World War II when air travel started to become more affordable, so it was no longer just for the rich.  Prior to this, the Civil Aeronautics Board would tightly regulate all air travel and pricing for the airlines.  An agent would have to go through the Official Airline Guide and figure out an itinerary and then either pick up the phone or telex airline staff to make the reservation.  Due to the increase of air travel this system became impracticable.

Sabre Holdings

A more automated way of ticketing was needed.  In 1953, Trans-Canada Airlines (TCA) was the first airline to use a computer based system to process tickets.  It was invented at the University of Toronto, but unfortunately it had some short-comings as airline agents would spend a lot of time with the input and output of the data.  Ferranti Canada became involved and used a system of punch cards and a transistorized computer.  The ReserVec was born in 1963 and the airline started using terminals at all TCA offices.  Now queries could be produced in one second without the involvement of a remote agent.

Even though TCA became the first airline to use an automated ticketing process, it was American Airlines that launched the largest Airline Reservation System (ARS) in the form of joint venture with IBM.  In 1959 the two companies collaborated on developing a new automated ticketing system and the result materialized in 1964 with the launch of the Semi-Automatic Business Research Environment (SABRE).  At the time of the launch it was the largest civil data processing system in the world.  Other airlines soon followed with their own systems, such as Apollo (United & TWA), DATAS (Delta) and SystemOne (Eastern Airlines).

Soon travel agents began demanding direct access to these systems, but it wasn’t until the airline industry deregulated that travel agents got access on large scale.  European airlines soon followed as well with their collaboration, which created Amadeus.

Over the years the airlines spun off their stake in the GDS’ as they all became privately owned.  Currently Sabre is headquartered in Southlake, TX.  Worldspan and Galileo became part of Travelport and are located in Atlanta, and Amadeus is headquartered in Madrid, Spain.  There are several other players in the world, such as Abacus, TravelSky, Patheo, KIU and SHARES by EDS, but Sabre, Travelport and Amadeus are the largest GDS’ in the world.

How do the key players (Airlines, GDS’ & Travel Agents) make money?

In general, when a consumer pays for an airline ticket through a travel agent there are three parties that will divide the money.

1) Travel Agents: The travel agent will charge the consumer a service fee.  It varies greatly, but in general a consumer can expect to pay around $20-$25 in service charges if they use a travel agent.

2) GDS: The GDS’ in turn will earn fees in three ways.  They charge a per ticket fee to the airlines, which is about $12 per ticket on average.  They also collect fees from the airlines and travel agents for using their system.

3) Airlines: Of course the remainder of the funds go to the airline.

What is changing?

The value the GDS’ have given over the years has been incredible, but with the rise of the internet the end-consumer has ‘direct’ options to purchase tickets without having to use a travel agent and therefore a GDS to obtain airline tickets.  In essence, the internet would allow a company like American Airlines to cut out the middlemen, but now American Airlines is also aggressively trying to lure the travel agent away from the GDS’ and to its Direct Connect portal.  American Airlines stunned the world in 2009 when they announced that they would solely concentrate on American Direct Connect Service going forward, which would bypass any other form of distribution network, such as Sabre, Galileo or Online Travel Agent (OTA) channels such as Expedia, Orbitz, which also utilize GDS’ for processing reservations.

What are the benefits to American Airlines?

1) Cost – by bypassing the traditional distribution networks such as the GDS’ and the OTA channels the airline can save $12 per ticket.  American Airlines sells millions of airline tickets through the GDS every year, multiplied by $12 it would result in tens of millions of dollars in savings annually.

2) Customization – Direct Connect will allow American Airlines to up-sell to its consumers by offering extra legroom, access to the Admiral Club, pay for extra luggage, etc.  These are the types of extra fees the GDS’ are unable or unwilling to display via their distribution systems and thus American Airlines is making the case that using Direct Connect would result in better service and in turn higher profits

American Airlines

3) Pricing – Direct Connect will allow American Airlines to instantly change its pricing pending consumer demand, weather, etc.  It will also allow them to set up unlimited rate structures for the same flight.  In essence, American Airlines could charge 150 different fees for the same flight, whereas with the GDS’ they are limited in general to only 16 to 30.

4) Control – Of course it gives American Airlines direct control over its ticketing distribution network.  Next time American Airlines comes up with a new rate structure or a new way to charge passengers it can instantly implement this via Direct Connect, whereas the GDS’ have the tendencies to be slow in adapting to new technologies and/or processes, let alone American Airlines won’t have to go through painstaking contract negotiations anymore.

What are the downsides to American Airlines?

1) Consumers – the main benefit of going through a GDS for a consumer or travel agent is that all the prices from most airlines are listed there.  It allows for comparison shopping, which is why OTA sites such as Expedia and Travelocity are so popular with consumers.  It gives the consumer the ability to price shop without having to toggle between multiple websites.  Direct Connect would force consumers to log on to American Airlines’ website to find tickets (or price shop), which in turn can be an inconvenience for many consumers.  Critics also point out that it may end up costing the consumer more money for the tickets as it will become increasingly more difficult for consumers to do a price comparison.

