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What's New

2011-01-01 10:18:00

Could simple be a solution?

Question: What’s new?

Answer: We probably all have read things in emails and other forms of communication that are simplistic solutions to many of the real problems we face in America today. Maybe…too many times…too many of us…dismiss these as some sort of a joke. Maybe simplicity is the answer. I think often about all of the trillions of dollars this country spends each year on its budget and items in excess of its budget. Of course I think about my Honey, family, friends, the New England Patriots, Prime Rib, Lamb, Lobster, Cabernet Sauvignon, golf, Derek Jeter and other things too…but I spend a lot of time thinking about what is going to happen to us with the mess we’re in, and what can be done to stave off what appears to be a bigger mess coming because of all of this spending. As I have said quite often in this column, in all of the consulting of businesses I have done and being in business for more than 40-years, I have never thought or advised anyone that the way out of being “upside down” when it comes to income versus expense was to spend more to get out of it. While I am only going to deal with a couple of elements of our spending in this issue, the “umbrella” that has to be thrown over the entire situation is that somehow or other, this spending has to stop. And if we are going to throw money at something, we have to be able to fund it, and be a whole lot smarter than we have been in the last 5-years, by making this money do more things and work harder. Again…maybe simplicity is more of an answer than many of us might think. Please allow me to lead in with a few “Did you knows”… Did you know that our federal budget (that we haven’t met by the way in about 15 years) is $2.5 trillion per year in “mandatory” spending. “Mandatory” means for things like entitlement programs (i.e. social security, Medicare, Medicaid, etc.), defense spending, interest, etc. There is another $1.3 trillion that is labeled as “discretionary” spending? What is “discretionary” spending? It is all of the things that the President and Congress have tacked on…like the stimulus package, health care reform, bailouts, buying two car companies that owe the American taxpayers back billions, further extension of unemployment benefits, and a wide assortment of other projects. I doubt anyone likes to hear this…but it is true. At this writing, we plan to AT LEAST exceed our budget by a minimum of $1.3 trillion in fiscal year 2010-2011, and add to the deficit of $14 trillion! The stimulus package was supposed to put America back to work with “shovel ready” jobs. A year after it was passed, the President apologized and said, “Well, I guess there aren’t such things as “shovel ready” jobs. Oh…okay. We threw $800 billion at the problem of unemployment and a slow economy and we’re worse off today than we were when we did it. We didn’t even have the money in the budget for the budget. We certainly didn’t have anything for things exceeding the budget. It is estimated that there are now approximately 16 million unemployed, not counting the ones who are no longer looking for work and not counting those who are retired. This 16 million equates to 9.8% unemployment (latest December 3rd, 2010 numbers). We have a housing crisis. Inflation is on the way up with the latest and most aggressive Fed moves pumping $600 billion into the economy, with promises to pump more in. Now in my opinion, Bernanke can call it anything he wants…but at the end of the day…the Fed is printing money to do this. If I have 25,000 bushels of wheat…and Russia dumps 10 million metric ton onto the market, won’t that make the price of the wheat I have go down? The same goes with dollars. When the Fed pumps more money into the economy, they print it. We all know we don’t have it. The more money they print, the less value each dollar holds. The less value each dollar holds, the more of them that are required to buy things. This is inflation. What ELSE is coming we don’t YET know about? Some forecasters are saying it may take as long as 10 years to bring unemployment down to 8%...and further into the future to bring unemployment back to under 5%. Get ready for the term “chronically high unemployment” to be used often. It does not paint a rosy picture. Currently, with up to 99 weeks (and another 56 weeks on the table at the time this publication was going to print) of unemployment compensation at an average of $400 per week take home…many workers have chosen to sit it out and wait for their benefits to run out. I guess I can understand. Why would they work? Many of them are making more on unemployment than they would make if they worked…and IF they worked…they would have to WORK. I can’t help but think however…if their unemployment was gone, how many would find something to do. It