Government Underground

I was recently asked the question “How is a state treasurer’s job political? Aren’t they bound by law and GAAP?” While I don’t claim to be an expert, here is my “two cents” for an answer.

The Colorado State Constitution establishes the elected office of treasurer as part of the Executive branch of our state government (Article IV, Sections 1 & 3). As described on its web site, the Colorado State Treasury is:

“…the constitutional custodian of the public’s funds. It is the Treasury’s duty to manage and account for the citizen’s tax dollars from the time they are received until the time they are disbursed. The Treasury’s staff is committed to safeguarding and managing the people’s monies with the same diligence and care as they do their own.

What the Treasury Does

The State Treasurer and her staff serve the citizens of Colorado by providing banking, investment, and accounting services for all funds and assets deposited in the Treasury. By continually optimizing cash flows and maximizing the return on the state’s investments, Treasurer Kennedy plays an important role in helping to minimize the tax burden on Coloradans.

The Department of the Treasury is organized into five different operating sections: Accounting, Investments, Cash Management, and Administration. The Treasurer is also responsible for managing the state’s unclaimed property division – The Great Colorado Payback.”

As the fiduciary for the people of the state of Colorado, I would submit that the criteria for election should be based upon expertise in finance, accounting, investments and operations. The Treasurer makes decisions as to when/how/where to invest the state’s money, manage cash flows, structure financing for state infrastructure projects, and account for all of the state’s finances. How can the state squeeze every basis point out of the Treasury by making good investments, hedging risk, managing money efficiently, etc? There should be a high bar for the level of investment and finance expertise required of a state Treasurer. Certainly the treasurer must work within state statues and Generally Accepted Accounting Principles (GAAP).

In addition to strictly quantitative investment issues such as yield, credit quality, reinvestment risk, diversification, liquidity, etc., you also have potential political/social issues that may come into play such as do you adopt investment policies influenced things such as “green” strategies, social issues (apartheid, etc.), or other reasons? Some might respond that yes, this should be part of this elected position, while others (such as myself) would say no, that fiscal policy should trump political policy.

Closer to home, do you invest within Colorado to “support the local economy” or do you invest in other states where yields may be higher? While this could be described as a political policy question, a sophisticated approach would incorporate the expected financial impact of one decision over another, including the advantage of maintaining higher levels of capital within the state of Colorado vs. the potentially more efficient use of said capital placed out of state.

Should the Treasurer work to expand funding for schools by increasing taxes, expand health insurance coverage with new tobacco taxes, or push for TABOR time-outs like Referendum C, as current Treasurer Cary Kennedy boasts on the Colorado Treasury website? These are the political questions that should be evaluated when electing a state treasurer.

So, the treasurer has a financial and political impact upon how the state manages its money. Given that this is the case, it makes sense that it is an elected position.

However, I would end with the following questions (which I find myself asking of just about everything the government does these days): What is the state’s constitutional mandate and enumeration of powers for the responsibilities of the office of treasurer? Are our government officials acting within those constitutional restraints? Those are questions for another day…

The GAO has confirmed that we are WASTING $142,209,675 per year of our Colorado citizens’ money through the federal surface transportation program.

The GAO has identified Colorado as one of 27 “Donor” states that pay more in federal taxes and fees than they receive in federal-aid. No surprise there, since reports from ALEC show that Colorado gets $0.81 for every $1.00 we send to Washington.

The federal GAO published a report in March 2008 on ideas for restructuring the federal approach on surface transportation.  One of the ideas outlined was to “Turn Back” surface transportation programs and revenues to the states. Appendix III of the GAO report details the implications of this idea.

Bottom line: Turning back the surface transportation programs and revenues to Colorado would allow Colorado to manage these programs itself, without federal interference or funding, without the additional layer of federal government redundancy, spending the same amount of money as is currently being spent on surface transportation today and we would actually need to charge $.0457 less per gallon in taxes than the federal government is charging.

The fed tax is $0.184  per gallon. We only receive back from the federal government $0.1383 per gallon through current federal funding for surface transportation. We could either deliver the same programs we have today and charge Colorado citizens $0.0457 less per gallon for gas, or we could keep the additional $0.0457 per gallon of gas and use appropriately (reduce “fees”, enhance road maintenance, etc.) within the state’s constitutional limits, if any, for revenue attribution, etc.