2) Bundle – GDS’ allow a consumer or travel agent to bundle a vacation package.  Not only can a consumer get an airline ticket through Expedia, but it can book the rental car and the hotel at the same time.  It may become a major inconvenience for some consumers to have to unbundle their purchases.

So who will win the ‘war’ between the GDS and American Airlines?

Nobody will know for some time to come.  it will depend on several factors:

1) Will other airlines follow suit?

Contracts are coming up for renewal with Sabre for other airlines soon.  If airlines like United, Delta, etc. follow American Airlines, it will become increasingly difficult for the GDS’  to hold on to its cash-cow, but if nobody follows American Airlines, the airline will risk alienating a lot of its consumers.

2) Will the GDS’ be able to modernize and be flexible enough in its pricing?

The benefit of having a virtual monopoly on a distribution network is that you don’t have to make that many changes/enhancements since your biggest clients have no choice but to use you.  However, ever since the push into direct connect by American Airlines the GDS’ run the risk of being stuck with an outdated system, which will make it more difficult for them to continue to renew their contracts as the value proposition may be lacking compared to direct connect systems.  They can avoid all of this by modernizing, but more important they may have to become more flexible in their service offerings and in their pricing.  It may cut into their cash-cow model, but at least it will allow them to continue to operate and remain profitable, albeit with a smaller margin.

3) What will the consumer do?

Consumer Choice

If American Airlines gets other airlines to follow the consumer and the travel agent may grow accustomed to the new process.  Southwest is a perfect example of how it can thrive on selling its tickets through its own website only.  Then again, they are a known low-cost carrier and airlines such as American Airlines may have a tougher time steering its consumers to its website.  In addition, it would seem that the airlines would need to ensure that they can continue to offer vacation bundles.

In the end, if American Airlines can attract enough consumers and travel agents to its Direct Connect System to make up for the once it will lose plus the cost savings associated with not having to pay the middlemen anymore then it will have a good chance of living without the GDS’.  One thing is for sure; the age of internet usage has given more power to the consumer and companies have no choice but to adapt to the changing world.  In the end it will be the consumer that will most likely determine who’s going to prevail in this war…

Share your thoughts

3 reasons not to raise the U.S. debt ceiling (next time)…

If one thing was made clear during the shellacking the Democrats got in the mid-term elections of 2010, it was that the American voters are fed up with the uncontrollable spending spree of Washington and the resulting deficits that come along with it.

Debt Increases

By now, most people know that the U.S. has almost $14 trillion in debt and the newly elected congress will need to raise the debt ceiling in March 2011 in order for the government to remain functioning, albeit in a dysfunctional way some may argue.

Certain politicians, especially newly elected tea-party favorites, have been very vocal about not wanting to raise the debt ceiling.  They feel that a strong fiscal signal needs to be send and that includes not raising the debt ceiling.  So the big question is: should or shouldn’t congress raise the debt ceiling come March 2011?  To answer this, let’s look at the actual debt ceiling and what it does.

What is the debt ceiling?

The United States of America is the only country in the world that actually has a law for having a debt ceiling and requires congress to vote on whether to raise it or not in case they are about to reach the ceiling.  The Second Liberty Bond Act of 1917 established a statutory limit on federal debt.  It gave the government more leeway in the administration of debt.  Prior to this act, congress had to vote on every single debt issuance, whereas the new law would allow the government to use more modern management techniques in governing its finances.

Debt Levels

Critics of this law will argue that it fosters uncontrollable spending.  If for example congress raises the debt ceiling by $1 trillion, it is pretty much a guarantee that the government will spend every penny of that without requiring a single vote on each individual spending item (in conjunction with raising the limit that is), thus avoiding a potential  embarrassing vote for the politicians.  If we didn’t have the law, congress would need two votes every time it enacted another spending bill without having the money for it; the first one to pass the actual spending bill and the second one to raise the debt so that the treasury can go ahead and borrow the money to pay for it.

What is the downside of refusing to raise the debt ceiling?

1)      Government would come to a grinding halt almost immediately. Without the ability to borrow anymore money, the government would be faced with a tough dilemma; who to pay first with the little bit of money left?  Under normal circumstances the government takes in about $2.5 trillion in revenues annually (less during the recession, but more without the recession), but lately it’s been spending over $3 trillion annually.  This means that once the $2.5 trillion is spent it can no longer spend additional funds to pay its obligations.  It would be required by law to only spend what it takes in, which in this case would be funds coming in through payroll taxes, etc., but it would be far short to pay all its obligations thus it will default on certain payments.  This means that non-essential spending becomes the victim, such as national parks, department of education, etc.  Thus resulting in a shut-down of the federal government, with the exception of national security matters, such as military spending, border patrol, air traffic, etc.