used to be that when someone was laid off, they knew they only had six months to find another job doing something, and the compensation for that period of time would be less than what they were making. This made them much more aggressive in finding something, even if the new position did not quite pay what they were making in their old position. With the benefit amounts being increased and the length of time these benefits are payable being extended, we have seen a change in our culture. Some culture changes are good. This is not one of them. Do you know what the tab is each year for 16 million unemployed workers? $346 BILLION! If we are at this number or close to it for the next 10 years, that’s almost $3.5 trillion by itself! It’s been stated a thousand times that all we have to do is put America back to work and we will begin to heal this sick economy. I believe this. Do you? We’ve already spent hundreds of billions of dollars trying to do this…and like I said earlier…we are worse off now than we started. We do not have the years it’s going to take to put America back to work. It has to be done…almost…over night. What if there was a simple approach that would do this? I think I’ve got one. Try it on. 1.There are about 40 million people over 50 working full time in the work force. They have not been laid off or will they be. The companies they work for need these people, or people like these people in these positions. I will bet you a dollar to a donut, 8 million of these folks between the ages of 50 and 60 would take a lump sum severance payout of $500,000…tax-free…to retire. Wouldn’t you? What would that cost us? $4 trillion. Where do we get it? We certainly don’t print it and add to inflation. Right now there are trillions of dollars from businesses and consumers, sitting on the sidelines, waiting for the most opportunistic time to be re-invested. Interest rates on savings and CDs are at an all time low. We can’t look to the European Union or anyone else in the world to bail us out. Americans are going to the be the ones who do it. Let’s reward them. Let’s sell this $4 trillion to American businesses and the public in the way of 10 year, tax-free bonds that pay 3% per year, with a one-time opportunity over the 10 years to ratchet up to a higher rate. The total interest cost…$120 billion per year…or $1.2 trillion over 10 years. Our total cost for this solution is now $5.2 trillion. These 8 million people’s jobs would go to 8 million of the unemployed, bringing unemployment down to 4.9%. Taking this many people off unemployment would save $175 billion per year, or $1.75 trillion over the next 10 years. That puts us $3.45 trillion in the hole. Each person accepting this severance package would do so while accepting the following stipulations: a.The person must retire from his/her present position. This does not preclude them from starting up a business of some type, they just can’t take another job in the public sector. b.The person cannot draw any social security until he/she reaches full retirement age, which this age goes up every year. Today, 50 years olds would have to reach the age of 67 to draw full social security benefits. The savings over the next 10 years for this would be $1.65 trillion. We are now $1.8 trillion in the hole for the next 10 years. c.This person must buy a new American made car immediately upon acceptance of the severance amount. 8 million cars ordered…the auto industry is now in good shape and the two car companies can pay back the $60 billion that they still owe American taxpayers. Granted, with all of these other numbers, it’s chump change…but it will still reduce the deficit. d.This person must either buy a house or pay off his/her mortgage. 8 million homes sold and/or mortgages paid off…I think we could all agree the housing crisis is…at the very least…put at bay. Now, let’s take a look at the good ol’ US economy, with 4.9% unemployment, for the next few years, at no higher tax rates than what we have now, and watch the “monkey climb the bars.” Our total gross national product today is approximately $15 trillion. What would it be in this environment? It could be as much as $18 trillion. Remember, the “engine is running, the accelerator is pressed half way to the floor, and the feet are on the brakes.” Give the economy this dose of good news…take the feet off the brakes and watch it run! At this level, tax receipts…again at the current rates…would rise 20% or increase approximately $500 billion. Now, implement this, freeze spending to 2008 levels, freeze government hiring, force ourselves to spend only what we have…and guess what? We’re back in business with a balanced budget, reducing the deficit…and again have the strongest economy and country on the planet earth. We could see the “fruits” in days instead of years. What am I missing here? Oh yeah…I remember now…it’s probably too simple.