To give you an idea of how much money this is, I looked at the state’s revenue from motor fuel in 2006-2007. It was $684,598,000. Doing a back of the envelope calculation assuming all gasoline (simplifying here) that would indicate that 3,111,809,091 gallons of gas were taxed in that year. 3,111,809,091 gallons x $0.0457 = $142,209,675 per year.

I think the GAO has come up with a good idea – perhaps we should take them up on it? This would be an excellent step toward reducing the unconstitutional burden that the federal government places upon the citizens of Colorado.

In reading about the National Governor’s Association meeting, I saw that Pat Quinn, Governor of Illinois, was leading the all-too-typical uninformed charge of history revisionists. Pat stated that “We need more help from Washington to protect against job cuts and health care cuts. If we don’t do that, we’re following Herbert Hoover economics.”

My response was an email to Pat’s office.  I know that he won’t read it, but maybe some staffer will. Maybe it will plant a seed. My email follows:

Hey Pat, read a history book instead of blindly lying to the public. In campaigning against Hoover, FDR accused Hoover of “reckless and extravagant” spending and of presiding over “the greatest spending in peacetime in all history.” Rexford Guy Tugwell, one of FDR’s New Deal architects said that “We didn’t admit it at the time, but practically the whole New Deal was extrapolated from programs that Hoover started.” FDR won in a landslide in the 1932 presidential election on a Democratic platform that advocated a 25% reduction in federal spending, a balanced budget and a solid gold standard. Director of the Bureau of the Budget Lewis W. Douglas quit after 1 year due to FDR’s about face from what he had campaigned for. FDR & Congress unconstitutionally seized gold holdings and then overnight increased the price of gold, creating the greatest theft in history. I could go on about how FDR’s policies literally created 10 years of misery but I know that YOU will never read this email.  I only hope that some staffer of yours will read this who is probably young and intelligent and open-minded and might possibly be interested in actually digging for the truth for him/herself instead of listening to mindless crap that you’re spewing. People who actually think for themselves and find out the facts for themselves are what will save this country from pathetic politicians like you. Illinois is already in the pitiful position of having to borrow $2.2 billion from the federal government just to make unemployment payments.  Your solution? Gee, the federal government should just GIVE it to us. Where do you think it comes from? The government can only “give” to some people what it takes away from others. You’re a taker just like so many other politicians. Go get a real job and earn something by being a producer for a change instead of spending other peoples’ money for a living.

Government doesn’t create jobs.  Government cannot create jobs.  Anybody who says that “I want to be elected to office so that I can create jobs for the people” needs a remedial course in economics.

Government is by definition a drag, a friction, an impediment to the creation of jobs, wealth, or value. Government can only attain resources by taking them from people upon threat of force or incarceration (see the IRS, et al.) The money that government spends in the name of job creation is the same money that private business and entrepreneurs no longer have to spend that they could have created jobs with.

Colorado government takes its money from private citizens (we’ll leave the idea of the federal government creating money out of thin air, i.e., the deficit spending “stimulus” approach, for another day). When the government takes money from people, the people lose their money. In order for government to “create” a job it must take money from the private sector first. While the government may revel in its new found power to “create” a job with the money it took away from the people, the private sector has now lost that same amount of money with which it would have created private sector jobs.

Who’s Better at Creating Jobs?

So the question becomes, who do you think is better at creating jobs, products, value and wealth – government or private enterprise? Before you choose, consider this:

Government has no sensitivity to cost, has no sensitivity to price, has no threat of going out of business by putting out a bad product, has no competition who can lose money every year and simply raise more taxes to make up for it, and has no capital market discipline placed upon it because there is no competition or true market prices that provide any signals of value. None of the discipline of multiple market forces apply to the government. Government can create a bad product and not worry about going out of business. It can overspend because it doesn’t care if it loses money – it can simply raise more taxes (by threat of force/jail) or, if you’re the federal government, it can simply print more money. Look at this in a simple way through this table:

So back to the question: who do you think is better at creating jobs – government or private enterprise? The government which could care less whether it efficiently produces valuable products because it’s going to be in business forever regardless of results, or an entrepreneur whose ability to feed himself and his family is based upon successfully competing in the marketplace?

Government cannot “create” jobs because in order to provide a job it has to first destroy the private sector’s ability to create a job by robbing the private sector of some of its resources. That’s called opportunity cost.  When the opportunity cost is greater than the cost of a given project, you would be a fool do the project. So it is with the false idea of government job creation.

