Raising the Ceiling on the National Debt

Consider a car racing down a highway at 150 miles per hour. Then consider that the highway leads to a river - quite a few miles away - and that the bridge over the river has collapsed. If nothing is done, the car will wind up in the river. The solution to this problem is relatively simple: slow down and stop before disaster occurs.

That analogy quite reasonably describes the United States government's twin deficit and debt problems. The rate of government spending is well over any sensible speed (the annual deficit is around ~ $1.5 trillion per year) and, as the national debt increases, the time approaches when lenders vanish and our car, as it were, sails into the river where we all drown.

The solution is for the driver of the car to take his foot off the accelerator, apply the brakes and stop before reaching the river. Admittedly this will take a bit of time and distance but both of these are still available - at least for a while. So too, for the government: stop out of control growth in spending (foot off accelerator) and start making serious cuts (apply the brakes). It will take a few years but, properly executed, the deficit and debt problems will be solved without major damage to the economy.

To claim that the problem of excessive government overspending can be solved by refusing to raise the debt ceiling is the equivalent of proposing that the best way to stop a speeding car is to run it into a tree. Undoubtedly that course of action will work but, as is too often the case, the side effects of the cure are likely to be worse than the disease.

Perhaps the ideologues - on both sides - will pick the sensible solution, before the bond markets over-react, but your correspondent does not believe that holding his breath will do anything other than make him blue in the face.

Headscratcher (12)

The most important feature of Hong Kong's tax law is a flat income tax with a universal rate of fifteen percent. Their entire tax law is written in about two hundred pages.

The United States tax code, as of 2010, filled seventy one thousand, six hundred and eighty four pages.

Taking into account all forms of revenue, the tax burden in Hong Kong is just under 16% of Gross Domestic Product. In the United States, taxes raised by the Federal government, between 1970 and 2009 averaged a little over 18% of GDP while inflicting top marginal rates of as much as 70% (prior to 1981) on the better off and rich. That the top marginal rate of tax is now "only" 35% is an improvement but still higher than is either fair or economically effective.

Few complain much about the relatively simple Hong Kong tax code, which raises almost as much as does the IRS, while almost everyone complains about the insane complexity of the IRS Code.

The difference, of course, is that the United States uses the tax code to engage in social engineering while partially - but only partially - mitigating the punitive effects of the higher marginal tax rates with a bizarre array of deductions, exemptions, and credits designed to reward favored groups and buy votes.

It is strange that there is not a single Representative or Senator who has dared to introduce a Tax Reform Bill based on the Hong Kong Tax Law. There are two features in every word processor that should make the task easy: they are 'copy' and 'paste'.

President Reagan made a good start with the 1986 Tax Reform but, in the past twenty five years, self serving politicians have largely emasculated that excellent piece of legislation. That Mr. Reagan's professed admirers are so disinclined to act is a headscratcher indeed!

Where Next?

Since the beginning of George H.W. Bush's Presidency in 1989, the United States has been in involved in major military actions in Panama, Iraq, Bosnia, Somalia, Kosovo, Iraq (again), Afghanistan, Somalia (again but at least only naval forces protecting against piracy in the Indian Ocean) and Libya. One may also suspect that small groups of special forces have been active in other countries.

In 1859, responding to a group of New Jersey legislators who were pushing for him to run for President, Cornelius Vanderbilt wrote:

"I am well satisfied that all of the results that have attended the labors of my life are attributable to the simple rule which I early adopted, to mind my own business…

Nor can I suggest one more appropriate for the regulation and conduct of the foreign policy of the American people."

Were our leaders to learn from the wise words of the Commodore, the question 'where next?' could, mercifully, be put to sleep - at least for a while.

Penny Wise and Pound Foolish

Reducing government expenditure is critical but those who would cut budgets need to remember the old adage that it is easy to be penny wise and pound foolish.

In a short sighted attempt to save a relative pittance - at the expense of reliability and performance - the Pentagon and Congress have canceled the development of a second engine for the F-35 Joint Strike Fighter which, in various versions, will replace all existing fighters (except the F-22) used by the Air Force, Navy and Marine Corps. It will also be sold to a number of allied nations. The total production run is expected to be at least 3,000 and possibly as many as 4,000 aircraft.

