Capital Idea Indeed!

Four cheers for The National Review and National Review Institute they have launched Capital Mattersto the joy of us capitalistic orphans.  For those of you that might have missed a MWG post, we refer to ourselves as capitalistic orphans because supporting capitalism is rarely a priority for politicians.  It is a first priority for us.  Capital Matters is:

a new initiative on business, finance, and economics from a National Review sensibility.

When headlines are going to Climate Change and the ironically named organization Black Lives Matter it is good to start serious discussions on serious stuff from the details of the deficit and entitlements to how to encourage capitalism.  We hope that Bjorn Lomborg has put the last nail in the Climate Change activist’s coffin with

How climate change alarmists are actually endangering the planet

But we really doubt it.  We are sure that when Bill Barr (via PowerLine) pointed out the obvious:

When a community turns on and pillories its own police, officers naturally become more risk averse and crime rates soar. Unfortunately, we are seeing that now in many of our major cities. This is a critical problem that exists apart from disagreements on other issues. The threat to black lives posed by crime on the streets is massively greater than any threat posed by police misconduct. The leading cause of death for young black males is homicide. Every year approximately 7,500 black Americans are victims of homicide, and the vast majority of them –around 90 percent – are killed by other blacks, mainly by gunfire. Each of those lives matter[s].

that it won’t yet make an iota of difference.  So there will still be plenty of silly and/or trivial issues and ideas floating around but you can go to Capital Matters for important issues and we will have more to write about.  Everybody wins.

Derek Chauvin’s Pension

Derek Chauvin in the former police officer charged with murdering George Floyd.  Zachary Evans at NRO has a CNN report with the headline: Officer Charged With Killing George Floyd Still Eligible For Pension Worth More Than $1 Million.  CNN’s first sentence tells us that the headline is incorrect:

Former Minneapolis police officer Derek Chauvin could receive more than $1 million in pension benefits during his retirement years even if he is convicted of killing George Floyd.

So it is not worth $1 million but Derek might get that much if he survives prison and lives a long life.  It is like the “million dollar” lottery games where you can win $50,000 a year for 20 years.  There is usually an alternative to get a much smaller amount in cash now or there are folks that will do it.  We remember ad and found the organization that does it.  It is basic present value.  A dollar today is worth more than a dollar at some later date.

Let’s ignore legal niceties and convict Derek.  Should he still receive his pension?  Here is some background from CNN:

The laws governing whether pensions can be stripped from police accused of misconduct vary depending on the state. Less than half of states have laws that allow for pensions to be taken away from police who were convicted of any kind of felony, while some other states allow pensions to be taken away for specific crimes like corruption or sexual crimes against minors but not for the conviction of an officer for using excessive force, according to 2017 research published in the Journal of Law, Economics and Policy.

Pensions are different than entitlements like Social Security.  Public pensions in states like Minnesota are often underfunded but they are real obligations.  If we wait to fix Social Security we will almost certainly see a reduction in benefits.  Will they be across the board or means tested is the real question?  Pensions, on the other hand, are real obligations.  Derek has earned his.  He is entitled to receive his pension based on the almost 20 years he has worked on the police force.  There are choices but basically his pension is  computed as salary (usually average of highest three) * years (19 for Derek) * a multiplier.  We no longer have access to that data but our recollection was police in Wisconsin got 2.2 percent.  We are going to use that figure for our rough calculations that follow.  As a comparison faculty in Wisconsin got 1.6 percent for some years and 1.8 percent for others.  So 30 years on the force got you 66 percent of your highest salary.  It is hard and dangerous work but a nice pension.

Derek will get a decent pension for work he has already done.  He also leaves an enormous amount on the table by getting fired.  He had 11 years to age 55 retirement.  That would add 24.2 percent to his multiplier.  If he got a average raise of 3.1 percent his salary would be up by 40 percent.  And, often in their last few years folks work lots of overtime to boost their salary average even more.

Sidebar: Here is something CNN reported that we didn’t know and can’t confirm:

Officers also usually pay some of their own salaries into the funds and typically receive their pensions in lieu of Social Security.

It would be another reason to meet the obligations to Derek.  End Sidebar.

