Flashback – Robbing Peter to Pay Paul

[Here, from over seven years ago, are some examples of government actions showing how failures in economic understanding lead to bad outcomes. Politicians will never change their tactics and sales pitch until voters wise up. In many cases we have to lead the people we elected  away from senseless legislation with hidden, but predictable, consequences.]

When I call for economic understanding by saying that there is no magic money tree, here is what I mean. When corporations incur added costs, whether it be shoplifting, a utility rate increase, wage increases or higher taxes, they find a way to pass the cost along to their customers, usually as higher prices. When governments decide to spend more money, they either raise taxes or borrow, leaving the taxpayers to absorb the cost directly or pay the interest now and leave the principle repayment to future generations.  No magic money tree means that the funds must come from somewhere, not out of thin air, and that somewhere is usually from our wallets, directly or indirectly.  The consumer/taxpayer is the bottom of the economic food chain.

As 2013 begins, the Affordable Care Act (ObamaCare) requires manufacturers of medical devices to pay an excise tax, 2.3% of sales. Besides the possibility of reducing costs by outsourcing to other countries and reducing development budgets, the industry also hints that the added costs will result in a price increase. As this article points out:  “Recent surveys show that medical technology executives are examining a host of other options that will have negative consequences, including passing along the added costs through price increases.” (Emphasis added) Those of us who don’t believe in a magic money tree are not at all surprised.

But look at how circular this situation becomes. The government adds a tax to help offset the cost of healthcare. The companies pay the tax by raising prices. Healthcare providers, doctors and hospitals, raise their prices to account for their now higher costs. Insurance companies raise their premiums or co-pays to account for their now higher costs. The government uses the tax money to subsidize health insurance that is now more expensive due to the tax itself! If anything, the cost of the whole system increases due to the added administration associated with paying and collecting a new tax.

In an economy such as ours, this concept of punishing greedy companies with taxes or penalties doesn’t seem to work very well, and why would we even want to punish someone who provides us with a product or service that we want or need? In general, magic-money-tree thinking leads to a host of unintended consequences.  

As citizens and voters we can solve this, but not until we stop thinking this way ourselves. This type of logic drives decisions by both parties at all levels. They tell us that most of a project will be paid for by a federal government grant, as if that's not our money too.  They try to make us believe that corporations pay taxes by just reducing their profits or paying their CEO less. They spend as if the bills will never have to be paid, as if there is some magic money tree or secret treasury to make it all right.  

No Magic Money Tree

For years I have been patiently explaining how unbelievable it is that people go through life putting their faith in some magic money tree to take care of their problems. They spend instead of save, then stress about the cost of education and retirement. They expect a lifeline to bail them out – money off some magic tree. Buy now, pay later, and don’t worry about the consequences, just continue to borrow and play the lottery.

As the government increases spending, it makes no impression on them except to feel good that some people are getting more goods and services for free. If a big business is fined or sued, people assume there is some invisible bank account to cover the expenses. (Maybe the CEO will take a pay cut.) Americans fail to see the unbreakable link, either direct or indirect, between these expenditures and their own wallets.

Here are the facts. There is NO magic money tree! The money always comes from somewhere, and that always has ramifications for every single citizen: higher prices, higher taxes, a sluggish economy or a bigger share of the National Debt. The poor are usually disproportionately hurt.

When the business gets an unexpected expense, they raise prices and pass it along to their customers. This is easy when it’s due to a new government regulation that affects the entire industry. No one has an advantage, and everyone’s prices go up to cover the added cost. If it affects only one company and raising prices makes them non-competitive, they risk going out of business or downsizing, and people lose jobs.

When the government increases spending, it comes from taxes and debt. For many years lawmakers seem to have more interest in using some combination of lower taxes and increased spending to buy votes than in acting responsibly. (In fact, they characterize a lower than expected increase as a “cut.”) This has pushed the National Debt to unimaginable levels, currently over $26 trillion. Now Congress is fighting with the President over whether to spend $3 trillion or only $1 trillion on another emergency COVID package! Where do they think that money is coming from? 

The debt, in the form of government bonds is interest-only. Payments do not lower what is owed. Growing debt leads to more interest, which holds back economic growth. Fiscal irresponsibility can lead to inflation, which also affects everyone.

Many economists tell us not to worry, despite what happened to Greece in the recent past when their debt got out of hand. In 2017, years after the initial crisis, its economy grew by only 1.4% with unemployment around 22% and one-third of the population living below the poverty line. The EU bailed them out to some degree, but there is no entity big enough to bail out the US.