Economics 101

The fundamental premise of economics is that for every action you must look at the consequences of taking the action vs. not taking the action. The classic example is the story of the broken window. A vandal throws a brick through a window of the baker’s shop. People gather around and agree this is a shame. But then they conclude that the silver lining is that this will provide work for a glazier (guy who fixes broken windows). He’ll make $300 for fixing that window. They walk away consoled by the job creation that has occurred. (You can expand this example to the ridiculous notion that the destruction brought about by war somehow “creates” jobs and lifts economies out of recessions.) What the people don’t see is that the baker was planning on spending $300 for a new suit that week.  Now he’ll have to spend the $300 on the window instead.  The result is that the tailor just lost out on the $300 sale he was planning on making to the baker. The tailor is very sad about this because he was going to use that money to buy bread from the baker as well as new cloth, needles and thread to expand his business…

You get the idea. Every action has consequences. Things WILL happen as a result of an action that can be seen, but there are also things that WON’T happen as a result that will go unseen and so most people won’t realize that the consequence exists even though it is just as real.

In our case of job creation, the consequence that people see is the government job “creation” and the consequence that people do not see is the loss of the ability of the private sector to create a job. Since the private sector is better at creating a job because it must heed market forces or go out of business, the value of the unseen consequence – the opportunity cost – is greater than the value of the government “created” job. When the opportunity cost is greater than a project, the project is a NET LOSER. No one in their right mind would do a project that they know will create a permanent loss of value. Yet this is happening every day in the name of “job creation”.

So when I hear a candidate say, “Government needs to create jobs,” I know that candidate does not fundamentally understand economics or the government’s role in the economy.

Producers and Takers

Government is a taker and a re-distributor through taxes and fees. To be sure, there are services that the government should provide as specifically prescribed by our constitution. Everything else is over-reach that robs those people who are producers of their ability to create jobs, products, value and wealth. Government is also a drag on job creation through excess regulation that robs the private sector of money, time and resources that could have been more efficiently used by the private sector to create jobs, products, value and wealth instead of jumping through regulatory hoops.

The only thing that a candidate could honestly propose to help create jobs is to remove those barriers that rob the private sector of the ability to create its own jobs. Reducing the size, cost and burden of over-reaching government will help. Reducing excess regulation and bureaucracy will help. These are the things that will take money and resources out of the hands of inefficient government and put it back into the hands of the people who are the backbone of our state and our country. Over 85% of the jobs in Colorado are provided by small business. If Colorado government would quit robbing incredibly talented Coloradoans of their hard earned resources only to waste it on inefficient bloated government and instead allow our talented people to use it for themselves, our state would be a shining example of true job creation.

Empower the Producers, Limit the Takers

So the only way that politicians can help our economy or help our country to be more productive is by eliminating the drag on resources that government represents.  Eliminate the friction, the impediments, the barriers to creativity that government presents.  The first and foremost way of doing that is to reduce the size of our over-reaching government which has expanded far beyond its constitutional directives. Once the bloated expense of government is reduced, then that would naturally lead to the ability to reduce excess taxation and fees which take real capital away from the private sector. Finally, government can reduce other impediments to job creation by reducing its over-regulation. Companies are spending too much money, time and resources to comply with over-burdensome regulations. This robs our private sector of those resources as surely as any direct tax, and the lost opportunity cost means less jobs, products, value and wealth for everyone.

Reduce the Problem by Reducing Government

People inherently understand that government somehow is the problem and that the government just can’t always be the answer, that you’re always robbing Peter to pay Paul. Everybody knows this in their gut, but when we hear a politician say “We’re going to spend $200 million on creating a green energy economy and it’s going to create all these jobs,” we need to think this through and we’ll see that the politician is dead wrong. That $200 million that the government is going to spend on green energy programs is $200 million that private industries no longer have.  Opportunity cost. Think about it.  How much of that $200 million green energy fund do you think is getting wasted by government bureaucracy, government contracting to special interest groups that drive up the cost, government quotas, government regulations, government this and government that, so that the $200 million is not being effectively used.  It’s not creating jobs because it just destroyed $200 million of private investments.  That $200 million would have otherwise been available for business owners throughout the state who watch their pennies and could generate unbelievable amounts of economic activity, could create real value, real products, and real jobs if that $200 million was left in the hands of the private sector to do what it does best, which is create value and return for money.  That’s what businesses do.

