JustinIdea - Justin Ricaurte's Personal Blog

The Next Four Years

It's great to see a barrier fall in America by Barack Obama being elected the first black President in our nation's history.  Although, many people have what will turn-out to be unrealistically high expectations of what will happen over the next four years, no matter how good their reasons are - the Law of Unintended Consequences still lives.  While Obama is great in some areas he falters in others, and just because an issue wasn't across every news screen during the election season doesn't mean that it isn't important.  I wish him the best as President of the United States and making the best decisions possible considering the circumstances our country is in.  The issues:

Very Excited About

• Obama's energy policy.  I'm hoping he picks Al Gore as Energy Secretary and has T. Boone Pickens head a panel of industry advisors.  Energy determines our foreign policy, so making a smart pick here will be his most important decision.
• A cap-and-trade carbon market where all carbon credits must be bought by private industry.  Allocating them among participants for free would create loads of corruption.  Also, if Democrats want to make sure our company's aren't at a competitive disadvantage to those in nation's with more lax environmental standards, they can make any company that produces or sells products in the United States buy carbon credits.
• The closing of Guantanamo Bay prison and hopefully all the other secret prisons the U.S. has.  We should not deny any person on earth their right against cruel and unusual punishment and to a fair and speedy trial by jury of the peers, not to mention access to a lawyer.
• The ending of the war in Iraq.  We shouldn't have been there in the first place.
• Hopefully the end of most rhetoric from the White House being about terrorism.
• America's world image being repaired as we stop Bush's use of "Cowboy Diplomacy"
• Stem Cell research using federal funds being legalized.  It's about time we started taking the lead further in this very important field of research.
• Federal investment in basic research increasing, so that the pace of innovation in our country picks up again.
• Intelligent Design not being given the same standing as Evolution in schools, because it is not a sound scientific theory.

Excited About

• The ability for Obama to make the R&D tax credit permanent.
• Greater potential investment in education.

Lukewarm About

• Obama's ability to hold government programs accountable.  With rock-solid majorities in the House and Senate, he won't be under as much pressure to find what should be given more money and what should be cut.  This was the one good thing Bush started, while he was in office: The President's Management Agenda.
• Ability of the Supreme Court to contain the Democrats with their majorities to overextending the government's role in the economy as long as Obama doesn't turn into a tyrant like FDR, when he tried to pack the Supreme Court.  Currently the Supreme Court is leaning slightly conservative with a 4-1-4 break-down, so any attempt at overstepping their bounds should hopefully be struck down.
• The Democrats being able to re-privatize the banking system in short order.  The government has no place running the banking system and further destroying the balance between risk-and-reward in the financial marketplace.

Concerned About

• Corporate taxes.  If Obama closes the tax loop holes and does not lower the corporate income tax rate, businesses will be forced to lay-off workers or raise prices in order to stay profitable, especially given the current circumstances.
• Health care.  Moving towards a single payer system will not make our health care better.  If you think government-run health care will work well, how well does government-run infrastructure work?  Oh yeah, that's why our government has underfunded our infrastructure by $2 trillion, which is why our infrastructure is degrading to the point of being a developing nation.  The only way to cut costs dramatically is to cut access.  If you want to check out the future of health care, check out Qliance 
• Personal income taxes.  Raising taxes never helps the country as government is less-efficient than the private sector at using the money it has, which is also why government workers are paid less.  Not only that, but Obama wants to raise taxes on those citizens that make more than $250,000.  At a time when the United States desperately needs investment in the country in order to create jobs and get out of the financial crisis, Obama wants to tax the group of people that invest most of their money back into the economy.  If you want to pay more taxes, you should voluntarily mail the extra amount of tax burden you would like to take to the Department of Treasury as a gift.  Here's the mailing address, so it is easier for you to increase your own tax burden. 

  Gifts to the United States

  U.S. Department of the Treasury  

  Credit Accounting Branch

  3700 East-West Highway, Room 622D

  Hyattsville, MD 20782

• Fannie Mae and Freddie Mac.  The Democrats will want to keep these institutions alive, but no company in America should be given an unfair, government-endowed advantage in the marketplace.  They helped to create the problem we're in today by creating excess liquidity in the financial markets due to their implicit government-guarantee, and now we're paying for it.
• Excessive Regulation.  Regulation in its current form is unnecessary.  We have already bestowed police powers on the Federal government, so it can prosecute companies and their officers for fraud and other crimes.  The Democrats will be tempted to over- regulate the markets, especially the financial ones, but hopefully they can't add too much regulation, or innovation will slow.
• The Government bailing out the auto industry.  The Democrats will be tempted to help the voters in Detroit that helped put them in power, but government intervention in industry only delays the inevitable.  If the companies are not able to quickly adapt to the market, they should be allowed to die, so that they stop draining resources from the economy.  If they want to invest in job re-training for these voters, then they should invest in job re-training instead of bailouts.

