Instead, I have seen this take a wider view and, dare I say it, even some political overtones.  While it has not been intentional, it is a logical progression.  There has always been an interest in economics and how wider forces can impact me.  So I started looking at those forces in an effort to find ways to suggest to you, my readers, ways to take advantage.

In my efforts to make sense of these larger forces, there has been a need to explain the lessons learned about them.  This has resulted in some more interesting posts like: How To Live on Minimum Wage, Wal-Mart is Bad for US(A), and Leasing a New Car Makes No Sense.  Others have proven to be less popular, but helped me understand more: What is Financial Independence?, The Scale of the Federal Deficit, and How to Snowball Debt.

The surprise has been that by looking into some larger scale items like the national debt and Social Security, my interest in politics has grown.  It certainly is not because of politicians or their attempts to protect us from us.  It is because of how tightly integrated politics is to economics which strongly influences what happens to me and you as individuals.

It should not have been such a surprise.  Politics is about deciding what needs to be done as a country.  Getting things done is about using resources (money).  Those resources have to come from somewhere.  That somewhere is the economy.

I guess it was because in my mind the economy was like a wild elephant and the government a ranger.  The government could poke and prod the economy and tell it where to go, but you never knew if the economy would cooperate or if it would try to trample the ranger.

The more I learn, the more the analogy changes.  It still seems like the economy is a elephant, but is a trained one.  The government has carrots and treats and a small slender prod to get it to do tricks.  Usually, it behaves well.  Rarely it gets upset or sulky and bad things can happen until the circus gets shut down.

It seems to be a valid analogy.  The bigger government is, the more the economy is like a performing elephant.  The smaller government is, the more of a wild elephant.  Despite the apparent dangers, the more I learn, the more I think we ought to be looking for a wild, untamed economy.

Give me your thoughts – pro and con.  I’ll start you off with just a few of the multitude of items that can be expanded on:

Pro

• A smaller government means it needs less money out of my pocket to operate
• A wilder economy means that only the best companies will be able to survive the harsher cycles

Con

• A larger government is better able to address the thousands of dangers that face us from carcinogens to global warming and recessions
• A tame economy means fewer layoffs and more stable employment

Agree?  Disagree?  Want to add to the list? Add your comments.

Social Security Problems

Social Security and Medicare are two of the looming issues that will dominate and determine the economic future of our country. As they exist right now, they are welfare programs that will suck up more and more of this country’s economic output every year until they are curbed or our country goes bankrupt. The most difficult part is that there are industrial (pharmaceutical) and demographic (AARP) forces that are going to push for them to be expanded and not moderated.

Since those groups are both well organized and well funded, a political solution that is good for the long term health of the economy is going to be difficult, happen slowly and not be sufficient unless there is a crisis which forces expedient change. There are only two alternatives: a) find a multi-billionaire who believes in the cause and/or b) start spreading the word about responsible changes and see if there is enough support for a grassroots campaign.

Anybody who looks into the budget and projections for Social Security will agree it needs to be massively overhauled. This huge program gives to every retiree – whether they need it or not. As the retirees grow – in numbers and percentage of the population – the impact of this program is going to grow significantly.

The problem is that this generosity has to come from somewhere. In this case, it is from the paychecks of millions of Americans. With so many of other people’s wallets to draw from, politicians have had no problem making promises of future benefits. To meet those promises, more and more money is going to need to be borrowed and taxed from generations down the line.

This is going to bankrupt individuals if taxes are raised to meet the promises. It is going to bankrupt the government if they are not. This means the system as it exists today is severely broken and needs to be fixed.

While the system is severely broken right now, it is not the concept that is flawed, but rather the implementation. Here are some suggestions for how to go about fixing it.

• Do Not Change Benefits for Current Retirees
  
• Include Social Security in the Federal Budget
• Tax ALL Earned Income Equally For Social Security
  
• Not Everybody Should Be Eligible
• Provide Equal Benefits For All
• Really Balance the Federal Budget Every Year
  

Do Not Change Benefits For Current Retirees

It is critical that the changes to be made to Social Security do not impact current retirees. It would be unfair and disastrous to weaken or remove a major portion of somebody’s income for retirement. It would be especially cruel for the government to renege on that promise at a point when many people would find it difficult or impossible to replace that lost income.