It’s a simple matter of critical thinking to understand that this issue is going to become a crisis some day, but as the problem grows, no one seems concerned. Behavior has not changed. Politicians still win elections by promising more spending and programs. Even numbers in the trillions get a ho-hum response. 

Everyone must assume there is some magic money tree somewhere; but there isn’t. 

Flashback – Social Security Myths

[Here is a brief excerpt from a long rant on Facebook about how unfair the Social Security system is and looking for support. 

“This is NOT a benefit. It is OUR money, paid out of our earned income! Not only did we all contribute to Social Security but our employers did too! It totaled 15% of our income before taxes. (This should be enough for you to forward this message, If not read on.)”

Despite my posting only 6 months ago the following full explanation of why this idea is complete hogwash, the misunderstanding continues. If you pass anything along, this should be it, because it is the truth.]

People keep saying and posting on social media thoughts on Social Security that are dead wrong. These myths and misconceptions have been going around for years, and apparently too few people take the initiative to look for the facts. Instead they express righteous indignation against an imagined injustice that they can't control. Their anger and frustration are amplified by cowardly politicians eager to feed into the fear in order to blame the other side rather than to do anything about it . 

First: It’s my money. I paid in, and I expect to get it back. (Wrong)

Second: Congress raided the Social Security trust fund to pay for their pet projects and wars. (Wrong)

The concept behind Social Security is that the government collects money from working people, salaries and wages, to pay retirees at a set rate. Here is the way the government explains it: “Under a pay-as-you-go program…, the taxes of each generation are used to pay for benefits to prior generations and are not used to advance fund their own benefits.” The money you paid in goes to pay someone else; it's not set aside for you.

Previously, there were far fewer retirees than workers, so SSA collected more than they paid out. Surplus funds were (by law) invested in government bonds. Like any other investment in bonds, they accumulated interest. By a recent estimate, Social Security earns $80 million per year from the interest on this investment.

That surplus is sometimes referred to as a trust fund, giving the false impression that they are holding your money in a separate account to fund your retirement. As shown above, this is clearly not the case. Money collected this month is paid out to retirees this month with any excess invested. As more people retire and live longer, the surplus has gotten smaller. Beginning very soon there will be no surplus. Social Security will begin cashing in those bonds to cover monthly payments. 

By 2032 the surplus is expected to be used up. The only money available to pay out will be the money collected. That amount will cover only about 75% of the set rate. For many years politicians have avoided trying to fix this problem, because anyone who mentions it is accused of stealing from old people, instead of trying to address a known problem.

What about raiding the mythical trust fund? The reason a government (or any other entity) issues bonds is to borrow money from investors. They can use that money in any way they wish. There has been no raiding or stealing. They treat money borrowed from Social Security the same as any borrowed from any other bondholder. They spend it. Otherwise they wouldn't borrow it in the first place! As mentioned above, they also must pay interest on the money borrowed - that's the opposite of raiding. 

At times the government has changed the way it accounts for Social Security collections. Sometimes they were counted separately and sometimes they were included with all other tax revenues. This affects only how the deficit is calculated and reported. It has nothing to do with how much is available to pay out but has been misrepresented as raiding. CBS News debunked this myth back in 2012, but did anyone listen?

Furthermore, the agreed payout can be and has been unilaterally changed many times in the past. A cost of living adjustment was added in 1975. The month when that adjustment was applied changed in 1983. Part of the payment became taxable in 1984. The age for full retirement was adjusted in 1983. The contribution rate has grown since its inception and the cap changes every year with inflation. 

That means the government can change the rules if necessary. Here is how the Social Security Administration explains it. “We use the term obligation in lieu of the term liability because liability generally indicates a contractual or legal obligation. No contractual or legal obligation exists for paying full scheduled benefits on time once the trust fund reserves are depleted. In fact, current law requires that, when the trust fund reserves are depleted, benefits paid should match income received.”

It’s not your money. There was no raiding. There is no firm promise to pay, and it was never meant as the sole source of retirement income. Look it up!

(Also, for a full explanation of whether Social Security is an entitlement follow this link.)

Both Sides of Tax Responsibility

Have you heard that radio ad about the tax relief company starring Louie? A man identifying himself as Louie says that he did not pay his taxes for eight years and now he is in trouble with the IRS. No kidding?