So Derek has earned his pension.  There are lots of reasons to be concerned about state and local pensions but Derek isn’t one of them.

A Legislative Challenge

The always informative Kevin D. Williamson has a wicked neat idea at NRO.  He recognizes that the feds like to attach strings to aid.  He explains why the attempt to eliminate stock buybacks was so silly.

He recognizes the need for federal aid to states and the problem:

There is a good case for providing some short-term aid to states and cities whose revenue streams are currently smoking ruins in the wake of a global crisis over which they had no control. But that is not the question. The question is whether Washington should bail them out of troubles that are only tangentially related to the epidemic. The answer to that is, No.

We absolutely agree.  Part of the reason we agree is, see below for why, we are from Wisconsin.  He is not quite right when he says:

The main issue here is the unfunded liabilities of the state and local pension systems, particularly in Democrat-run jurisdictions such as the state of Illinois and the city of Dallas. [Emphasis added]

If we look at the map here of the funded ratio of pension liabilities from 2017 it is hard to find a political pattern. Illinois is 50th and KY is 48th.  As a state retiree we feel good that WI is number one.  It is true that Democrats run essentially all of the big cities where there are numerous pension problems.  It is also true that CA has a ratio in the middle (27th) but the size of that state, in both senses, means that unfunded amount for CA is very large.  So it is less of a red/blue problem than Kevin D. suggests.

He gives some ideas to Mitch McConnell and the GOP:

It would be entirely appropriate to encumber aid in such a way as to prevent its being used for any other than a relatively narrow range of specified purposes. But, because money is fungible, that sort of legislative guardrail might not be enough. A better approach would be to condition aid on distressed states’ and cities’ actually addressing their unfunded liabilities, which are the root of the problem here. To that end, Congress could require that states adopt reasonably responsible pension practices in order to participate in ongoing assistance programs; “reasonably responsible” here would mean renegotiating programs with beneficiaries in order to begin to align the promises that have been made with the resources needed to make good on them and seeing to it that states start making actuarially required contributions to pension plans going forward. Of course that assumes a level of credibility and discipline not obviously in evidence in Washington (or in Austin, or in Frankfort, or in Olympia), but so does every alternative.

We think renegotiating pension agreements and making actuarially required contributions is a great solution.  We are not sure if the former is legally feasible.  The GOP might find other good solutions.  We are almost sure it won’t happen.  One reason is that Washington never does anything that smart.  But the other, and more important reason is, Mitch is from KY.  Check the map.  Sadly, we are not going to see a legislative solution that prevents federal aid from being used to pay off unfunded pension liabilities..

After COVID-19, VDH version

Victor Davis Hanson, his writing be praised, tells us that the American public is asking tough questions about what our government should do after COVID-19.  Of course you should read the whole thing.  In fact, you should go out and read some of his books.  If you can afford it, you should buysome of them.  To help our discussion we have numbered the questions:

[1] Does the U.S. really need almost 15,000 people flying in from China each day? [2] At a time when American students owe $1.5 trillion in student loans, it is smart to have some 360,000 Chinese students enrolled in U.S. colleges? [3] Is it safe to fund hundreds of labs on university campuses that conduct joint research with Chinese academics? [4] Does the United States really wish to curtail fracking, which has made it the largest producer of natural gas in the world and ensured that a quarantined America has plenty of fuel? [5] Is it prudent to release precious irrigation water out to the Pacific Ocean when California is the richest and most diverse producer of food in America?

The answers to VDH’s questions:

  1. We don’t need folks coming in from anywhere but if we are to be a free country then we need to let temporary visitors come and go.  Events will determine how how many come from each country.  Visits are different from immigration unless there is an issue like health.
  2. Chinese students have, at best, nothing to do with student loans of American students.  Our experience at a state school is that international students, like the Chinese, pay full costs of tuition that help us give discounted tuition to in-state students.  We predict that 2020-21 will have devastating consequences for university budgets because there will be fewer foreign students.  Restricting international students will cause tuition to go up or quality to go down.
  3. Joint research is different than students on campus.  Researchers must get campus approval for using human subjects.  Some similar system for approving research with international colleagues seems appropriate
  4. No! No! No!
  5. We have interesting problems with governmental intervention.  This is one of VDH’s pet peeves for good reason.