2)      Economic ripple effect would be devastating to U.S. and global economies.  The U.S. will be roughly $700 – $900 billion short in its obligations and it will have a devastating impact on the economy.  The money it does have will need to go first to institutions, central banks, investors, etc. that own U.S. debt.  Not doing so would result in a run on the bank, in this case the Treasury, wherein everyone will try to cash in their bonds and/or treasury bills.

Foreign Debt

It would collapse the financial systems around the world as the U.S. simply doesn’t have $14 trillion.  Not even its gold reserves would be enough to cover the enormous debt.  Even if it were able to meet its debt obligations to these investors it would result in higher interests rates immediately.  Debt owners will demand a higher interest rate (and they’ll get it), which in turn will ripple down to regular banks and in turn to the consumers.  Mortgage payments, car payments, small business loans, etc. will all be hit with a tsunami of higher costs, thus having an adverse impact on the growth of the economy as fewer funds will become available for reinvestments and consumer spending.

Why can’t we keep raising the debt ceiling?

1)      Even Obama’s Debt Commission and just about every economist will tell you that without strong sustained economic growth you will eventually run into a financial crisis wherein the U.S. will have trouble raising enough debt to cover its obligations.  At some point in the very near future investors will start demanding higher interest rates as the dollar continues to lose its value compared to other indexes.  Higher interests rates can be devastating to economic growth.

2)      The U.S. is losing its political and economic power in the world.  Part of it is because the rest of the world is catching up (India, Brazil and China to name a few), but part of it is that they own U.S. debt.  The next time the Treasury needs to borrow money the Chinese government can simply refuse to do so, if it doesn’t get its wish in other matters (see my point?).

3)      Debt payments take away funds that can be used for other programs, such as fostering job growth programs or rebuilding the U.S. infrastructure, etc.

Debt Projections

What should be the solution?

The U.S. needs to show the world that it’s serious about tackling its debt burden.  It can do that in three ways:

1)      Raise the debt ceiling for the last time in March 2011 and let the world know it will no longer raise the ceiling hereafter

2)      It will cut unnecessary spending and make some austerity cuts in other programs such as defense and Medicare/Medicaid

3)      It will raise revenues in the form of tax increases

It will take a Bi-Partisan effort…

Tea-party Republicans only want tax cuts and they don’t want to raise the debt ceiling.  Democrats and the White House want to increase the taxes on the rich and freeze spending at current levels and raise the debt ceiling.  Republican leadership wants spending cuts, freeze spending at 2008 levels and increases the debt ceiling.  Looking at the different groups there is plenty of room for compromise.

Raise the debt ceiling, but only for the last time.  Cut wasteful spending, across the board, but also raise revenues by increasing taxes in certain areas.  If all these measures are put into place then everyone will get something they can go back to their constituency with and claim a victory.  More important, it will put America back on the road to fiscal responsibility and it will demonstrate to the world that it is serious about its debt obligations.  It will stabilize the dollar and keep interests rates in check and will ensure long term prosperity, both economically and politically for the U.S.

If there was ever a time for politicians to step up to the plate and deliver a sound economic recovery package then that time is now.

Share your thoughts

High Speed Rail (HSR) – 4 Reasons the U.S. needs it!

If you were to ask what the benefits of HSR would be, the most obvious answer for most people would probably be that it will get a passenger from point A to point B in the shortest period of time.  Of course, this is a key benefit of HSR, but there are other very important benefits to HSR:

HSR Train in Japan

1)      Relieve Congestion – it can relieve congestion between major cities at airports and on the highways

2)      Limited Land Use – expanding airports or expanding highways take up a lot of land.  An HSR link can be build on a track only 4 feet wide and in most instances existing rail links can be used to convert

3)      Energy Efficient – the latest technology ensures that trains traveling at dazzling speeds of well over 250 mph are very energy efficient.  Moving 1,000+ people at once in a train is much more eco-friendly versus the same people driving in cars

Many publications lately have been touting the fact that China has not only caught up with Japan and the European Union when it comes HSR technology, but it’s actually surpassed them in the length of rail tracks built in kilometers.

Source:  International Union of Railways

HSR Europe

Notice the absence of one country?  Yes, the United States is not listed on here.  There’s actually one rail link in the U.S. that’s operating as an HSR link, which is between Washington D.C. and Boston, with a stop in New York City.  Unfortunately the average speed is only 78 mph, which doesn’t qualify it officially as an HSR connection.  Only on certain parts of the track in Rhode Island and in Massachusetts can the Acela Express operate at 150 mph.

The main problem for Acela’s slow speed is that it’s sharing the tracks with other passenger trains and with freight trains.  To complicate things even further, and for safety reasons, it’s the only HSR that has railroad crossings.  Under normal circumstances HSR cannot have railroad crossings, as it becomes a safety issue when a train comes flying down the track at 250 mph.

Does the U.S. really need HSR?

