I recently had a politician ask me what I thought about the state of economics in both our home town and in the country. After careful consideration I answered both the same way. Incentivize business, make job creation the number one priority, and take away the crutches. I liken this to teaching your child to ride a bike. We, for the most part, started with training wheels. Then after a while we took them off and found we were able to ride without them.
We have systematically built a welfare state and a huge underground economy. I mentioned in the earlier article how the average income for a family of four was just over $50,000. Instablog - Crisis by design.docx. I went on to say that, adjusted for inflation, that number was lower than it was in 1995. Take a look at this excerpt below from a U. S. Senate study based on 2012:
"Based on data from the Congressional Research Service, cumulative spending on means-tested federal welfare programs, if converted into cash, would equal $167.65 per day per household living below the poverty level. By comparison, the median household income in 2011 of $50,054 equals $137.13 per day. Additionally, spending on federal welfare benefits, if converted into cash payments, equals enough to provide $30.60 per hour, 40 hours per week, to each household living below poverty. The median household hourly wage is $25.03. After accounting for federal taxes, the median hourly wage drops to between $21.50 and $23.45, depending on a household's deductions and filing status. State and local taxes further reduce the median household's hourly earnings. By contrast, welfare benefits are not taxed.
The universe of means-tested welfare spending refers to programs that provide low-income assistance in the form of direct or indirect financial support - such as food stamps, free housing, child care, etc. - and which the recipient does not pay into (in contrast to Medicare or Social Security). For fiscal year 2011, CRS identified roughly 80 overlapping federal means-tested welfare programs that together represented the single largest budget item in 2011 - more than the nation spends on Social Security, Medicare, or national defense. The total amount spent on these federal programs, when taken together with approximately $280 billion in state contributions, amounted to roughly $1 trillion. Nearly 95 percent of these costs come from four categories of spending: medical assistance, cash assistance, food assistance, and social / housing assistance. Under the President's FY13 budget proposal, means-tested spending would increase an additional 30 percent over the next four years.
The diffuse and overlapping nature of federal welfare spending has led to some confusion regarding the scope and nature of benefits. For instance, Newark Mayor Cory Booker has recently received a great deal of attention for adopting the "food stamp challenge" in which he spends only $30 a week on food (the average individual benefit). The situation Booker presents, however, is not accurate: a low-income individual on food stamps may qualify for $25,000 in various forms of welfare support from the federal government on top of his or her existing income and resources - including access to 15 different food assistance programs. Further, even if one unrealistically assumes that no other welfare benefits are available, the size of the food stamp benefit increases as one's income decreases, as the benefit is designed as a supplement to existing resources; it is explicitly not intended to be the sole source of funds for purchasing food."
We have built a culture around welfare. We have done this by incentivizing welfare recipients to stay on the government's dime. On welfare a family of four makes $61,192 tax free, and a working family of four makes $50,000 taxable income per year. That's clearly an incentive.
As good people we should, whenever we can, extend a helping hand to someone in need. But we should help that person until they can take off the training wheels and ride by themselves. It's really that simple.
Building an entire society around welfare helps no one in the long run. That's more or less like expecting Tour de France competitors to use training wheels. We must incentivize folks to seek and find gainful employment.
In today's environment, our states and cities must attract businesses and industry from abroad. If we're going to take away the punch bowl we need to provide jobs.
At the same time there are many jobs available now. People just won't take them. I was talking to a local politician recently and he told me he knew of a business that accepted ten applications, but only one applicant could pass the background check. The comment came up that he would prefer to hire illegals, because they have a work ethic that many Americans nowadays simply don't have.
With the welfare system in its current state, you make more money staying at home. In such an environment, the traditional work ethic serves no purpose. I know of one person who enjoyed unemployment benefits for seven months and never looked for a job and was hoping for another extension of benefits. His significant other would search for jobs everyday and provide a list for him, but he still wouldn't apply. I just don't understand --- then again, I understand only too well.
We must change the culture of the American people. Forcing people by taking the punch bowl away may just be what the doctor needs to order. Take care of the truly disabled and help others to get off the training wheels. That should be the goal of this fail-safe for our country and its economy.
Part Two of my article addresses another part of our economy that has been difficult to measure --- the so-called "underground economy" or "shadow economy." These terms refer to cash transactions by legitimate businesses or illegal businesses that are never reported or taxed. Some can even be hid in inventory.
How much of our national economy is "underground"? Most economists think it's between four and 25% of our GDP. I came across a white paper done by the Federal Reserve Bank of St. Louis in May of 2011, concluding that the underground economy constituted around 2% of our Gross Domestic Product.
If I used the most conservative number published by the Federal Reserve which is 2% of our GDP, it would be close to $340 billion dollars. This doesn't include the persistent fraud we uncover in programs like Medicare and Medicaid or disability claims. Some of this money is laundered. Some is simply hid.
How can our government fix this problem, and effectively tax this sector? One answer might be to replace the income tax system with a sales tax on all goods and services. Of course, such a tax would likely get only a portion of the taxes due, but that sum would be substantial. And the tax would be regressive and hit the lowest income earners the hardest. Perhaps some of this revenue collected could be given back to low income wage earners by some sort of tax credit.
If you really want to think out of the box, let's say that we change the green back to a red back. Then give everyone 30 days to exchange their currency. You would match deposits with a paper trail back to their individual tax returns. You might be able to capture most of this dirty money and their owners. Just a thought!
The point being we need to aggressively go after this "shadow economy" from every legal direction. We should collect the taxes owed and have the felons arrested. By no means am I saying we should not go after the doctors, hospitals, pharmaceutical companies, health agencies, and of course individuals that have over-billed Medicaid and Medicare. Of course we should.
But if we are to fix this great nation, we must get our fiscal house in order by turning around the "anti-work-ethic" culture we have created here in the United States. We need some combination of welfare reform, forcing people off the welfare rolls and back on the payrolls, as well as an aggressive campaign to go after the fraudulent abuses and the "shadow economy." Maybe we can turn this ship around. To fix our country, we have to take a good look in the mirror. If we fail to do this, we will be well on our way to becoming a seriously divided third world country.
Back on Dec. 6th I wrote an article titled" The next major bail outs is The State Pension Crisis". Today we are seeing this unfold in Detroit and soon to be other major cities throughout this country. I really believe a change in the culture of this great country is every bit as crucial in getting us back to a sound fiscal policy. This one is part of the root problem and does effect the investment decision of the entire world and eventually will bring down our productivity. We simply cannot support an unproductive society.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.