So think about that the next time you hear a candidate say, “we need better government, we need to create jobs for people.”  Think to yourself, “No, you don’t get it.”  Government can’t possibly create jobs of any kind of comparative value like the private sector because of its immunity from market forces, it ability to raise revenue by force, and its nature of perpetual existence.

Candidates should be running on the concept that private enterprise creates and that government is an impediment.  Government has certain things it has to do and yes, it has to collect money though taxes to do those functions.  But creating jobs is not a constitutional government function.  Government is a private job destroyer. A candidate who understands economics will realize that the best thing he can do to help Colorado towards a stronger economy is to remove the barriers to job creation that government creates through taxes and regulation, and that there would be room to do that in our budget if we were to eliminate the unconstitutional government bloat that exists in Colorado today.

Below is a link to a report that says 32 states have borrowed from the federal government to make unemployment payments. Following are some initial impressions that only an actuary (or other number oriented, critically thinking persons) would note:

Twelve of these states have borrowed $1 billion or more. 11 out of those 12 states are “blue states” – CA, FL, IL, IN, MI, NJ, NY, NC, OH, PA, WI. Only one of those 12 states is a “red state” – Texas.

Out of the $37.8 billion that all of the states have borrowed to cover unemployment in total, 87% of that debt has been borrowed by “blue states” and 13% has been borrowed by “red states”.

BHO’s “home state” (whatever that means these days, but I mean it here as a former U.S. Senator from IL who helped create the mess we’re in) Illinois came in 6th on the list at $2.2 billion, behind such progressive states as CA, MI, NY, PA and OH (#’s 1-5).

If you take the total amount of borrowings for each blue state and divide it by their aggregate populations, you’ll find that “blue states” have borrowed $172.47 per capita. If you do the same for the “red states”, you’ll find that “red states” have borrowed $70.62 per capita.

These progressives really know how to get IT done. The questions that the sheeple have to wake up to are “What exactly is IT?” and “When are we gonna stop them?”

http://www.economicpolicyjournal.com/2010/05/32-states-have-borrowed-from-treasury.html

I read through some of “The Budget and Economic Outlook: Fiscal Years 2010 – 2020″, published by the Congressional Budget Office (CBO) in January 2010, by Doug Elemndorf, Director of the CBO.  Fascinating stuff… really… if you’re into horror stories.

Given all of the recent talk about sovereign debt, potential downgrades of various countries’ credit ratings, etc., I thought I’d take a cursory view of the United States Budget projections with respect to our ability to service our own debt. I have my own theories as to what our current situation is and what our prognosis is going forward (not good), but for this post, I’m going to simply look at one aspect of our current fiscal policy – debt service.

Loosely speaking, your “debt service coverage ratio” measures your ability to make payments on your debt by comparing your payments against your income.  In the classic case, the payments consist of the amortization of both interest and principal.  For example, when someone applies for a mortgage, the bank will typically look at the cost of the principal + interest + taxes and divide that by your income.  They’ll want to see a ratio of less than a certain amount, say 32% or whatever.  That ratio will help determine if you are making enough money to afford the particular loan you are trying to qualify for.  Most people who have bought a house should follow that example pretty well, having gone through it.

Thinking that this is a reasonable way to look at finances, I wondered how the federal government’s interest payments compares to its income.  This first graph shows the percentage of the government’s projected income that will go to pay interest from 2010 – 2020 (all data directly from the CBO report). Note that this is interest only and does not include repayment of principal.

It looks like the amount of income that will go to pay interest on our federal debt ranges between 17% and 24%. Now that doesn’t sound anything like Greece, so maybe we’re not in that bad of shape.  But let’s take a look at some of the CBO’s assumptions in this projection:  inflation will never rise above 2.0%, GDP will increase to 5.6%, unemployment will drop to 5.0%, the Ten Year Treasury will only increase from 3.6% to 5.5%, the Bush tax cuts are allowed to expire (taxes are raised), and the Alternative Minimum Tax “fix” is no longer fixed (i.e. AMT taxes hit more people in the middle class than ever.)  In other words, the perfect economy plus some increased taxes.

This is in spite of flooding the market with trillions of dollars in fiat currency during a time of decreasing production (the classic definition of inflation is more money chasing less goods), monetizing a large chunk of the debt, and  continuing to spend more money than the government takes in by an average of $600 billion every year over the next decade (again, according to the CBO).