1)      Competition – the U.S. for many decades has been the worldwide leader in industrial output, technical innovation, etc., but when it comes to HSR it’s falling rapidly behind the competition.  U.S. companies manufacturing trains, tracks, etc. will have a hard time competing on the world-stage if their own country doesn’t even have its own infrastructure for it

2)      Congestion – ever tried driving from Washington D.C. to Boston?  It will take you almost 9 hours…in the middle of the night; good luck driving during a weekday and making your away across the George Washington Bridge between New Jersey and New York states.  Congestion results in lost productivity and costs us all money (companies, government and tax-payers).  An HSR link at 250+ mph, would get you there in 3 hours, with stops in New York City, Philadelphia and Baltimore along the way

Acela Train

3)      Economy – any economist will tell you that moving goods and people between two points in 3 hours versus 9 hours is good for economic growth.  Economic growth spurs job growth and that in turn drives increased tax revenues

4)      Infrastructure – as mentioned in earlier articles, the U.S. is in desperate need to upgrade its infrastructure.  Airports, highways and rail are in desperate need of upgrades.  Infrastructure has been at a standstill for decades now.  Ever flown into LaGuardia or Newark Int’l?  It simply can’t compete with Heathrow, Schiphol or other more modern airports.  How about highway construction?  We are paving over existing roads, but fail to expand them or improve the traffic flow on a large scale.  HSR can fill that void and make an immediate impact on not only the local economies, but the national economy as a whole

Why doesn’t the U.S. have HSR?

We are a large country.  HSR is cost effective when constructed for distances between 150 – 550 miles.  After World War II emphasis was made on constructing airports and expanding the national highway system.  Rail systems only made financial sense in urban areas around Chicago or in the northeastern corridor between Washington D.C. and Boston.

However, plans are in the works to start building HSR in the U.S.  There are plans to build an HSR link in California between San Diego and San Francisco via Los Angeles and Sacramento.  Currently Florida is having bids come in for an HSR link between Tampa and Orlando and Texas is jumping on the bandwagon as well, by proposing a link between its biggest cities, Dallas/Ft Worth, Austin, San Antonio and Houston.

How much will it cost?

Tracks – It costs about $25 million per km to build an HSR track, which doesn’t include the cost of building stations.  So a track between Washington D.C. and Boston, with stops in Stamford, New York City, Newark, Philadelphia and Baltimore is about 440 miles in length or 704 km.  Multiply this by $25 million per km and the cost of construction, minus stations equals a staggering $17.6 billion.  Factor in the cost of land, which adds about 10 percent, then the cost totals $19.36 billion.

Stations – We’ll need seven stations build along the track.  Under normal circumstances a train station can be build for about $200 million, but we’re talking HSR stations and we’re talking prime real estate in the northeast, so you can easily double the figure to $400 million per station.

HSR in USA

Maintenance – A new train station and new HSR track is no good if it doesn’t get maintained.  It costs about $42,000 per km per year for the track to be maintained, so the northeast corridor would cost almost $30 million per year to maintain.  Rolling Stock maintenance (cost of maintaining the train) equals $2.1 million per train.  Cost of the actual train per year equals $3.36 million and then there is the operating cost per train, which equals $35 million per year.

There are 10.3 million passengers using the northeast corridor, which equals just over 28k passengers per day.  A train can hold 545 passengers (double-decker TGV), thus you’ll need 26 trains in service per day to handle the volume.  This means that the cost of per passenger equals $1.08 billion (track maintenance + rolling stock maintenance + train cost + operating cost) / 10.3 million passengers = $105.04 per passenger per day.  Add 10 percent for operating costs for the train stations and you’re talking about at $115 per passenger cost.  Easy to say that an operating profit can easily be attained.

The one catch…it doesn’t include the cost of building the tracks, but that should fall onto the federal government.  A special tax can be added to the cost of a ticket to pay for it over the long haul.  Even if you taxed each ticket at $10 per ticket it would still be cost beneficial compared to driving your car or flying between the cities.

In Summary

It’s worth the capital investment into HSR, but it needs to be done in certain areas first.  The northeast corridor, Florida, Texas , mid-west (Chicago, Milwaukee, Akron, etc.) and California are prime candidates for this type of investment.  It will drive economic benefits, let alone the thousands of jobs created building these projects and the long term impact on creating jobs due to increased commerce.  Then there’s the environmental impact by removing trucks, cars and airplanes from our roads and airspace.  Let’s not forget the impact it will have on our national prestige; a bullet train zipping along at 250 mph can instill some national pride into our hearts.  We will need the support of the federal government in conjunction with the states, but the thinking is that once the economy recovers that the momentum will build.  Let’s hope it picks up speed soon, because China and the E.U. are going full steam ahead…

What are your thoughts?

3 Steps to Wipe Out the National Debt – By a Humble Dutch Guy

According to the National Debt Clock as of December 6, 2010 the total national debt for the U.S. government is a staggering $13,845,864,407,468.84.  Yes, that actually is 13+ trillion dollars!  Not millions, or billions, but trillions…!!!