The history of sole source procurement provides a simple lesson: it is rare that the frequently conflicting goals of quality, reliability, performance and cost are met. When the F-15, F-16 and F-14 fighters first went into service, the engines were procured on sole source contracts. Verne Orr, Secretary of the Air Force and John Lehman, Secretary of the Navy, were instrumental in developing second engines for these aircraft. John Lehman, in an article published in the New York Post (click here to read the entire article), describes what happened:

"Nowhere was the wisdom of annual competition better demonstrated than in the establishment of an alternative engine for the Air Force F-15 and F-16 fighters. Despite strong opposition from his own bureaucracy, Air Force Secretary Verne Orr, fed up with constant cost growth and repeated grounding of all fighters due to flaws in the sole-source engine, forced through the qualification of an alternative engine and contractor, and had the two compete every year thereafter.

The benefits from this annual competition came swiftly, were many and have endured. There was steady improvement in reliability, performance and fuel economy and a dramatic drop in engine-caused accidents. By the second year of full competition, the cost per engine had dropped 20 percent. The Navy soon followed suit in choosing an alternative engine for the F-14 with similar benefits."

Following the Congress's refusal to appropriate funds to continue the development of the second engine for the F-35, the Pentagon bureaucracy has issued a 'Stop Work' order, as of March 31, 2011, to General Electric and Rolls Royce. The result is to leave Pratt and Whitney as the sole source provider. Given relentless pressure from the military for more features - and yet more features, all of which cause the sky to be blackened by streams of criss-crossing [and extremely profitable] change orders and contract modifications, it can reliably be predicted that the resulting engines will suffer from performance and reliability issues. Meanwhile costs will escalate uncontrollably.

The only small consolation is that General Electric has decided, at its own expense, to keep a small development team at work on the second engine. When politicians and the bureaucracy realize, or are forced to accept the fact, that competition in defense procurement is essential, it may yet be possible to realize some of the same benefits that Secretaries Orr and Lehman obtained for us in the 1980s.

Karl Marx claimed that history repeats itself, first as tragedy, second as farce but the F-35 situation simply seems to embody both tragedy and farce in equal portions.

Courage and Failure

Senator John McCain, in a lengthy article published in 2004 - a year in which he was not a Presidential candidate, discusses courage, failure, and responsibility. What he wrote then is more applicable now than ever.

"Courage is like a muscle. The more we exercise it, the stronger it gets. I sometimes worry that our collective courage is growing weaker from disuse.

We don't demand it from our leaders, and our leaders don't demand it from us. The courage deficit is both our problem and our fault. As a result, too many leaders in the public and private sectors lack the courage necessary to honor their obligations to others and to uphold the essential values of leadership. Often, they display a startling lack of accountability for their mistakes and a desire to put their own self-interest above the common good.

That means trouble for us all, because courage is the enforcing virtue, the one that makes possible all the other virtues common to exceptional leaders: honesty, integrity, confidence, compassion, and humility. In short, leaders who lack courage aren't leaders."

Later, he touches succinctly on the fact that, now, there is little accountability for failure:

"When no one takes responsibility for failure, or when responsibility is so broadly shared that individual accountability is ignored, then failure in public office becomes acceptable. It's hard to see how that serves the country."

Of particular note is what drives him, as often as possible, to do the right thing:

"In the past, I've been able to overcome my own fears because of an acute sense of an even greater fear -- that of feeling remorse. You can live with pain. You can live with embarrassment. Remorse is an awful companion."

The President and Congress will need all of their courage - and sense of accountability - as they address the extreme financial problems of our nation. If we are lucky, Senator McCain (although, in his own words, no economic expert) will be in the forefront - leading by example. Even though his two presidential campaigns were unsuccessful, Senator McCain still has much to give his country.

A link to the entire article can be found here.

Sleeping on the Job

Good management consultants are very well aware that poor performance on the part of employees is often (not always, admittedly) caused by system problems rather than by idleness, incompetence or lack of training and qualifications.