Think of all the people who sweat over their taxes every year for fear of being audited. Actually, few people sweat over their own taxes. Less than half file them themselves, and three-quarters of those self-filers use purchased software. Nonetheless, very few are casual enough (or careless enough) to let it go for eight years. 

To be in this situation is slightly understandable for a small business operating on the edge of solvency with inexperienced entrepreneurs trying to keep up on all the paperwork, but Louie sounds like an ordinary individual who is now terrified that the IRS is coming to confiscate his house, his bank accounts and his car.

It’s a little hard to feel sorry for the guy. Everyone else is trying to be conscientious about the annual chore, motivated either by fear or responsibility. Do people like Louie just assume that the rest of us will take up the slack for him and his fellow scofflaws? 

Regardless of the circumstances, in rides that tax relief firm to the rescue. They will negotiate with the IRS and help reduce what he owes based on their experience and understanding of the various hardship and forgiveness programs. So the people that let it ride, if they qualify, pay the firm a fee and pay the government less than what they would ordinarily owe. What a sweet deal! And all the people harping on the issue of not paying “your fair share” are silent about these sorts of arrangements.

These firms, not just one or two of them but over 100 listed on this review website, are proudly advertising ways to not pay a fair share. And it ‘s not some philosophical fair share. It’s a reduction to “pennies on the dollar” from the actual calculation after taking all the legal deductions and exemptions. Where is the outrage?

On the other hand, part of their message if you find yourself in this situation is, “Don’t go it alone.” Don’t try to take on the IRS without an expert. On that point they are right. The government has unlimited resources. They can use both force of law and delays of the legal system and bureaucracy to take your possessions and bleed you dry on appeal.

IRS tactics can be similar to another program called civil asset forfeiture. (This information comes from a news article from Alabama where they tried unsuccessfully to change the law.) “Under civil forfeiture, the government may take someone’s property as soon as they are accused of a crime, without that person having been convicted or, in some cases, even charged.” Suspected criminals can lose cash and physical assets without due process. “Even when charges are dropped or the accused is found not guilty, those accused often find it difficult to get their property back. Some never do.”

So whereas I can look at Louie and people like him and despair over their lack of responsibility – there must be a healthy number of them to keep 114 tax relief companies on the list in business – I can also see the necessity of such businesses to protect citizens from a likely abuse of their rights anytime they are even accused. If everyone in America was conscientious about filing honestly and on time, it would remove the need for these firms to exist, but it wouldn’t eliminate the threat from a heavy-handed government agency in this and other areas.

Facemasks and Climate Change

According to many, facemasks have become political. There is a little indication that the difference of opinion between wearing and not wearing a face covering divides along party lines, but the real similarity to politics is that most people have made up their minds and will try to badger the other side into compliance. Some suggest a federal mandate.

Today doctors state that wearing a facemask is the right thing to do, but going back only a few months expert opinion was the opposite.

Here is an explanation I read last week on the fivethirtyeight site. “The data that existed on mask effectiveness largely dealt with medical respirators and surgical masks. It wasn’t clear how protective a cloth mask would be.” 

Initially the experts thought “wearing masks might lead people to feel more safe than they actually were – and make choices that increased their risk of contracting or transmitting COVID-19.” The change in stance came “not because the evidence has significantly improved,” but because a sentiment spread that to wear one expressed caring about other people. The switch on mask wearing was based not on science but on a shift of the assumption about the perceived psychological effect – overconfidence vs. awareness. “Behavioral norms also matter, regardless of how much evidence backs them up.”

But once the behavioral norms machine starts moving, everything else including common courtesy and tolerance toward differing opinions go by the way side.” Most service workers where I shop wear a mask. Some don’t, but they practice social distancing; in my state/county it’s still a personal choice. A niece working in retail reports that wearing her mask all day at work gets extremely uncomfortable, but if she takes it off, customers will pull down their own masks to yell in her face how inconsiderate she is.

From the above article: “a public health and disease expert who is worried that mask effectiveness is being over-hyped, has also found himself threatened and harassed” by email and on social media for merely expressing doubt about “how effective DIY cloth masks are.” 

This passionate and aggressive defense of opinion and unwillingness to consider alternative ideas came to mind as I read the next article in Wired.