It may come as a surprise to many of you, but the United States of America has almost always carried debt.  It all started with the American Revolutionary War when debt was issued to finance the war against the British Empire.  By 1791 under the Articles of Confederation the federal government reported a debt total of $75,463,476.52, which in those days was a huge amount of money.

Over the years, the debt has grown steadily, only to briefly come all the way down to zero under President Andrew Jackson.  Believe it or not, but January 8, 1835 was the only recorded date in U.S. history that our federal government had no debt at all.  It didn’t last long; within a few years the government was back in the red in the millions of dollars.  By the time the Civil War broke out, the government had already racked up $65 million in debt; only to see it skyrocket during the war itself.  By the time the war ended in 1863 the U.S. government was $2.7 billion in debt.

US Govt Debt

If you look back at history from the revolutionary war until today you will see an easy trend; every time the U.S. government (congress) declared war the national debt skyrocketed.  It happened again during World War I and then again for World War II.  By the end of World War I the total debt had hit $22 billion, but by the end of World War II it was increased to $260 billion.

After this period, a steady increase was shown, but only at the rate of inflation, so in essence the government managed to keep the debt in check.   By the time Ronald Reagan took office, the national debt stood at $909 billion, which was still manageable.  However, within three decades, the U.S. government managed to increase this debt to over $13 trillion!

Many economists and politicians have debated the national debt over the years.  Some have given doomsday scenarios wherein we as ‘the People’  will have to declare bankruptcy in the not too distant future, whereas others have been preaching that we can continue to pile on the debt provided we keep the economy growing.  I won’t bore you to death with the pros and cons, but the one thing we all should agree on is that not having any debt is good for everyone.  It will lead to lower taxes (and being able to pay for it), more money for other programs and it won’t put so much pressure on the dollar and thus it will be healthy for the U.S.  economy overall.

So how do we go about getting out of debt?  By following these 3 steps:

1) Balanced Budget Amendment

There are many critics opposed to a balanced budget amendment as it could be considered detrimental to the U.S. economy during times of economic retraction.  Another criticism is that it would take power away from congress.  However, a well crafted amendment will put those fears to rest.

Tax Revenue Vs. Expenses

There will be one exception to the new amendment for not balancing the budget; if the U.S. or its territories are attacked directly by a foreign government/entity, only then will it be allowed to draw emergency funds.  It doesn’t mean we can’t get involved in foreign operations, but our involvement will come with an invoice.  So if South Korea gets attacked by North Korea again, we’ll be more than happy to help out and defend (and defeat) the North Korean army, but after the fighting is over, we will demand payment to cover all costs, no exceptions.

Congress will be required to submit a balanced budget before the beginning of a new fiscal year.  If congress can’t come to an agreement, then emergency measures will kick in.  This will be in the form of a set of complex formulas based on the current budget.  I can’t think of a better way for all parties to sit down and compromise (finally).

The balanced budget amendment will comprise of three important sections:

1) Current operating budget for entitlement programs, defense, education, etc.

2) Paying down the principle of the national debt

3) Emergency fund for such disasters as earthquakes, hurricanes, and more important recession, etc.

All three sections are based on percentile formulas and it’s based on the U.S. government paying of its debt within 20 years.  In order to do this you would need to spend $503 billion per year on the principle payment of the national debt.  For those of you paying attention, that may not make sense since that would only amount to $10 trillion after 20 years, but don’t forget the government is already spending $600 billion per year on debt payments (mostly in interest).  As with credit card payments, if you keep paying down the principle your interest totals are going down, yet if you continue to pay the same amount every year your principle amount will start decreasing more rapidly (see chart below).

The emergency fund, managed by Homeland Security (FEMA), should be set at $50 billion and adjusted every year for rate of inflation.  To the critics mentioned above; fluctuating economic cycles would still require congress to set the budget, provided it doesn’t spend more than it takes in for its operating budget.  The emergency fund can be used for times of recession.  Besides, increasing the transportation budget alone (see 4 Ways to Bankroll America’s New Infrastructure) will ensure that recessions are short-lived.

The government took in $2.1 trillion in receipts for 2009, but spent $3.5 trillion!  So now what?

2) Austerity Measures – Spending Cuts

Once a balanced budget amendment is in place it should be fairly easily to cut spending across the board.  Cut wasteful spending (Medicare and Medicaid are notoriously ridden with fraud, etc.).  Cut discretionary spending and start making tough decisions on cuts in defense.  There’s nothing un-patriotic about cutting waste.  We have eleven aircraft-carrier strike groups, nobody else in the world has more than one.  Will it really hurt us if we cut back down to eight or nine?  We have more than 40 generals, admirals or senior civilian equivalent working in Europe.  I hate to bring it to you, but the cold war ended a long time ago!