We are only on board with two parts of VDH’s solution (numbers added again):

Or we can have [1] bipartisan commissions decide how best to return key industries to the U.S., [2] prepare for the next epidemic, and [3] pay down the enormous debt we have incurred to defeat COVID-19. [Emphasis added]

We are fully in agreement with solutions two and three.  The federal government should be preparing for the next epidemic and don’t forget killer asteroids.  We need to take action about the debt from COVID-19 and the cost of entitlements.  This has been true for decades but it becomes more pressing now.

Sidebar: Yes, yes we know that there is a problem that everyone says that the government should do what we thought before COVID-19.  It is a problem.  The difference is we were right.  End Sidebar.

We are concerned about number one and particularly the bold word key.  At one extreme, we shouldn’t be buying aircraft carriers from the Chinese.  But we don’t trust the federal government not to go into full protectionist mode.  If Marco Rubio can successfully defend protecting Big Sugar then we will have big problems with trying to limit the number of industries designated as “key” industries.  Consumers will suffer.

As VDH says, we need to be thinking about the federal government after COVID-19.  It needs to change.  Getting any change is going to be a heavy lift.  VDH put the choice:

In other words, the choice is ours whether America awakens as a roaring giant or as a crying baby.

We hope we choose the former.

Retirement Planning

We were reading Suze Orman on the AARP Bulletin with a 2020 action plan for retirement.  She has a list of ten items.  Suze (we hope we can keep up with autocorrect) is worth reading but she is only a start.  She has some good ideas and a few that could use more details.  Given that it is a list she leaves out what we think are the two most important issues:

  1. How do you want to live in retirement?
  2. Do the math.

We like the general idea of downsizing that shows up in several of her items.  It is a great way to help make the math work.  We think that waiting on Social Security is not as good an idea as she suggests but we really like Roth Accounts.

We have a fellow retiree that loves his frugal lifestyle.  He cuts his own wood for his wood stove, enjoys fixing stuff, and the enjoys the outdoors.  Some of his activities are free and others save money.  On the other hand, we have been to Japan, Korea, Ireland, England, China, and all over the US since retirement.  We pay people to fix things and cut wood.  Another person we talked to was selling her home to buy a motor home to tour the US.  You need to have an idea of what you want to do.

Then you need to do the math.  You might need some help.  We hope you know what you make now.  Gross income is a tax term.  It means (except for certain exclusions) all income.  It isn’t useful to compare your pre-retirement gross income to your post-retirement gross income.  Why? Because pre you pay Social Security Tax, contribute to your retirement, and invest for your retirement.  You might pay union dues, have a big parking bill, have an expensive commute, and so on.  Post you pay no Social Security tax, pay limited federal taxes on Social Security and, in Wisconsin, pay no taxes on Social Security.  Disposable income is an economic term but you need to create your own version of it.  Usually, you can live the same life post-retirement on considerably less gross income than was necessary pre-retirement.

Sidebar: Health care is a decidedly complicated part of it.  Before you turn 65 you should apply for Medicare.  At 65 the federal government will pay for a substantial portion of your health care costs.  How it will all net out depends on your employment and post-employment benefits, if any.  We might have been an unusual case but for us retirement sharply reduced our health care costs.  End Sidebar.

In part because of health care, our version of disposable income went up when we retired.  Retiring was an easy choice because first, we would have more money than if we worked and, two, that amount would support our lifestyle.

Roth vehicles simplify your life because you take the money out tax free.  Another reason we are keen on Roth IRAs is that you can also use them to help your heirs.  So Roth is a good idea if you are considering leaving something to somebody.

Suze wants you to wait until 70 to start collecting Social Security.  Suze says in her usual combative way that:

Don’t start with me that you don’t want to leave money on the table. There’s a good chance you’ll be alive in your 90s. Even if you begin receiving Social Security at age 70, when you hit your early 80s your total payments will be more than if you started getting a lower benefit at age 62.

