Posts in "Economics"

Underfunded Pension Systems

Aug 7, 2012 at 1:21 PM

By now, many of you may have heard about the country's largest city to go bankrupt: Stockton, California. Although there are many reasons for the city's bankruptcy (e.g., from the New York Times: "falling housing prices, foreclosures, ... retiree pensions and hefty price tags for buildings"), skyrocketing pension costs are one of the primary ones. In this article, I would like to try and provide evidence as to why I believe the vast majority of pension funds will become underfunded (as if they aren't already), and where we can expect the underfunding percentage to stabilize. Since my background is in engineering and not finance, I will attempt to do this with some simple mathematical models, as opposed to the usual financial models, which are somewhat difficult for the layman to understand (due to their use of specialized vocabulary, among other things).

The City of Austin Employees' Retirement System (COAERS) will be the focus of this analysis. Please note that this analysis can be extended to other pension funds as well (with minor modifications). In my opinion, the primary difficulty encountered in designing a sustainable pension fund lies in predicting the future. If one could predict the future, one could figure out exactly how much money one would need to put into the pension fund and at what time. However, the future is inherently unpredictable. Therefore, when designing a pension fund, one should take this unpredictability into account by using conservative estimates for investment performance. Unfortunately, this has not been done in the past (for a variety of reasons, one being that overestimating investment performance enables lower payments into the pension fund). As a result, many pension funds today are underfunded.

Audit the Fed (H.R. 459) goes to a vote tomorrow, Tuesday, July 24

Jul 23, 2012 at 11:55 AM

By Bonnie Kristian

The bill will be considered under a “suspension of the rules,” which means that supporters of Fed secrecy can add no amendments to water down the bill as they have with past audit efforts.

However, it also means we need two thirds of the House in order to win — not just a simple majority.

Already almost two thirds of the House has signed on as cosponsors, so an Audit the Fed victory is within reach if we ensure the bill sponsors cast the right vote and persuade additional representatives to support Fed transparency too.

Use this link to contact your representatives (and ask your families, friends, and followers to do the same) now. Here's the email I sent to my representative; feel free to copy it to send your own email. For the second paragraph, be sure to check if they are or aren't a cosponsor yet and modify the text as needed, and of course add your real name and location at the end. I’d check the “require response” option on the House website if I were you (maybe it makes them more likely to read it?).

Dear Rep. _______ (& office),
I’m writing to ask that you vote in favor of Congressman Ron Paul’s H.R. 459, the Federal Reserve Transparency Act of 2011.
It looks like you’re not already a cosponsor (learn more and see a list of cosponsors here: 1.usa.gov/M5S0tS), but there’s still time to cast your support behind this important measure.
The Federal Reserve plays a huge but largely unknown role in our economy. The recession doesn’t seem to be getting much better, and a little transparency in the Fed’s manipulation of our money supply is long overdue.
Rasmussen polls have shown (bit.ly/dmzjEj) up to 80% support of a full audit of the Fed nationwide, which means it’s statistically likely that your constituents overwhelmingly support H.R. 459. Please vote YES on this bill tomorrow.
Best,
Name Name
City, State

Defense Cuts?! We're DOOOOMED!!!

Jul 20, 2012 at 11:16 AM

By Creighton Harrington

As I was flipping through the various mainstream news channels this morning, I would occasionally land on Fox News (I know, shame on me). I noticed that Fox is apparently fuh-reaking out because it is getting so close to when automatic defense cuts are to go into effect (January of next year).

For those who don't know, there are looming automatic defense cuts of around half a trillion dollars over the next 10 years. Only around $45 billion of those cuts would go into effect in 2013.

If we take the numbers at face value and compare $45 billion to the overall defense budget from 2012, then we're looking at a cut in spending that amounts to only about 5% -- and that is only from the defense portion of the entire federal budget from 2012. If we include all of the 2012 budget, we're looking at barely 1%.

Of course, as it often goes in Washington, these cuts are being hyped up as doomsday cuts that will cripple the military and, unbelievably, stand in the way of economic growth.

Yes, you heard that right, economic growth. Indeed, the fear that the defense department will lose jobs in an already fragile economy has been voiced a lot on the news lately and many Republican politicians are claiming that losing these jobs would be catastrophic for our economic health.

Am I taking crazy pills?

Is Military Spending Really Being Cut?