The wars (Iraq and Afghanistan) alone cost the government $150 billion per year.  On top of that, cutting back on overseas cold war era bases and unnecessary weapons programs, that even the Pentagon doesn’t want, can get us another $100 billion easily.  I’m not saying we should completely get out of Iraq and Afghanistan, but having CIA officers on the ground and predators in the air is a much better way, let alone cheaper way of fighting terrorists then having tanks on the ground.

Predator RQ-1

Sorry Karzai, we’ll be watching your country from the safety of our Nevada military bunkers while operating the predators, but the troops are coming back to the U.S.  The same goes for Iraq and the same goes for many overseas bases, which serve no purpose after the cold war ended.  Don’t worry; we’ll still have missile defense systems and the best ICBMs in the world to wipe out humanity in certain areas of the world, if need be…

Unless the economy starts growing at the rate of China, I’m afraid the receipts for the U.S. government won’t get us over $2.8 trillion, which is what’s needed to balance just the operating budget.  It doesn’t account for the emergency fund and the principle debt payment.

3) Austerity Measures – Tax Increases

$2.1 trillion in receipts is an exception to the rule, since the U.S. was in a deep recession.  Receipts will be over $2.8 trillion or higher in a healthy economy.  However, in order for the U.S. government to have an operating budget and pay for emergency funds and debt payments we’ll be faced with a harsh reality: spending cuts alone will only get us in shape for the operating budget, but won’t provide enough funds to pay down our principle debt of almost $15 trillion in a few years.

Federal Tax Revenue

We already said that we’d need $503 billion for principle payments on our national debt and we need $50 billion for the emergency fund (plus inflation).  So we need to come up with $553 billion in extra funds, assuming the austerity spending cuts will cover the operating budget.

I’m all for tax cuts.  I like them as a tax payer, but I’m also a realist and we can’t afford tax cuts when we owe $15 trillion, which jeopardizes the economy in the long term.  So let’s change the tax code once and for all and use three steps to do it:

1) Simplified tax code: I’ll go more into detail in a future post, but simplifying the tax code will generate over $250 billion in added revenues.  It’s mostly closing tax loopholes and doing away with certain tax deductions.  There is no need for direct tax increases for the lower and middle income groups.

2) National sales tax (VAT): Yes it won’t be very popular, but a 5% national sales tax on goods and services is needed to generate another $250 billion per year.  Even when adding in the state taxes the total would still be less than most European nations, which have a VAT rate between 15%-25%.

3) Increase in income tax for the wealthy: Yes, here again it’s not a popular idea, especially with the Republicans, but over and over again economists and even Bill O’Reilly from Fox News have said that increasing the income tax on the wealthiest Americans doesn’t hurt the economy.  Somebody making $10 million per year won’t invest the extra $100,000 earned; it’s been proven.  This should generate an additional $50 – $75 billion per year.

Remember, once the debt is paid off in 20years, we can reverse some of these measures, such as the national sales tax.  The important thing will be that the government will get its books back in order and after 20 years it’ll be confronted with a great problem…what to do with the extra $1.1 trillion in revenues per year!  We owe it to our kids and our grandkids to get this country back in financial shape, so that they can have a prosperous future ahead.

What are your thoughts on this subject?

Haiti – A Vacation Destination? 5 Steps to Make It Happen

Ask any seasoned global vacationer and you’ll probably get a blank stare or an “are you crazy?” comment when asked whether he/she’d pick Haiti as a vacation destination.  Sure, even the most hardened supporters of Haiti  as a tourist destination, such as Bill and Hillary Clinton (they honeymooned in Haiti), will admit that this country is probably at the bottom of any Caribbean destination.  Only Ciudad Juarez and Guantanamo Bay are perhaps worse off for law-abiding citizens looking for a bargain…

Decades of dictatorships, corruption, natural disasters (hurricanes and earthquakes) and utterly total mismanagement of foreign aid has sunk this once beautiful country to the ‘armpit’ status of all of the Americas.  Believe it or not, the country has potential to become a cheap haven for vacationers from North America and Europe, but it will take something short of a miracle to make this happen.  But, it can be done and this is how:

Stop Foreign Aid

Believe it or not, foreign aid kills local economies, which should be the backbone of any strong economy.  Only after the next step is taken (see below) should foreign aid continue, but only in the form of direct investment and not in the form of tents, food, etc.  In short, foreign aid feeds corruption and feeds corrupt government politicians.  Just look at the examples of Kenya and in Somalia wherein the well intended foreign community helped destroy the local economies.

Strong Government

Failing Haitian Government

In the eyes of the U.N., and most developed nations, a democracy is the preferred method of governing a country.  If done correctly it provides all citizens, regardless of cultural background, education, income level, etc. with a voice in how the country should be governed.  However, Haiti unfortunately is far from having a corrupt free democratic government.  This is one occasion where the country is better off having a strong interim one-party central government.