How good a deal depends on how long you live but Suze is misleading you, perhaps for your own good.  She is not asking you the run the numbers.  We are.  You only break even in your early 80s.  You need to live well past then to make a decent return.  The real question is when can you retire and live the life you want?  You need to be honest with yourself.  For our frugal friend the numbers worked before 62.  For us, it was almost 65 when the numbers worked.  We know somebody that loves work so much that he is making less working in his 70s than he would retired.  When he finally retires he will gets lots in Social Security but he won’t need it.  So when you should take Social Security depends on your circumstances.

As Suze says it is likely that you will be retired for a long time.  Start by investing, educating yourself, and planning early.  You might need help but you need to take charge of your retirement just like your career.  Retirement might be your longest part of your career.


Fixing Things

It has been a boring time.  Has there ever been anything more boring than impeaching The Donald?  Yes, the House is going to do it.  No, the Senate is not going to convict.  Now it has become even sillier, if that is possible, where the House might or might not send it to the Senate.  Killing Soleimani has been more partisan bickering.  Instead of worry about that you should read VDH to get updated on the Middle East.  Jay Ambrose has the right idea:It is 2020 and let’s start fixing things.  We agree with his list of no action things:

  1. Green New Deal
  2. Electoral College
  3. Fascism in the US

We are not as impressed by his action list

  1. Longevity
  2. Public Schools

He is right that longevity in the US has gone down but we are unconvinced that Big Pharma is the cause or that government can do much about it.  The solution to public schools is simple.  There needs to be competition.  Of course, the left is very much against that. So it is another partisan logjam.   Jay identifies an additional problem at public schools and universities:

Our public schools, meanwhile, also don’t teach patriotism the way they used to; I live near a school, for instance, at which teachers were telling students not to stand for the Star Spangled Banner at ball games.

It’s true, too, that too many professors at too many universities bend too many student minds to their leftist ways of thinking in which Western Civilization is the source of all evil and America’s exceptionalism is a grotesque sham.

We would be equally worried if the right were to require, as Jay seems to want, the teaching of patriotism in public schools and universities.

Instead let’s look at the five biggest problems facing the US:

  1. The deficit
  2. Medicare and Medicaid
  3. Social Security
  4. International relations (yes we could divide this several times)
  5. Immigration

There is one problem that sticks out as we could fix it in 2020: Social Security.  And there is one action that could improve all of them: support fracking and related infrastructure like pipelines.

Means testing is the key to fixing Social Security.  Unfortunately, any congress critter that votes to stop payments to millionaires will be portrayed as throwing granny over the cliff.  That means that a solution will probably need to include higher payments to low earners.  We are OK with that.  Let’s do it.

Fracking is great.  It fuels economic growth in the US which means more revenue for governments that will help reduce the deficit and pay for entitlements.  As VDH says:

The United States does not need Middle East natural gas or oil. Europe does. China does even more.

Certainly, it may be in the larger economic interests of America to keep moderately priced oil flowing from the Middle East. But disruptions, cartels, and embargoes do not matter to the United States in the degree they did during the last half-century.

Fracking is the primary cause of this joyous set of relationships.  It is a great help to the US in resisting the oil powers from Iran to Venezuela.  It might even help with immigration in the unlikely event the US can convince Mexico and elsewhere to allow this technology to enrich them.  We may not be able to convince our congress critters to have the gumption to fix Social Security but can surely stop them from restricting fracking.  The new decade really starts in 2021.  Perhaps we will be more ready to start fixing things after the election.


Pointing Out The Obvious

Are you as bored as we are with impeaching The Donald?  Let’s get it over with and get on to serious stuff.  Speaking of serious stuff, John Phelan at the Foundation for Economic Education makes an obvious point right in his title: Entitlement Liabilities Are a Graver Threat to the Next Generation of Americans Than Climate Change.  Our only minor quibble would be to add an s to the first word and leave out liabilities because these obligations don’t rise to the level of accounting liabilities.  You should read it all.  Here is a quote from John and a quote of his we would like to discuss:

To make Social Security solvent again, the payroll tax rate would need to be hiked immediately from 12.4 percent to 15.2 percent, or Social Security benefits would need to be cut on a permanent basis by about 17 percent. According to economists Roger LeRoy Miller, Daniel K. Benjamin, and Douglass C. North:

[F]or Social Security and Medicare to stay as they are, the payroll tax rate may have to rise to 25 percent of wages over the next decade. And a payroll tax rate of 40 percent is not unlikely by the middle of the twenty-first century.