During the past three weeks, the media's response to reports of air traffic controllers who fell asleep on the job - leaving aircraft to land without direction from the tower - bring to mind the hypocritical words of Police Captain Louis Renault in the 1942 movie Casablanca: "I'm shocked, shocked to find gambling..." A fair question, however, is to ask whether there are many people who can reasonably work the midnight shift, in an environment where there is little activity, and not spend a significant amount of time fighting against sleep - and sometimes losing the battle.

The fault lies with the Federal Aviation Administration (FAA) which, in a shortsighted attempt to save money, assigned a single controller to midnight shifts at many airports where there is only sporadic activity during that time period. That the FAA's system created the problem, rather than the employees, is clear.

While the controllers in question have been suspended from their jobs pending the investigation, your correspondent believes that all of them, save only the one who made himself a bed of cushions and slept deliberately, should be exonerated. The solution is to have a minimum of two controllers in each tower on midnight shift, regardless of the expected level of activity. That is now the case and, since one of their priorities will be to keep each other awake, sleeping can now legitimately be considered grounds for disciplinary action.

In a workplace where poor performance can cost many lives, holding employees accountable is critical. Management, however, must do its part by providing the necessary resources. That Hank Krakowski, Chief of Air Traffic Control at the FAA, accepted responsibility and resigned is honorable: the fact that the National Air Traffic Controllers Association (the controllers' union) has been asking the FAA to address this issue for twenty years points out the real issue.

What other critical issues has the FAA left untended? For all our sake's let us hope that they are few and none are critical.

What's Next?

The media are full of reports that the government is now funded for the balance of the fiscal year. These reports are misleading - at best.

The real situation is that an agreement has been reached on the general contents of such a bill. To enable the real bill to be written, yet another short term Continuing Resolution, expiring on Thursday at midnight, was passed. While it is probable that the bill will pass the House, it will likely only be on a close vote. Many Democrats believe that the cuts are excessive and will vote against it while a significant minority of Republicans (of the Tea Party persuasion) are unpersuaded that the cuts are sufficient.

The Tea Party Republicans are right that the outcome is disappointing but they would do well to accept the half loaf of bread and move on to more important issues.

Our country has two critical financial situations facing it. First, a possible default on our debt if the legal limit is not increased and, second, the need to adopt a budget for 2012 which includes a comprehensive and credible medium term strategy for balancing the budget and beginning to pay down the debt.

If the Congress and the President fail at the first task, we will have to ask which of these ugly consequences will occur:

• Prolonged high unemployment?
• Wage and salary cuts?
• More reductions in the value of homes and financial assets?
• Loss of ownership of American companies?
• Price inflation?
• Higher taxes?
• Reductions in government services and benefits?
• All of the above?

Most likely we will suffer all of the above and, if we thought that the Great Recession was ugly, just wait. If they fail at the second task, then the ugly consequences described above will merely be delayed for a year or two.

Meanwhile, at the end of this week, ignoring the fact that the United States will reach its legally permitted limit on the issuance of debt by approximately May 16, members of the House and Senate will leave Washington for two weeks to engage in what is laughably described as a District and State Work Period.

Can anyone in the House or Senate spell V-A-C-A-T-I-O-N?

What are these people are thinking? Are they even thinking at all when they engage in this hypocritical self indulgence at such a time of crisis? Where is the outrage? Where is the political firestorm? Why do we tolerate such behavior from those that were elected to lead and to manage the affairs of our nation?

If we, the People, do not act we can be sure that we have exactly the government that we deserve.

Irony and the Tea Party

A recent article in the Washington Post reports on the activities of the Franklin County Patriots - a so-called Tea Party Group that holds its monthly meeting in Rocky Mount Virginia.

That Tea Party groups adamantly oppose government spending, even on what many would regard as necessary and desirable services, is axiomatic. That the Franklin County Patriots would have welcomed a federal government shut down is a given. That they hold their monthly meeting in the Rocky Mount Public Library - a taxpayer operated facility - at no cost to the group, would be deliciously ironic except for the fact that this is one of the groups driving an ill tempered political debate in which any compromise as regarded as equivalent to treason.

Their hero, former President Ronald Reagan, must be spinning in his grave!