A potential solution to slowing and possibly solving climate change could be on the horizon. A couple of companies are teaming with the Department of Energy to develop an idea that has been around for a while, but was formerly too cost prohibitive, tristructural isotropic (Triso) fuel. It is made by sealing small particles of a mixture of low enriched uranium and oxygen inside a protective shell. The fuel can be used to power small nuclear reactors. “Not only will these reactors be smaller and more efficient than current nuclear power plants, but their designers claim they’ll be virtually meltdown-proof,” as the particle can withstand temperatures far above the limit beyond which the reactor will automatically shut down.

Nuclear is by far the best solution to carbon-free power generation. It is more efficient and has a much smaller ecological footprint than wind and solar. And, Forbes reminds us, “Study after study in top scientific journals find that nuclear power plants are far and away the safest way to make reliable electricity.” And with the danger of meltdown eliminated, “rather than needing to have miles of open space around a reactor, future plants running on triso fuel could be situated close to their users.” NASA is considering it for nuclear powered spacecraft. 

This could be a dream come true with houses, factories and refueling stations for electric cars powered by meltdown-proof, non-polluting reactors. But in the blink of an eye, opponents will dub it the nightmare of the future with dire warnings of radiation poisoning and other terrifying predictions, accusing proponents of putting profit above caring for others. Can we count on the American public to consider the science before flying into a panic?

Will “behavior norms” quickly develop and, like the Germans who thought it was smart to phase out their nuclear power program in favor of dependency on coal and Russian oil and gas, will Americans likely reject it, harassing defenders and voting out politicians. Based on other behavioral evidence, that’s my fear. 

Flashback - Diet Soda and Depression

[I wrote this over seven years ago about another meaningless study meant to make disturbing headlines for the news media and possibly to attract more funding for the researchers. The only party left out of the equation, as usual, was we, the consumers.] 

I have mentioned before the tendency of journalists and the media to try to get and hold our attention with emotionally charged pictures and stories. We regularly see news about the results of studies that seem surprising, scary, or shocking, but they are often somewhat meaningless. They challenge our ability to remain calm and think rationally about the subject. Here is another example.

“A new study finds that people who drink diet sodas or fruit drinks are more likely to be diagnosed with depression.” The article continues very responsibly to explain the size and nature of the study and to emphasize that a link does not necessarily mean that drinking diet sodas causes depression, but the headline - "Drinking diet soda linked to depression" – has us hooked. (With sugary soft drinks being blamed for obesity - blame the soda, not the person drinking it - our choices are narrowing.)

Thinking critically about it, we know that correlation is not the same as causation. "Linked to" isn't the same as "caused by." We may wonder what we are supposed to do with this information – stop drinking diet soda so to avoid depression or start drinking lots of coffee, which the article tells us may have the opposite effect? I don’t think it works that way.

Later in the article they say, “more research is needed.” So what was the point?

Why should we even care about these kinds of studies that give preliminary findings, or publicize findings before they are presented for formal review, or rely heavily on self-reporting as opposed to objective observation?  As I pointed out before, we don’t have the time or energy to be worried about everything, so there is nothing really useful about such news. But it does make for catchy headlines.

[After all this time nothing has changed. Basically meaningless preliminary studies continue to be published and highlighted in the news almost daily, and it won’t stop until a large number of Americans wise up to the tactics.

On second thought, one thing has changed. Judging from comments on social media, some people do have time to worry and express an opinion about everything, but that's another topic. ]

Black Raspberries

Without a doubt black raspberries are good for you. They contain more antioxidants than most other fruits along with anthocyanin, ellagic acid, Vitamin A, Vitamin C, Calcium and many other nutrients. But let’s not get carried away!

The subject came up in one of those health stories on the news last week. The big announcement was that a new study indicates that eating black raspberries might reduce inflammation associated with skin allergies.

The story went on to say that in a study done with mice at Ohio State University and recently published in Nutrients “found that a diet high in black raspberries reduced inflammation from contact hypersensitivity.” They fed one set of mice a normal diet while another set had the equivalent of a daily serving of black raspberries added to their diets. After three weeks the ears of all the mice were exposed to an irritant “that caused contact hypersensitivity. Then, they measured the reductions in swelling, comparing the ears of each mouse.” It turned out that the swelling went down more quickly in the group of black raspberry eaters.

This is interesting and promising, but why does it make the news? Mice are not the same as people, or else drug companies could save a lot of time on human trials. They plainly state, as do most initial studies that it was “an early indication that those benefits might exist” and “more work needs to be done.” 

The health benefits of black raspberries are well known. Other studies both at OSU and elsewhere have shown promise in reducing inflammation associated with some types of cancer. The National Institutes of Health (NIH) published this paper on the benefits of the anti-inflammatory properties of freeze dried black raspberries on ulcerative colitis, a disease that can dramatically increase the risk of colon cancers. Again, the studies were done with mice, not people.