The increasing cost of fixing Social Security (SS) given in the quote help us compare the problem of Climate Change and entitlements.  Because we don’t understand climate very well trying to solve Climate Change now is extraordinarily expensive and very uncertain.  It is obvious we need to study climate and wait to make any substantial changes.  It will be cheaper to solve it later when we know more.  We still favor replacing the gas tax a modest carbon tax now but ideas as foolish as eliminating fracking have been proposed by supposedly serious people.

Medicare is less complicated than climate but a challenge because health care is a complicated system.  We should be careful about wholesale changes to Medicare because it will have an impact on the health system.  SS, on the other hand, is little more than an arithmetic problem.  It is the opposite of Climate Change in another way in that it is cheap to solve now and expensive to solve later as John’s quote of a 40 payroll tax rate points out.

The solution is, as John says, to raise taxes or cut benefits.  We think that it is critical to recognize that when considering cutting benefits that such cuts to not have to be across the board.  We favor means testing for SS benefits starting now with a phase in period.  Effective means testing has complications so we need to experiment with it starting now.  And of course, income is alway real, that is, adjusted for inflation.  So, for example, starting in 2021 retirees with income over $600,000 per year get no SS.  Retirees with incomes below $150,000 per year get 100 percent of SS.  SS will change by 10 percent when income changes by $50,000.  Over time the means testing would be adjusted to a permanent solution.

Sidebar: What about the folks who rightly complain that they pay lots of SS tax but would get little or none back?  Well, one answer is: too bad!  You have the money to retire. It is your responsibility to plan.   The second answer is that the other choice is to tax you heavily.  This is the least bad deal the rich are going to get.  End Sidebar.

We are not suggesting that the numbers above are the solution.  There are lots of decisions to make even in this easiest of the three problems (SS, Medicare, Climate Change) including how to means test and measure inflation.  For example, current Taxable Income will not be a good measure of means for a retired individual with his wealth in a Roth IRA. A good solution will means test SS, start soon, be phased in, and be adapted over time.

Geraghty Nails It

Over at the Morning Jolt, an NRO newsletter, Jim Geraghty has an epic paragraph.  He is discussing Elizabeth Warren’s comment on John Delaney.  As we see it, Elizabeth is defining the difference between progressives and conservatives when she says:

“I don’t understand why anybody goes to all the trouble of running for president of the United States just to talk about what we really can’t do and shouldn’t fight for.” [Emphasis added]

It won’t happen but John versus The Donald would be a hard choice.  As conservatives, we see Elizabeth as both foolish and inconsistent.  We, conservatives, think that an important, perhaps the number one, reason to run for president is to tell folks what the government can’t do.  It takes time because the list is rather long.  We do, however, want them to fight for it.

Jim then gives us one of the great paragraphs in pundit history:

You want to know why you have problems, America? Because you don’t like doing the math. Your checkbook doesn’t add up, you didn’t read the fine print, you didn’t realize how bad the interest rate on your credit card was, you didn’t think your adjustable rate mortgage would adjust so soon, and you can’t believe you agreed to buy that timeshare.

We would add student loans that pay for premium TV services to his list.  We think Jim could have done a better job of connecting his rant to elections and that those financial parts that we keep ignoring: entitlements.  Well, it looks like we are going to financial hell until at least 2024.

The Green New Deal And 2005

Both Jonah Goldberg and Jim Geraghty’s Jolt are on the Green New Deal this week.  At first glance it seems like a real waste of talent (leave the low hanging fruit for MWG!) to deal with an obscure and silly document from the Green Party of all places.

Sidebar: As Jim says, you should read it.  See the cite above.  It is much worse than you could imagine.  End Sidebar.

But as MWG recently warned, folks are going to try to ignore the important issue of entitlement reform and replace it with climate change.  Jonah and Jim are on the case because of a new press favorites has supported it.