Mark Twain may have described the Franklin County Patriots (and members of the United States Congress) perfectly with these words:

"Sometimes I wonder whether the world is being run by smart people who are putting us on or by imbeciles who really mean it."

Enough said!

Government Shut Down

The United States Government's current fiscal year began on October 1st, 2010.

Last year, as so frequently happens, the Congress failed to pass the necessary appropriations bills before the beginning of the year and, since that time, the government has been operating on a serious of short term Continuing Resolutions. Unless an agreement is reached by midnight today, the government will only have the authority to spend money on non-appropriated items such as entitlements (including Social Security and Medicare), interest on the national debt and other mandatory items.

Of particular note - and an insult to all of us who pay taxes - salaries due to the responsible parties (the President, Members of the House of Representatives and Senators) are a mandatory spending item not subject to Congressional appropriation.

The result will be a partial government shut down: contractors will no longer be paid and employees whose responsibilities do not involve the protection of life or property will be furloughed. Those employees who are considered to be essential, including members of the armed services, will be required to work although there is no assurance that they will actually be paid for their time and effort.

As of now, the difference between the parties is $5 billion which, compared to the projected 2011 deficit of more than $1.3 TRILLION, is trivial. Republicans in the House of Representatives are also insisting on some policy riders, unacceptable to Democrats who control the Senate, relating to regulation of greenhouse gases by the Environmental Administration and abortion.

It is hard to understand why such a small difference regarding spending cuts can not be resolved. Matters of policy, specially those where opposing views are strongly held, should be debated and passed, or not, on their own merits rather than being used to hold critical spending bills hostage. That these issues are a matter of principle for some is one thing but they may wish to consider the old adage that the ends do not justify the means.

In a parliamentary system, legislators are quickly held responsible. Earlier this week, the Portuguese parliament failed to adopt spending cuts proposed by the government. As a result, the Prime Minister announced his resignation and the government fell.

Since our Constitution provides for both the separation of the Executive and Legislative branches and for fixed terms of office, irresponsibility is largely painless - at least in the short term - and the resignation of the government is not an option.

A possible solution is that the President, together with his senior staffers and the Cabinet, as well as all members of the House and Senate should be locked in an empty, unheated, warehouse with no food, water, furniture, or access to a bathroom until they have agreed on a bill to fund the government through the remainder of the fiscal year.

It would have been better had they been locked up on Monday but, since the damage resulting from a weekend shutdown is serious, but not critical, today would be better than not at all.

Nuclear Power

Murphy's Law says that whatever can go wrong, will go wrong, at the worst possible time. A corollary to Murphy's Law states that Murphy was an optimist.

A more subtle description of the ongoing disaster at the Fukushima Daiichi nuclear power plant is suggested by this quote attributed to engineer James Arnhein in the book Forensic Engineering written by Professor Kenneth Carper:

"Engineering: the art and science of molding materials we do not fully understand; into shapes we cannot precisely analyze; to resist forces we cannot accurately predict; all in such a way that the society at large is given no reason to suspect the extent of our ignorance."

Knowing this, design engineers generally add additional safety margins (i.e. fudge factors) as they attempt to compensate for the limits of their knowledge and of the unknown - perhaps even unknowable - events that may take place. Whether the problem is operator error, outside intervention, a catastrophic natural disaster, or some combination of all of these, human imagination is frequently unable to conceive of the forces, stresses and malfunctions that may actually take place.

On the other hand, a design that attempts to guard against every possible event, or combination of events, whether known or unknown and no matter how unlikely, will not only be uneconomic but, according to Murphy, will still malfunction. Since that is so, designers must rely on the much maligned cost-benefit analysis which, for all its appearance of objectivity, is essentially a political - sometimes a legal - rather than a technical decision.

Without minimizing the potential danger posed by nuclear reactors, the consequences so far (none dead and cost of $24 - $30 billion to replace the destroyed reactors) are almost trivial compared to the damage and loss of life (more than ten thousand dead and some $235 billion in property damage) caused by the earthquake and tsunami.

In spite of all of the shouting and fuss about this latest disaster, there is one simple reality: life can not be a totally risk free adventure. It would be useful if the public were to get used to that idea - sooner rather than later.