Jul 20, 2012 at 11:16 AM

By Julie Borowski

By now you may have heard from neoconservatives that “catastrophic” defense spending cuts will kick in on January 2, 2013. This is completely misleading and ignores the reality of the military budget. There are no scheduled military spending cuts despite the best efforts of the Republican establishment to convince us otherwise.

Washington has once again cleverly disguised a spending increase as a “cut.” President Obama is only cutting $480 billion in military spending from the bloated Congressional Budget Office (CBO) baseline that predicts government spending over the next ten years.

He is merely reducing projected military spending, as opposed to cutting current spending. This means that military spending will increase at a slightly slower rate than previously anticipated over the next decade.

But real fiscal conservatives aren’t satisfied with reductions in projected spending—we want real, substantial cuts. No serious discussion about reducing our $15.8 trillion national debt can occur without putting military spending on the table.

Now there is a difference between military spending and defense spending. A large chunk of military spending has nothing to do with the defense of the United States. I mean, why the heck are U.S. troops still in Afghanistan?

The rate at which the military budget has expanded is outrageous. Current U.S. military spending is higher than at any time in our entire history and accounts for nearly half of all military spending on earth. U.S. military spending has doubled when adjusted for inflation over the past decade.

Candidate Obama criticized George W. Bush’s spending on overseas wars on the 2008 campaign trail. But President Obama beats George W. Bush when it comes to war and military spending. Under President Bush, military spending averaged 3.9 percent of Gross Domestic Product. It has increased to 4.9 percent—a full percentage point higher under President Obama.

Don't be fooled by fuzzy Washington math. Obama isn't really cutting military spending like he should.

Enough with the Bad Economics -- Understanding Private Equity Firms

Jul 16, 2012 at 10:13 PM

By Dylan Sclater

Democrats have made it a key strategy in the upcoming election to denounce Mitt Romney’s career as the former head of the private equity firm Bain Capital (see the two campaign ads above to an example of what I mean). Over and over again he is slammed for “destroying” jobs, often by outsourcing them overseas. Apparently, if only these practices could be stopped, Americans would be far better off.

Putting aside Mitt Romney’s qualifications for the presidency -- for I'm not writing this to endorse or oppose any candidates; this is about the issues -- it is abundantly clear that Obama's ad managers do not understand the fundamentals of economics, much less how private equity firms work.

Henry Hazlitt once said, “the bad economist sees only what immediately strikes the eye, the good economist also looks beyond. “ Our friends on the left always seem to make the unfortunate mistake of only focusing on the effects of a single group of people while overlooking all other groups and consequences. It is often easy for the casual observer with no training in economics to see the benefits of ordinary consumer goods, but when it comes to more complex services, the positive effects are often much harder to recognize. So, perhaps Mr. Obama should be asking himself: What do private equity firms actually do and what are the benefits?

The Affordable Care Act will Hit Your Wallet as Early as 2013

Jul 9, 2012 at 12:49 PM

By Mikayla Hall

The Americans for Tax Reform recently released a complete list of the taxes within the Affordable Care Act. President Obama's signature legislation contains 20 new or higher taxes. Of these, five major taxes are set to begin as early as 2013.

Surtax on Investment Income

The new ObamaCare surtax takes the top capital gains rate to 23.8 percent and top dividend rate to 43.4 percent. The tax will take a minimum of $123 billion out of taxpayer pockets over the next ten years.

Flexible Spending Account Cap

This places a $2500 annual cap on Flexible Spending Accounts, which allow 24 million Americans to use their own tax-free money to buy health-related goods and services. This low cap disproportionately affects families with special-needs children:

These pre-tax accounts, which currently have no federal limit, are used to purchase everything from contact lenses to children’s braces. With the cost of braces being as high as $7,200, this tax provision will play an unwelcome role in everyday kitchen-table health care decisions.

Medical Device Manufacturing Tax

Within the Affordable Care Act is a 2.3% excise tax on the medical device industry, which includes everything from pacemakers to scalpels. Not every company turns a profit, but this tax goes after revenue. What makes this tax particularly confusing is its classification as an excise tax. Excise taxes exist on cigarettes and other "vices" in an effort to raise their cost and thus decrease individuals' likelihood of purchasing them. Not something you'd want to encourage when it comes to life-saving products. Rep. Erik Paulsen of Minnesota introduced a bill to repeal this tax. It passed the House with bipartisan support and now awaits action in the Senate.