Very Concerned About

• America's future trade policy.  It doesn't matter if the economists voted Democrat or Republic, 95% support free trade.  Why?  Because, free trade brings prosperity to all parties involved and has created more jobs than it has destroyed.  Yes, we should hold other countries to our environmental standards, but the best way to bring about this would be to make companies that produce or sell products in the United States to join our future cap-and-trade system and by permits.
• The deficit.  Government spending needs to be kept in check, and it should stop mortgaging the future for the present.  No amount of stimulus will help revive the economy, because consumers and the federal government are over-leveraged and need to cut back on spending.  Democrats being able to control spending?  I don't think this has ever happened, and the Republicans haven't done much better.  They need to get Keynes's influence out of there.
• Monetary policy.  The government has put $5 trillion into the monetary system in the last two months, which is completely unsustainable and will most likely over time as it has time to sit create massive amounts of inflation.  Again, they need to get Keynes's influence out of there.
• Entitlement Programs.  The Democrats will want to raise taxes to cover these, but no matter what they try, they are sitting on a demographic time-bomb.  Entitlements will eat-up our economy if the system isn't reformed.

The Real United States Federal Deficit

During the Bush administration's reign, we've constantly heard the drumbeat about the ballooning federal budget deficit.  While deficits of $400+ billion dollars may sound like a lot, do they tell the entire story?  They don't.  The Federal Government has been manipulating the deficit numbers for the past 40 years in order to make itself appear healthier than it really is.  Is a Federal default likely?  It's a strong possibility with the impending retirement of the baby boomers.  While I hate to be pessimistic, realism is necessary and the stars are not aligned well for the Federal Government, and governments are not immune to default - remember Russia in 1998?

The Federal Government's deficit calculations are based-on the cash method of accounting, in conjunction with the unified method.  In the cash method, revenue is only recognized when cash is received and expenses recognized when cash is paid.  While it is very important to understand the cash flow of any entity, the cash method represents a dramatically distorted picture when it comes to the Federal Government's finances.

In 1968, Democratic President Lyndon B. Johnson had the Federal Government adopt a method of accounting known as "unified" budget accounting in order to allow his administration to use the Social Security surplus revenues to go against the then ballooning budget deficit caused by the Vietnam War.  Would a for-profit company be able to use surplus gains from its pension system and other obligations in order to show excess profits but not take a hit when those liabilities ballooned?  No, they wouldn't be able to.  These gimmicks would bring about an accounting scandal reminiscent of what happened with accounting manipulation at Enron and Worldcom.  So why does the government get to get away with it?  Good question.  Are the politicians in DC afraid the truth would be too great for the public to bear?

So what do the numbers really look like?  If you think a $400 billion deficit is big, you'll pass out from these.  

Note - 2004's huge increase is mostly due to the creation of the Medicare part D (Prescription Drug Benefit) plan

As you can see the Federal Government has been running an actual budget deficit of approximately $3 trillion a year for the last 10 years, with only one year of an actual surplus, which is about 20-30% of US GDP.  Sustainable? No, it's not.  Runaway spending has completely destroyed the Federal Government's financial position.  Currently the Federal Government is carrying $51 trillion in debt - $41 trillion from entitlements and $10 trillion in other liabilities.  If the Federal Government were a public corporation it would have a negative net worth and would be deemed insolvent.

So how can we make the Federal Government more accountable with this knowledge?

1. Replace use of the Unified Method with GAAP-based accrual accounting for Federal Government reporting (including taking into account the entitlement programs).
2. Modify the annual financial statements to show a Consolidated Income Statement, Balance Sheet, and Statement of Cash Flows, and put them at the beginning of the report to make them easily accessible.
3. Distribute financial statements to all registered voters in the country.  If shareholders of corporations are required to be sent this information, then the voters should receive it every year in the mail as well.
4. Require a balanced budget using GAAP-based accrual accounting. 
5. Reform the Entitlement System. 

Other Resources:

Defined Benefits, Loose Accounting - From CFO.com

What's the real federal deficit? - From USAToday.com

Financial Reports of the U.S. Government - From GAO.gov

Accounting Insolvency - From Bloomberg

Fudging the Budget - From the NY Times

Federal Deficit Reality - From Shadow Stats

A Sustainable Policy

Last week it was great to see Al Gore acknowledged for his efforts in promoting the building of a more sustainable society.  With a decrease in pollution and energy consumption, we will have fewer incidences of illnesses such as asthma and thereby decreasing the amount we spend on health care, more money to spend on things aside from energy, greater domestic and international economic growth, and a more peaceful world because money will not flow en mass to dictatorships built off of fossil fuels, especially ones that finance international terrorism. 

One big problem with proposed policy measures is that they do not allow for both parties to get what they want from the table.  The Democrats want to help the environment, public health, etc., and the Republicans want to promote growth by lowering taxes.  To increases its chances of success, a policy should take into account these agendas.  One such as this:

1. A cap-and-trade pollution system where the government sells credits that companies can buy for their needs.  The cap would need to be lowered each year to promote further decreases in energy used. 
2. Requiring all business that produce goods in the United States or that sell goods to American consumers to participate in the system and to take into account a life-cycle analysis of their products.
3. Requiring companies listed in the United States and those that want to have government pensions buy their stock to disclose their carbon footprint.
4. Eliminating the corporate income tax in exchange for participation.

A policy such as this will promote business to adopt more energy efficient measures and reward the most energy efficient companies by allowing them to sell their credits and then not have to pay a corporate income tax.  The elimination of the corporate income tax would further spur innovation and accelerate the development of a more sustainable environment.

This acceleration of innovation will create millions of jobs in research, development, production, marketing, financing, and servicing these new products and make American-made products more competitive in the global economy.  These new employment opportunities along with the money the government makes by selling the credits will also offset the revenue lost by the elimination of the corporate income tax, keeping our national debt from increasing due to the program.