Included in this are those who are very close to retirement too. At least the 55+ year olds who would hve very little time to make changes to their financial plans for retirement if changes to Social Security are enacted swiftly.

For those of us who are further out from retirement, the amount of change that is reasonable will grow the more time we each have to deal with the issue. A phased approach is appropriate where the full changes should impact those who are currently in the 40-45 year old range. 20 years is a good amount of time for individuals to adapt to the new program.

Include Social Security in the Federal Budget

The accounting trickery that is used to keep Social Security and Medicare ‘off the books’ of the annual budget needs to stop. Social Security is not independent. The program will not be shut down just because the ‘Trust Fund’ becomes empty. Plus, the collected funds are ‘borrowed’ for use in the current budget anyways.

It is time to stop pretending. Include it. Incorporate the Social Security tax into the income tax. Do the same with the Medicare tax. By consolidating, it becomes clearer how everything is really being paid for and how much we, as a nation, are overspending.

Only then, when the budget and projections are accurate will we really see how bad the issues are. Only then, will we be able to make the hard decisions for sustainability. Only then will meaningful changes be possible.

Tax ALL Earned Income Equally For Social Security

As it is currently implemented, the Social Security tax is among the most regressive taxes in this country? It gets paid on an individual’s first earned dollars, but not on their last. The poor pay a higher percentage of their total compensation to Social Security than do anybody else.

The quickest and easiest way to restore some of the equality to this tax would be make it apply equally to all earned income. This would generate additional income to meet the Social Security obligations without increasing the burden on those least able to afford it.

Not Everybody Should Be Eligible

The final step in ‘fixing’ Social Security is to limit who can collect. This ties in with allowing people to opt out of the retirement portion, but it also covers limiting benefits for people who otherwise would seek them.

Rather than handing it out to everybody who has paid in, benefits should go to those who are not able to provide for themselves. Those who lack assets and who are not earning a living income otherwise. Individuals like Warren Buffet and Bill Gates and Steve Jobs should not receive Social Security. My suggestion? Pick a point that is at 125% to 150% of the poverty level. Set Social Security at that level and phase out benefits at a 1/3 or 1/4 rate (Receive $3 or $4 in income, Social Security drops by $1. ). That way we have defined the minimum somebody will receive.

The actual amount of benefits can be adjusted based on the number of years in the workforce and the age benefits are first taken at, just like now.

If the desire is to limit the beneficiaries even more, there is another step that could be taken. Allow individuals to voluntarily remove themselves from Social Security. Let them have a reduction is Social Security taxes in exchange for not being eligible for retirement benefits. Thus, if I claim exemption for one year, I pay less taxes, but for Social Security calculations, it is just like I was unemployed for the entire year.

Now, before you say it – yes, some people would be in trouble from that. They would claim exemption, not save the money, and be destitute at retirement. This is America however, and along with the Freedom that we enjoy comes the responsibility to accept the consequences of our own actions. If I am able bodied, choose to opt out of Social Security, and don’t save – why should I be rewarded?

Provide Equal Benefits For All

For everybody who qualifies for Social Security, the benefits should be the same. Not based on how much has been paid into the system. The changes to the system that I am proposing is to turn it into a safety net and nothing more than a safety net. As such, the idea is to ensure that anybody receiving benefits is able to live at a certain level of lifestyle. That level is consistent, no matter who you are.

If we accept that somebody who has been a contributing member of society for 45 years deserves not to fall between the cracks, does it really matter what they did or how much they made? Does a former janitor deserve less of a safety net than a former stock broker? If they did not save or could not save, should one receive more benefits than the other? If so, which one and why?

Lives well lived are equal in my book. Lets reward them the same.