High Medical Bills Tax

This onerous tax provision will hit Americans facing the highest out-of-pocket medical bills. Currently, Americans are allowed to deduct medical expenses on their 1040 form to the extent the costs exceed 7.5 percent of one’s adjusted gross income. The new ObamaCare provision will raise that threshold to 10 percent, subjecting patients to a higher tax bill.

Medicare Payroll Tax Increase

Over the next ten years, this will cost employers $86 billion. It will be interesting to see how this affects long-term unemployment.

"Affordable Care," indeed.

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Money Monday – My Experience Buying Gold and Silver Bullion Coins Last Week

Jul 2, 2012 at 8:23 PM

By Wesley Messamore

m dime Suiting action to words last week, I finally made a trip to a local coin store in my city to start my run on the global fiat banking system by letting their bad money drive the good money (gold and silver) into my new hoard of inflation-proof value. I’m hoping that when the fiat money system crashes, everything will be so cheap for people who have gold and silver to spend that I can take a year off and ride motorcycles across South America. Or something awesome like that.

So on the big day, I rolled into this coin shop with a collection of numismatic coins (coins that have collector’s value because they are rare, or have interesting stories behind them) that I used to collect as a(n extremely nerdy) child. I wanted them to appraise the collector’s value of the coins, and then trade them in along with a stack of Federal Reserve notes for some gold and silver. I was happily surprised to learn what a couple of my coin sets were worth. I definitely got more for them than I'd expected. Then I kicked in my FRNs to buy some hard assets…

Live for Yourself

Jun 26, 2012 at 11:49 AM

By Brian Underwood

Rodin's "The Thinker"

Throughout our lives, we are told many things about how to live our lives. "You should live for your country!" say some. Others say, "Your goal in live is to serve the 'common good'!" And the examples merely continue from there.

But these things fly in the face of all rationality. They man that his life is not really his own, but instead he is born indebted to some other entity. The individuals supporting such doctrines treat man's life as a blank check for anyone and everyone else to fill except himself.

This is not how man should live. Man should live for himself.

Does this mean that by living for oneself that compassion or good will towards others is prohibited? By no means! In fact, it is only by living for oneself that there can be any true compassion at all.

Pipes Destroys Statist “History”

Jun 26, 2012 at 11:48 AM

By Zach Foster

Book cover Richard Pipes’ eighty-four page book Three "Whys" of the Russian Revolution -- based on a series of lectures delivered at the Institute for Human Sciences in Vienna in 1995 -- is a controversial work that reveals much about the early years of the Soviet Union, disproving a number of popular statist notions of Soviet history.

The book seeks to answer three often-asked questions regarding the 1917 revolution in Russia: (1) Why did tsarism fall? (2) Why did the Bolsheviks triumph over other revolutionary parties? and (3) Why did Stalin succeeded Lenin? Though the book takes on a tone quite biased against the Bolsheviks (and seemingly against Marxism in general), other histories told of the USSR, as well as previously classified documents, confirm Pipes’ suspicions and validate his theories on the Russian revolution, its causes, and its outcome.

Pipes’ bias against the Soviet Union and the Bolshevik Party (later the Communist Party of the USSR) stems from his Polish background, having lived in a post-First World War Poland in which the effects of Poland’s war against Red Russia (Russian Civil War) were still widely felt in his motherland. Though biased against the Bolsheviks and the Soviet Union in general, Pipes’ theories, statements, and generalizations (summaries of points from his books The Russian Revolution and Russia Under the Bolshevik Regime) are substantiated by his research of formerly top-secret documents from Russia’s Presidential Archive and the Centre for the Preservation of the Study of Documents of Recent History.

Capitalism and Love

Jun 20, 2012 at 11:33 AM

By Angelica Malik

What the world needs more of is love.

Few would disagree with this statement. Even the most ardent statist wouldn’t dare doubt the power of romantic love nor the happiness it breeds in those caught within it. But what many have failed to appreciate is the connection between capitalism and love as we know it.

Most Americans view romantic love today as the ultimate truth; something completely individualistic, to be found freely without coercion, and to be nurtured throughout one’s life through a lifelong commitment and marriage. Yet this is drastically different than the way love has been treated throughout history; it is vastly different than the way it is currently thought of in many countries today . Love is the same the world over, but the freedom to pursue romantic love as a means to marriage is largely a western tradition that has coincided with the growth of markets. While love in America often means a relationship with the end goal of marriage, many individuals throughout history have had their marriages arranged by family, often without any consideration for the ideas of love or affection.