We suppose there is some chance that the Congress could pass something as foolish as the Green New Deal but the more likely problem is that the pressure put on by the crazies will cause Congress to feel that it must do something.  We see a situation similar to 2005 that led to the Energy Policy Act of 2005  and to the ethanol mandate.  Although W and the GOP held both houses (well, they added four in the Senate) of the Congress in 2004, there was pressure to do something about what was then called global warming but we now call climate change.    Evidence of the pressure is Al Gore winning the Nobel Peace Prize in 2007.  We did not make that up.

We are of two minds about the 2005 Act.  As a binary choice we would vote against it.  The ethanol mandate interferes with markets.  As we would have predicted, it has caused problems for both gas and corn.  But it wasn’t a binary choice.  There was lots of pressure to do something about climate.  Our view is the the 2005 Act took the wind out of the extremist’s sails.  Without the 2005 act it is possible that something really nasty would have passed Congress.  In 2018, the situation is even more troubling as the Democrats control the House.

Therefore, it is good that Jim and Jonah are out in front giving the Green New Deal the opprobrium it deserves.  It is just as important that Kevin is on the entitlement beat again and again.  MWG tries to help.  We think the events of 2005 are likely to recur and Congress will feel great pressure to do something.  Unfortunately, we have The Donald rather than W.  Conservatives may have some difficult decisions about what is the least worst option.  Our best chance is to make it clear what a really, really bad idea the Green New Deal is and the importance of dealing with debt and entitlements.  Thanks to Jim, Jonah, and Kevin for a good start.


Big Risks And Easy Solutions

Jim Geraghty’ Jolt reminds us that government workers are in a difficult situation during the shutdown.  We agree with him when he says:

You’re seeing some conservatives argue that the American government is functioning fine during the shutdown, demonstrating that the “nonessential” workers are genuinely unneeded and that this proves that there’s no real need to bring the shutdown to an end.

This is a pretty poorly informed reaction. Some of the most important duties of the federal government are continuing to function because hundreds of thousands of federal employees are working without pay and hoping that they get paid for their labor once the shutdown ends.

Kevin Williamson reminds us that there are much bigger problems out there.  As he puts it he shutdown is a blip and the debt crisis is an atomic bomb.  Kevin notes that government jobs are more highly paid than their private sector counterparts.  Kevin is right but there are two problems with his comment.  He doesn’t cite his source but is likely that a substantial part of that difference is post-employment income that can’t be used to buy peanut butter.  The fact that we have our Medicare supplement paid for until we are 115 is great now but didn’t make it any easier when we were an assistant professor making five figures.  The second part is connected to our low salary early in our career.  Most of us, and certainly almost all government workers, have life cycle earnings that start low and increase over time.  The new employees now have the same problems we had 40 years ago.  Conservatives need to have some sympathy for federal workers.  We need The Donald and Nancy to work out their problem and get on to the serious stuff.

The serious stuff, as Kevin tells us, is the combination of government debt and entitlements that he refers to as the debt crisis.  If you are worried about climate change then you should be terrified about the debt crisis.  The math for climate change is very complicated, the evidence is mixed (we will agree it tends to support it), and the sign of the net outcome is uncertain.  That is, there are positive outcomes from climate change like longer growing seasons as well as negative outcomes.  It is also likely but not certain that any solution to climate change will become cheaper later.  It is certain that solutions to the debt crisis get more expensive every hour.  Kevin puts the fiscal crisis like so:

Which is to say: If the federal government does not do something to reform its long-term finances, then a fiscal crisis of some sort is inevitable. No one knows exactly what it will look like, and no one knows what the consequences will be when a country responsible for about a quarter of the human race’s total economic output becomes insolvent. Hard to say, really, how that will shake out. Safe to say it will be ugly.

There are three main parts to the problem: government debt, Social Security, and Medicare/Medicaid.  Social security we can solve this evening.  The other two are very difficult problems.  We need means testing for Social Security.  If we are going to solve it this evening we need to start phasing in means testing now.  The challenge is devising the means testing system.  Something from your individual tax return like Gross Income or Taxable Income seems like an obvious choice but individuals can have assets or income that are not taxed.  Let’s suppose that Warren Buffett is not paid a salary.  How can we see that one of the world’s richest men does not get a social security check?  it might take slightly longer than this evening but we can get it done this year.  Let’s deal with the shutdown and start on the serious problems and take care of the easy one first.