Call me a chicken-little, doom and gloom actuary, but I don’t think that this makes a lot of sense.  While I hope things go well, let’s do a little sensitivity testing.  What if, due to some of the above mentioned facts, inflation actually goes above 2%? Not an unreasonable question. Or what if, in continuing to sell more Treasuries to pay for our ongoing deficit spending, we have to increase rates more than anticipated to continue to attract buyers? Or what if the Fed needs to raise interest rates more than the modest amount assumed in these projections in order to try to keep inflation down?

All of these sorts of very plausible “what-if’s” would cause rates to increase more than the CBO’s projection. Let’s say that interest rates go up 2% or 4% more than the rosy CBO scenario suggests. What will happen to our “debt service ratio?” Remember the power of compound interest folks and look at the next graph. The red line shows rates up by 2%. The blue line shows rates up by 4%.

Not a pretty picture.  If rates go up 4% more than expected, then the debt service jumps from averaging 20% of revenue to 40% of revenue.  Carefully consider what that means. In order to get that ratio from 40% back down to 20%, the tax revenue would have to be DOUBLED. Tax revenues, to my knowledge, have never been doubled. The other alternative would be that the government would have to cut enough other expenses out of the budget to make room to pay for the additional cost of the interest payments. I have never known the government to implement a 20% across the board cut.  In fact, they’re rioting in Greece, literally burning bodies in the street, due to that country’s austerity plan, whose cuts are not even close to 20%.

If this isn’t enough to make your head explode, consider that raising interest rates causes the cost of capital to go up, plus the aforementioned tax increases cause economic growth to be stunted, and total tax revenues don’t meet the rosy projections in the CBO’s baseline scenario.  For example, due to the recession, federal revenues dropped by 1% from 2007 to 2008. They dropped by 17% from 2008 to 2009. During the previous recession, revenues dropped by 2% in 2001, 7% more in 2002 and an additional 4% in 2003.

What happens if tax revenues fall 10% short of the CBO’s projections in 2010 because a 2% or 4% unanticipated rise in interest rates holds the economy down.  This is not unreasonable. After 2010 I assume that revenues will continue to grow going forward at the CBO’s assumed growth rate.  This is just a one year hiccup. Here’s the result:

Or what happens if the one year hiccup is a 20% shortfall in tax revenues from the CBO’s projections because a 2% or 4% unanticipated rise in interest rates holds the economy down.  Debt service of over 50%, that’s what:

So, according to the CBO’s rosy baseline scenario, we are adding an average of $600bil per year to our debt by spending $600bil per year more than we collect in tax revenue. The graphs above are simple “what-if’s” given some very plausible scenarios. The results would be catastrophic.

Still don’t think that whole Greece thing could happen here?

Damn The Recession, Full Spending Ahead

This weekend Congress will vote to approve the final pieces of our country’s discretionary spending budget for fiscal Year 2010. Discretionary spending is all of the spending that Congress “appropriates” each year that is not already mandatory such as Social Security, Medicare, Medicaid, Food Stamps, interest on the debt, etc.

The Final Pieces Fall Into Place This Weekend

While we’ve been fighting the government takeover of more than 1/6 of our economy, Congress has been using this opportunity as cover while they spend like never before. The plan is to pack as much punch into this year’s spending as possible in order to use the following election year to tout a gimmick “spending freeze.” This weekend Congress will approve the appropriations for the final six committees, virtually completing the appropriations process (five of the other six pieces have already been approved, the 6^th, Defense, is also set to come up) and setting the complete discretionary budget for 2010. Here are the increases for this weekend’s spend-a-palooza:



Source http://appropriations.house.gov

This Is Obama’s Budget

This is not Obama’s first time in setting the budget with these six committees. Because Congress delayed completing the majority of last year’s appropriation committees’ budgets until AFTER Obama was inaugurated (in order to avoid having to work with President Bush anymore), this is Obama’s second go round in working with Congress to set the budgets for nine of the twelve committees. That includes the six being completed this weekend as shown in the graph above.

The Total Budget

Here’s the complete picture of discretionary spending for 2010 assuming that this final piece of the puzzle falls into place this weekend, as it will.



Earmarks

That’s a story I’ll have to come back to.  Right now, if you’ll excuse me, I’m going to try to keep my head from exploding as I call every member of Congress I possibly can.  I suggest you do the same.

For those of you with cast iron stomachs, I attach the following summary breakdown of the budget for the last three years.