From another OSU press release three years ago: “The researchers have demonstrated the remarkable ability of black raspberries to reduce the development of tumors in animal models of cancer, including the oral cavity, esophagus, and colon.” At that point they were ready to start some limited human trials and were soliciting smokers to test whether giving them regular doses of a black raspberry-rich drink could “protect [them] from oral disease and lower the risk of oral cancer.”

They are clear in their conclusions however. This does not necessarily mean that black raspberries prevent cancer.. “A definitive human study to answer that question would take decades and be cost prohibitive. Instead, researchers will continue to evaluate the influence of berries on biomarkers of cancer in both animal models and short-term clinical trials.”

Of course that sounds too much like science and doesn’t prevent this website from boldly proclaiming: “Black raspberries are a cancer-fighting superfood,” while pushing copies of his book.

This is so typical. News organizations release as health news a preliminary study done with mice, as they cover the TV screen with stock footage of berries at the grocery store. It's an easy job; they don't have to do any work to get the story. Meanwhile, limited studies and early indications are misrepresented as definitive results and to promote the superfood du jour. (A few years ago açaí berries were the new superfood.)

All this hype comes around regularly because Americans tend to ignore the details (critical thinking) and look for the easy answers in the form of supplements and superfoods (discipline). 

Flashback – Teacher Pay

[The value of a teacher reflects how much we value education. I wrote about this in January 2013.]

Here is the problem. Teachers have one of the most important jobs in society, teaching our children.  They must have a college degree, but their pay and benefits are comparable to those who work in unionized manufacturing jobs. Professional football players and other entertainers provide a service that is totally unnecessary for our survival, yet they are paid ten to twenty times as much as teachers with top end athletes getting tens of millions of dollars. It challenges our sense of fairness. How could we let that happen?

Maybe the answer lies in behavior, specifically in the dimension of perspective.

If we decide to take our family to a college or professional football game, it could easily cost us around $500. That includes 4 tickets, parking, food and drinks and a souvenir or two. Of course this assumes that we can even get tickets for a single game, because in some places the demand is so high.  This is for a single game and doesn’t even address the idea of season tickets. On the other hand, if the city decided to raise our taxes by $500 per year to pay the teachers better, most people would join the mob storming city hall in protest. (This link shows a non-scientific poll of Massachusetts voters when the governor suggested raising income taxes to support schools and highways. They were very unhappy.) 

But our willingness to support our favorite team doesn’t stop there. We will set aside 3 or more hours each weekend to cheer them on. We buy their clothing, intently watch and critique the players, coaches and officials. Players who miss blocks or tackles, players who drop passes and coaches who don’t make it to a bowl game or a playoff game are fired with our approval. The stars have us hanging on their every word and buying the products they endorse. On the other hand, ask us to commit an hour per month or less to attend a PTA meeting or a teacher’s conference, and we react negatively or indifferently. It seems like an imposition.

Finally, teachers do not do one of the most important jobs in society alone. They are part of a team that provides that service. The team consists of teachers, parents and the students themselves. Asking teachers to do it alone is like asking the offense to win games without a defense. Do parents believe they are part of the educational team or are they too quick to let the teachers do the hard work and then side with their child against the teacher when problems arise? Should parents be held accountable for daily assignments and for student preparation, both in terms of learning and of their attitude toward learning? If there were more parental involvement, if children arrived at school expecting to learn rather than expecting to be entertained, would there be such a cry for smaller class sizes?

Perhaps teachers aren’t paid what they should be based on their contribution to society. Perhaps athletes and other entertainers are paid too much. We are the ones making those decisions by what we choose to support and what we choose to ignore. Again it’s about our behavior: our values, our choices, our perspective.

[Over the past 6 months or so, America has seen many statues torn down. One question might be: how will this affect the 14-year-old African-American student of today? Will a greater percentage be motivated to finish high school with the skills needed to get a good job or go on to college? Will they choose to prioritize education over being accused of “acting white” by their peers? Will their parents actively support the children and their teachers in those goals? Will they perhaps even become role models for all younger students. The answer will come in four years. This may be yet another area to positively channel that anger and frustration to achieve improvements in this tumultuous time.

The message, as it has been for the past 940 entries to all Americans, is how much success we can achieve on our own with strong behavior in the key dimensions.]