I emphasize ‘interim’ as it’s only needed for 10 years if done correctly after which Haiti can switch back to a full-fletched democratic nation.  The benefit of having a single party government is that decisions can be made quickly and corruption can be cut drastically.  This would help speed up the rebuilding of this country.  Just look at shining examples such as South Korea and Taiwan.

In order to accomplish this Haiti will need to find politicians that are powerful enough to rule the country with an iron fist, yet do it with the intentions to enrich the country as a whole and not their own pocketbooks.  This would bring peace and stability to a gang and drug infested country and would allow construction to start without the much maligned corruption that we’re so accustomed to in Haiti.

Infrastructure

Once peace and stability has been restored and a 90%+ corrupt free government has taken hold you can start on the second priority, which is the rebuilding of the nation’s infrastructure.  Some may argue that preventing cholera, which has killed more than 1,000 people so far, should be a priority or providing housing to the thousands of homeless people should be a priority, but what this country needs foremost is a modern harbor, upgraded airport and roads/rails to transport the goods across the country.

New harbors and upgraded airports will allow goods to be brought into the country much quicker.  New roads and rail will allow those goods to be transporter quicker and cheaper across the country.  Ask any economist, if you can move goods from point A to point B you will create commerce, which in turn will create jobs, which in turn will create tax revenues, which in turn will create revenues to: build sewer systems (to prevent cholera outbreaks), build schools (to educate the population for modern jobs), build hospitals (to keep the population healthy).

A population that has comfort in feeling safe, is educated and is healthy will provide long-term prosperity for many generations.  If you can build a 4-lane highway from the harbor/airport to Port-Au-Prince and to Cap-Haitian then the economic benefits will be immediate.  Building tent cities and having food rot in port warehouses does nothing for the well-being of Haitians today (see Stop Foreign Aid above).  Building a viable infrastructure does not only help today’s generation, but generations to come.

Tourism

Labadee Resort - Haiti

Once a stable government is put in place and the port/airport and roads/rails have been constructed then it’s time to open up the beaches to resort development.  The country is beautifully situated next to the Dominican Republic and not too far from Cuba.  Investments will come from large companies such as Hilton, Starwood Hotels, etc. to build resorts for the tourists.  Cruise ships will dock in the new modern ports and airlines will once again fly to Haiti thanks to the upgraded airports.  It will make the tourists feel safe and provide them with a unique country/culture experience that if done correctly, will only bring more tourists.

Reinvestment

Once the resorts and infrastructure have been built then it’s easy to understand that tens of thousands of jobs will have been created for Haitians, which in turn will mean that tax revenues will start coming in for the ‘non-corrupt’ Haiti government.  The bulk of this new revenue needs to be reinvested into the country in the form of better schools, hospitals, sewer systems, phone systems, etc.

Once you reach the final stage of this rebuilding effort, only then can you start with democratic elections.  It will be easy for the country’s politicians to see that continuing on the path of growth will create a new middle class that will continue to grow and benefit everybody, rich or poor.

Now if only France (former colonists) and the U.S. can pull this off and hold off on distributing the $5.2 billion in promised donations until a new government is in place, then we wouldn’t have to worry about Haiti the next time a natural disaster strikes as it will be able to stand on its own feet for the most part.  We can then also start seeing some TV commercials from the Haitian tourism bureau during the winter months in the north…

Got a different view or opinion? Share it!

TSA Pat Down Policy – What’s all the fuss about?

Much is being made of lately about the new security rules put in place by the T.S.A. I’m talking about the ‘pat-down’ policy and especially if passengers refuse to go through the full-body scanners, which are set up at most airports around the country.

Of course, the media is contributing their part by sensationalizing this issue for their 24-hour news cycle or otherwise they wouldn’t have another excuse to fill the airwaves.  God forbid they would actually start reporting news, but I guess that’s for another topic of discussion or for a different blog I should say.

Let’s put things into perspective first.  According to a recent CBS News poll 81% of Americans favor the full body scanners, 15% are opposed to using the scanners and 4% of Americans probably never travel or don’t care enough to provide an opinion, which always baffles me with these survey results, but …

So the blown up media fuzz about the new pat-down policy only pertains to a portion of the 15% of Americans opposed to full body scanners.  Remember, they don’t agree with full body scanners, but that doesn’t mean they are opposed to the pat down policy.  So even if we assume that half of the 15% of people are also against a pat down, then it would still leave us with only 1 in 14 people opposed to strict security at airports.

What is the alternative to full body scanners and/or the pat down?  I’m a U.S. citizen who is keen about privacy, but I’ll give up some of that privacy if that means arriving safely at my point of destination without having to worry about another Nigerian stuffing his underwear with explosives!  I mean at some point we have to start using common sense.  We can’t rely on a numbers game wherein we decide that it’s worth the risk to have a plane being blown up in the skies once in a while so that we don’t have to show our blurry private parts to a T.S.A. screener.  That’s like agreeing with the Ford officials from a few decades ago and deciding that it’s cheaper to have a few people killed in the Ford Pinto rather than building a safer car.

