Monthly Archives: May 2016

The Interest rate on the debt is low and is that good?

Chapter 17

The Interest rate on the debt is low and is that good?

The current interest rate that we, as tax payers, are paying is just under 2.4%. That rate seems to be more than fair given the rates on other securities, but just what does this mean?

First, let’s examine the reasons for this historically low rate. There are primarily two factors at work. The FED is making every effort to maintain artificially low rates in the US as compared to other countries with the idea that this will assist in stimulating the economy. Following is from the FED (

“The financial crisis that began in 2007 was the most intense period of global financial strains since the Great Depression, and it led to a deep and prolonged global economic downturn. The Federal Reserve took extraordinary actions in response to the financial crisis to help stabilize the U.S. economy and financial system. These actions included reducing the level of short-term interest rates to near zero. In addition, to reduce longer-term interest rates and thus provide further support for the U.S. economy, the Federal Reserve purchased large quantities of longer-term Treasury securities and longer-term securities issued or guaranteed by government-sponsored agencies such as Fannie Mae or Freddie Mac. Low interest rates help households and businesses finance new spending and help support the prices of many other assets, such as stocks and houses.

By law, the Federal Reserve conducts monetary policy to achieve maximum employment, stable prices, and moderate long-term interest rates. Information indicates that economic activity is expanding at a moderate pace. Labor market conditions have improved, however, a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing. At the same time, the Federal Open Market Committee judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year, and survey-based measures of longer-term inflation expectations have remained stable.”

Unfortunately this strategy has, so far, not produced the desired result, the economy remains sluggish and in fact retail sales declined in the first quarter of 2015.

“US Retail Sales Decline For Third Straight Month

Source: Sales in U.S. retail and food stores unexpectedly decreased 0.6 percent from the previous month, following a 0.8 percent drop in January as cold weather kept consumers from shopping malls and car dealers. It was the first time since 2012 that sales had dropped for three consecutive months.”

Of course this result will demand that the FED continue to artificially depress interest rates.

Why do I say that the rate is artificial? Let’s examine a more stable economy with a modest growth rate and one that has a much lower per capita national debt. Here I use New Zealand as an example. It is difficult to find a short term rate at any US Bank over 1%, while the 120 day term rate for KIWI Bank as of the date of this writing is 4.4%!!

What would be the impact on the US taxpayer should the current interest rate double. The answer is that we would incur an additional $500 Billion in costs!

Our Insane Federal Tax Code

Chapter 16

Our Insane Federal Tax Code

Our system of taxes is truly messed up. I have been filing and paying (or not paying) taxes for almost 50 years and can safely safe that the process becomes more convoluted and complicated each year. It also has created an entire industry of non-productive workers in order to process paper, quasi legal firms that live off negotiating reductions and ten times the required number of IRS workers (approx.. 100,000) that these taxes fund! Using the average Civil Service salaries from the prior chapter and an average tax & benefit rate of 25% this amounts to just over $8.9 Billion!

You have heard several potential solutions to this issue and here is my suggestion:

An average flat income tax of (5%) on all gross income except for capital gains. My math could be a bit off here, but the rate stated should be close to working. I would segment this into five categories with gross incomes at or below the poverty level at 0% (currently $25,000 for a family of 4). I would not provide incentives for larger families). For incomes from $25,000 to $50,000 I would make the rate 2%, from $50,000 to $100,000  4%, from $100,000 – $250,000 6%, from $250,000 – $500,000 at 8%,  and all over $500,000 at 10%. These rates would become the automatic withholding and there would be no deductions

The above would not change either SS or Medicare tax rates.

I would completely eliminate capital gains taxes. Instead I would propose an annual tax on wealth (assets minus liabilities). The proposed rates would be: 1% for under $500,000, 1.5% for $500,000 – $1,000,000, 2% for $1,000,000 to $5,000,000 and 3% for $5,000,000 to $100,000,000 and 4% over $100,000,000.

Also, a flat national sales tax at 2% on all business sales at retail. I would completely eliminate corporate income taxes.

At this time I would not suggest any change to the excise tax structure.

Note: I have done my best to insure that the above would effectively replace the total revenue achieved by the current tax system and freely admit that the results may not be perfect, but you get the idea. These numbers can be tweaked to achieve the desired revenue results.



The Cult of Government Bureaucracy

Chapter 15

The Cult of Government Bureaucracy

A sure fire recipe for inefficiency and waste is to turn an activity over to a large organization and the inevitable bureaucracy that runs the show. In our country the largest employer, by far, is the federal government.  You might speculate that there have been more government employees per capita during democratic administrations and you would be wrong. Currently there approximately 24 million government employees

The following table shows the number of government employees, total population and the GE/P Ratio. It essentially takes a snapshot at the end of each president’s term and compares it to the point when they took office. Numbers are stated per 1,000.


End of Term Date # Government Employees (GE) Population (P) GE/P Ratio
Obama Dec. 2012 21,925 315,255 6.9%
GW Bush Dec. 2008 22,555 306,004 7.4%
Clinton Dec. 2000 20,804 283,696 7.3%
GHW Bush Dec. 1992 18,878 258,413 7.3%
Reagan Dec. 1988 17,736 246,056 7.2%

The above numbers include all those employed in all governments, federal, state & local. In total, this represents about 15% of the entire work force (public & private).

Taking a look at civil service employees, which make up the bulk of Federal government employees, that belong to one of (if not the) strongest unions in the country. Currently there are just under 3 million civil service employees which represents almost 20% of all union workers. Nineteen percent of federal employees earned salaries of $100,000 or more in 2009. The average federal worker’s pay was $71,208 compared with $40,331 in the private sector, although under Office of Management and Budget. In 2010, there were 82,034 workers, 3.9% of the federal workforce, making more than $150,000 annually, compared to 7,240 in 2005.

Since government workers make so much more than workers in the private sector one would hope that they make up the difference in productivity? Again, such thinking is misguided. The Bureau of Labor Statistics does track productivity but one could argue that it is like the fox watching the hen house. Using their stats they do show a very slight annual increase in overall productivity per person (about 1% per year for the last 30 years or so), but a significant decrease in productivity per wages as they have increased at a faster rate. There is one very significant issue with their stats and that is the assumption that the base line against which all future numbers was a reasonably productive number. And if you believe that then…….

The above chart is revealing, but it still does not address the issue of productivity of the individual in the workplace. What is does reflect is that government workers make 75%+ more than private sector workers and work 10% fewer hours.                                                                                                                                                                           This is a very difficult item on which to find valid information so I speculate a bit. I would be willing to bet all of the money in my bank account that a 10%+ improvement in individual productivity among all government workers is achievable. I suspect this expectation is actually too low. Achieving this result will never occur through any inspection or evaluation by an existing government agency. It will take the efforts of a professional, private management & administrative auditing firm. This service does exist and could easily be funded out of savings. My suggestion is that an RFQ be issued for this activity and that any and all management consulting firms be invited to quote. I do wonder how the controlling body for Civil Service would react to this suggestion?