Really Balance The Federal Budget

Yes, this ties in to Social Security – especially if it is incorporated into the budget like it should be. This ties in because Social Security expenditures are driven higher and higher because of inflation. Inflation is tied in to the federal debt and deficit numbers. Thus, if we balance the budget, Social Security will grow at a slower rate as inflation will also be held down.

Think of it this way: The economy has a certain amount of goods and services for sale. All of these are for sale regardless of how many or how few dollars there are out there. If there are a lot of dollars, people will be willing to pay more for those goods and services. They are willing to pay less if there are fewer dollars out there.

Every time the government spends a dollar it does not have, it creates a dollar. The mechanism of creation can vary, but in effect the federal deficit is a measure of extra dollars created from nothing to buy goods and services.

If the budget is balanced, even if the debt stays the same, we will have a positive effect. The economy will keep growing with more goods and services available. More goods and services, against the same amount of ‘extra’ dollars means each dollar is worth more.

Now, the federal government is not the only place that can ‘create’ dollars. Consumer borrowing plays a large role too. The federal government is the largest single entity and has enough power that its debt does influence the inflation rate.

Conclusion

Social Security needs to be modified for long term sustainability. However, the system should not be scrapped in its entirety. With a significant overhaul, it can become a positive program that does what it should and not more. With those changes, it will no longer threaten to damage or destroy our economy or personal lives.

Lets make difficult choices, but with an eye to our long term future. Do not pander to organized political interests. Instead, lets do what is best for ourselves and our country in the long run. Lets reduce the cost of Social Security and make it a safety net instead of a benefit for all. Lets give back our futures to each other and not to a Nanny Nation who knows how to plan for our retirement better than we can do on our own.

I do stray from that realm regularly, although not always satisfactorily.  I have read a number of classics that were less than stellar in my opinion.  Textbooks that confuse the issue as much as advance my knowledge.   Even newspapers and a few magazines (I love National Geographic).

Admittedly, not a high amount of non-fiction.  Today, I am reading a non-fiction, autobiographical book that I am glad I made an exception for.

Alan Greenspan, The Age of Turbulence, Adventures In a New World is a worthwhile read.

The first half of the book he traces his own history, providing context behind his education up to and including his time as the Fed Chairman.  The second half has less history and more of his thoughts on macroeconomics.  Both parts are a worthwhile read.  I have to admit that I’ve got even more respect and awe for the man than I did before I read the book (and like many people, I thought he was a smart, astute, and tough individual to begin with).

What else can I say?  I strongly recommend this book, and encourage you to get it and to feel free to take notes in the margins.  There is a lot of good information in there that is worth learning.

Wealth Accumulation

Out of the article, there is one I want to expound upon: “…perfection is unattainable. Wealth does accumulate in the hands of its owners, and if there is no mechanism for redistribution, the inequities can become intolerable.”

If you think about it, this makes a lot of sense. As so many financially successful people demonstrate, having money makes it easier to accumulate more money. It does not guarantee it, but it certainly helps. Usually, this is not a problem because we only live for so many years, and those talented enough to amass huge fortunes fade into history as their heirs prove less adept or less willing to work to accumulate additional wealth. The powerful names of yesteryear including Rockefeller and Vanderbilt still exist and have money, but they are not among the richest in the world anymore.

Despite the increasing heights of some individual fortunes, individual wealth does not threaten to undermine our way of life. Many of the wealthiest individuals are also great philanthropists, including Bill Gates and Warren Buffet. This even helps to hasten the cycle of wealth redistribution back to the general population from the wealthiest individuals. That cycle remains alive and well and even provides examples that are worth emulating and striving for, even by those who will never accumulate such large fortunes.

Corporations and Wealth

There is one entity which can exist forever,and as such, has the ability to gather more and more wealth until it has the financial ability to rival that of small and medium sized nations. Additionally, it has few enticements to be philanthropic with its wealth beyond a token level of support for the communities where it does business. That is the Corporation. Corporations have an unlimited lifetime and can continually change leadership to keep the best and most capable in charge. In doing so, they are able to accumulate wealth that far exceeds anything that an individual could.