Now, there are certainly ways to improve the system.

1) Pilots / Flight Attendants – should be exempt from the full body scanners provided they get clearance from the government.  They should still be patted down and go through a metal detector, but they should be given the option to avoid the increased radiation exposure.

2) Privacy for pat-downs – if people refuse the full body scanners they should still be patted down, but it should be done in a complete private area away from public view.

3) Privacy controls on body scanners – no images are allowed to be stored unless a suspect is found with prohibited items on his body.  Also the T.S.A. screener needs to be out of view from the public, so that no images can be seen by the public.

In the end, we all have to use common sense.  We can’t risk having someone board a flight without a full body scan or pat down and have them blow up the plane over a large U.S. city.  I guarantee you the family members of the victims on board or on the ground would unanimously have voted for the full body scanners or pat downs.  You can always drive, take the train or a boat if you’re so worried about your privacy.  Or stay put in your secluded mountain hideout…

Solving the Entitlement Dilemma

The bulk of the federal government’s spending goes towards entitlement programs such as social security, Medicare and Medicaid.   This leaves the federal government on average with about $200B to $400B for all other programs (depending on the health of the economy).  Needless to say, it’s no wonder the government has been running a federal budget deficit as our entitlement programs and debt payments eat up most of the revenues before any dollar can be spent on education, defense, environmental programs, etc.

So if we’re serious about tackling the budget deficits and national debt we need to come up with some viable solutions.  We can cut spending, including into the entitlement programs, but spending cuts alone won’t do the trick as the programs will run a 45% deficit over the next 75 years at current dollars.  Making cuts that drastic would hurt the economy as it would bankrupt hospitals, doctors and other medical related businesses as they won’t be covered in full.  Cutting social security by that much would result in a drastic increase in poverty for our seniors and that would become an enormous burden for the individual States.

What’s the solution(s)?

The success of the entitlement programs are heavily depended on the success of the economy overall.  If the economy is doing well it would mean that pay-roll taxes are up and would therefore provide funding for the programs.  However, we need to be realistic and understand that recessions are part of the economic cycle and thus we should account for swings in funding over the upcoming decades.

Cuts into the Program

Social Security

Under normal circumstances this would be considered political suicide for just about any politician, unless your name is Rand Paul.  However, what I’m referring to is changing the law so that entitlement payments such as social security are not going to be paid out to well-to-do Americans.  It makes no sense that a multi-millionaire receives $2,000 social security checks upon retirement.  It’s a tax-payers waste of money and goes against what the program was meant to be; a safety net for retirees that do not have enough money to live on!

Therefore, we should be facing out social security for the richest Americans and set a benchmark at which the government calculates your payments based on your net worth at retirement.  On average social security pays 53 million people every month for an average check amount of $1,072.20 as of September 2010.

28% of all households makes more than $75k per year and the vast majority of those will have enough savings come retirement to live comfortable enough without social security benefits.  If we assume that 2/3 of this income bracket would not need social security to survive that means roughly 9.5 million retirees would not need benefits on a monthly basis.  This means savings of about 10B – 11B per month.  Guess what?  We can keep social security solvent well into the 22nd century this way without having to raise the retirement age or an increase in payroll taxes.

Medicare / Medicaid

In my prior blog (4 Ways to Bankroll America’s New Infrastructure) I noted that fraud in the Medicare/Medicaid programs cost the U.S. tax payer on average about $60B per year.  if the government could set up a better enforcement agency at a cost of about $5B per year that would still save the tax payer about $55B per year in fraudulent charges.

Just the savings alone will keep the entitlement programs solvent well into the 22nd century without having to raise payroll taxes or making cuts in benefits.  Instead of having a half a trillion dollar deficit in 2040 for these programs you’d actually have a surplus.

Now, you will need to make additional changes to the program in order to keep the program viable during economical downturns and to keep up with the cost of inflation.  Additional measures that can be taken are:

1. Tort Reform – I know, not very popular with Democrats, but there are some very simple measures that can be taken to at least reduce the cost in half.  Currently 2% of all medical expenses can be contributed to legal costs.  If we can cut that number in half to 1% than I think both parties will be satisfied in the long run.  It would need to include a provision that protects doctors, but forces them to cut back on unnecessary tests.
2. Preventive Measures – This one is highly controversial, but why should a healthy person be penalized for someone that weighs 350lbs with diabetes and blood pressure issues that costs the health care system an enormous amount of money?  Programs need to be made available for people to become healthy and if they don’t; they need to be penalized in the form of a tax penalty on their insurance/taxes.

Tax Increases (?)

If all measures are adapted as described above there won’t be a need to increase payroll taxes.  However, the government should set a benchmark that if savings aren’t met at certain intervals during the program then payroll taxes will go up and be split evenly between companies and employees.  it would serve as an incentive for everyone to get involved so that we don’t have to raise taxes at all.