At the same time, this increased aggregation of wealth lends these mega-corporations a lot of political and societal clout. What they want becomes important to the social agenda because money does talk. What is good for Wal-mart or Microsoft becomes good for politicians, even when it is against the best interests of society in general. Even worse, the impact becomes even greater on the state and local level as large corporations can have a huge impact on cities and states by even just threatening to relocate to places that are more company friendly.

Increasing Globalization makes this worse. Not only is there the threat of corporations relocating jobs to different cities and states with favorable laws within a country, but the very real threat of multi-national companies relocating off-shore from their traditional homes if the business environment becomes contrained in their original home.

This power is only threatening to become worse. Yet, how do you set limits on growth and development – especially when that offers the potential for more efficient production, improved standards of living, and increased employment? There are a few times where it has been recognized that the potential for problems exceeds the potential benefits and anti-monopoly efforts have been undertaken by national governments.

Strength of Free Markets

It is the efficient re-allocation of capital that give free markets their strength. An individual or company that does a poor job of handling capital will lose that money and others who do a better job of protecting and using capital will take their place. When less efficient providers can be supplanted by more efficient ones, the free market does the best job of improving conditions for everybody. This works most of the time.

Laissez-faire is the thoeretical standard that Capitalist economies are compared against, and ideally strive for. It requires a few assumptions however. First is that there is free and open competition for resources, multiple providers and multiple consumers. Second is that there is true efficiency, where different providers and consumers are free to make their own decisions and act unconstrained on those decisions. Anytime a competitor is not efficient, they will lose market share to those who are more efficient.

Mega-corporations

To that end, actions and institutions that distort the free market pose significant threats to the long term health of the global economy. Within the last fifty years, there has been a rise in potential distortions in the guise of gigantic multi-national mega-corporations. With an ability to move large amounts of money between countries at will, large accumulations of capital, and highly recognized and rewarded brands,these corporations have the ability to function long term even when they are not the most efficient provider of a good or service.

Beyond that, the huge reserves of capital and their easy access to debt financing, it is possible for a mega-corporation to make a credible attempt to enter and dominate markets outside its experience and expertise just by throwing money at the problem. In the process, they do not necessarily contribute anything and certainly act as disruptive forces. Even should they fail and abandon their attempts to muscle in on new markets, their impacts can be catastrophic for otherwise effective and efficient competitors who were already in place.

Mega-corporations can grow to such a size that even operating inefficiently, they can linger for years or decades as a large company. In some cases – Worldcom for example – a company can lose billions of dollars, go through bankruptcy and be handed over to their creditors, and when the bankruptcy is discharged, immediately become an industry leader because of the now discharged debt. I understand it was because the former creditors were now the owners, and the former stockholders lost everything. Yet when the bankruptcy was cleared, Worldcom was immediately in a better financial position than its competitors who had not declared bankruptcy.

So, how do you allow for companies and individuals to function in a free market, while avoiding the potential problem of inefficient mega-corporations? The simplest expedient of not allowing corporations to exceed a certain size is more problematic. Some activities and services cannot be well provided by small or medium sized companies. Plus, there is always the ability for a large company to still be efficient – in some cases almost brutally so.

A potential solution would be eliminate an inefficient large corporation when they prove that they are not efficient. Give those companies that have reached a certain size – measured either by assets or revenue – a different set of bankruptcy options than normal. The first would be the same as is offered now: Liquidation.

The second would be: Break-up. Behind the break-up option are a couple of ideas. First, is that the company proved not to be the most efficient at their large size. Splitting into several smaller companies will allow normal market forces to once again play a significant role in the operations of the company. Second, it will force new leadership to be chosen, since the same leadership team cannot run all of the smaller companies. Thus even more will there be opportunities for new competition to come in.

Long live limited market intervention.

PS

There is a lot more to that article. If there are other points that you would like to discuss, feel free to add a comment referencing the part you are interested in. Comments are also welcome on the discussion for this small snippet. Registration is not required to comment either.