Thoughts From the Frontline - John Mauldin

Below is an excerpt from John Mauldin's weekly newsletter, this issue is titled The Cancer of Debt and Deficits, (John Mauldin | February 18, 2012) 

John writes a long newsletter each week full of interesting thought and analysis.

His introduction to this week's piece:

"We are coming to the point in the United States when even the US government will no longer be able to borrow at very low long-term rates. That point is a few years off, and we have time to change paths; but as I have shown in previous letters, the longer we wait to get the deficit under control, the fewer choices we have and the more painful they are. NO country can run deficits the size we are currently running, along with unfunded deficits over four times the size of the economy and a growing overall debt burden, without consequences. At some point, investors in bonds will start wondering exactly what the process is by which they will be repaid. And what will the value of those future payments be?"

Then, further on, he discusses a tax approach that he believes makes sense for the revenue portion of a deficit reduction plan that must be implemented soon if the U.S is to avoid the type of degradation we are witnessing in European countries. While reforming entitlements is absolutely required, any serious proposal to reduce deficits and long term debt must also reform the tax code and raise revenue. Here's one way:

"Taxing ConsumptionSo let's get down to details. I met with Marc Sumerlin for breakfast a few weeks ago, and he later sent me a book he coauthored back in 2007 with Larry Lindsey, called What a President Should Know … but most learn too late. Both men are serious economic thinkers, and Lindsey is a specialist in tax policies. They both worked as economic advisors in the White House, and Lindsey was on the Board of Governors of the Federal Reserve. They do understand some of the mechanics of politics and economics. They now work together at The Lindsey Group, an economic advisory service based in DC. They do excellent work.
Marc outlined to me their thoughts on reforming the tax code. I read the chapter in the book on reforms, and like it better than anything else I have seen.

What they suggest is to tax consumption with a 20% Value Added Tax (VAT). There would be no taxes for incomes under $100,000. None. No Social Security. No Medicare. If you make less than $100,000 you pay nothing.

All income over $100,000 is taxed at 20%, no matter what the source. No capital gains rate or dividend break. I assume that also means no municipal bond exemptions. No exemptions for anything. Every last tax expenditure goes away. Corporate tax rates would be 20%, and again I assume no exemptions. If you make a profit, you pay taxes.

Although they did not say it in the book, they essentially agree with Hobbes that income measures what you contribute to society and spending measures what you take from it.
What society wants (and needs) is more income, as that grows tax revenues and general wealth. Consumption – what you get from society – is taxed. We don't just need to tax millionaires more, we need more millionaires that we can tax. And you get that by encouraging growth in the economy.

They also note that their proposal was revenue-neutral in 2007, and included a $2,000 per child tax credit. Every worker would get an approximate 7.5% pay raise from the removing of Social Security and Medicare taxes. While businesses would also get that same tax break, they would have to pay a VAT on salaries, which would be an increase in cost. Welfare, the social safety net, and health care would all be funded.

As the VAT would not be paid on exports, it would put us on a more even ground with those nations that have a VAT and certainly lower business taxes, both of which would make us more competitive and increase exports and thus employment.

While they did not suggest it, I would change the tax code over four years, although phasing out tax expenditures faster to help the current budget crisis. A sudden change might be disruptive, and it would take time to get the mechanism in place for collecting a VAT. States with individual income taxes would need to adjust the sources of their incomes. (It would also give my tax-accountant and tax-lawyer friends time to find a different career focus.) Businesses would need some time to adjust their costs and sales.

This is different from the so-called "Fair Tax," which is essentially a national sales tax. While I like the idea of taxing consumption, a 20% sales tax on top of state and local sales taxes of 8-10% would encourage much of our economy to move to either a barter system or a cash economy. A VAT might provoke similar reactions on a smaller level, but I think overall it is more readily collectible.

One can adjust the levels of both the VAT and income taxes to match the desired level of government spending. I might prefer less, but that is not the point here. Match these taxes (along with the normal excise taxes) with entitlement reform, a properly structured health-care system, and some cuts in other areas, and you are close to a balanced budget.

One caveat. It may surprise a few readers, but I met with David Krone yesterday for a long breakfast in Washington, DC. David is chief of staff for Senate Majority Leader Harry Reid. He is passionate, articulate, savvy, and an all-round nice guy. We found many areas of common ground and concerns. When I broached the idea of the tax proposal above, he seemed open to it, but came back with one thought.

"It has to have a trigger." I must admit, I had to ask what a trigger is.
"A trigger is a pre-agreed-upon outcome if the desired budget outcome does not happen. Either spending cuts, tax increases, or some combination, but it must be automatic." Quite a reasonable suggestion.

I readily admit there is something for everyone to hate in a VAT tax. It would raise my costs for employees substantially. I would lose several nice deductions. But given our current tax code, I think it would be the better of two evils for the economy.

Do you hate the idea? Then come up with an alternative that collects enough revenue and doesn't have the problems of the current structure, and can get the votes. As I noted above, I would vote for something like Simpson-Bowles if that was my choice. I think Reid and Boehner should introduce Simpson-Bowles for an up or down vote before the next election. Let's see what happens.

Guess Who?

Guess who said this?

"We hope to change how people relate to their governments and social institutions.
We believe building tools to help people share can bring a more honest and transparent dialogue around government that could lead to more direct empowerment of people, more accountability for officials and better solutions to some of the biggest problems of our time.
By giving people the power to share, we are starting to see people make their voices heard on a different scale from what has historically been possible. These voices will increase in number and volume. They cannot be ignored. Over time, we expect governments will become more responsive to issues and concerns raised directly by all their people rather than through intermediaries controlled by a select few."

Guessed yet? Read more here. Even more here. Will you invest your money? Better read this first.

Big Data’s Impact in the World - NYTimes.com

If I were in high school or college, I would aim my career here. The ability to manage, manipulate and interpret Big Data is a skill in high demand now and will be for the foreseeable future because the volume of data is doubling every two years! Networked intelligence will continue to revolutionize how we see the world and how and when decisions are made.

Those in control of Big Data will have tremendous power. Can government 'regulation' be far behind? What form will it take? 

"...What is Big Data? A meme and a marketing term, for sure, but also shorthand for advancing trends in technology that open the door to a new approach to understanding the world and making decisions. There is a lot more data, all the time, growing at 50 percent a year, or more than doubling every two years, estimates IDC, a technology research firm. It’s not just more streams of data, but entirely new ones. For example, there are now countless digital sensors worldwide in industrial equipment, automobiles, electrical meters and shipping crates. They can measure and communicate location, movement, vibration, temperature, humidity, even chemical changes in the air..."

"...the computer tools for gleaning knowledge and insights from the Internet era’s vast trove of unstructured data are fast gaining ground. At the forefront are the rapidly advancing techniques of artificial intelligence like natural-language processing, pattern recognition and machine learning."

"...Data is tamed and understood using computer and mathematical models. These models, like metaphors in literature, are explanatory simplifications. They are useful for understanding, but they have their limits. A model might spot a correlation and draw a statistical inference that is unfair or discriminatory, based on online searches, affecting the products, bank loans and health insurance a person is offered, privacy advocates warn."

Is Google Hard At Work On New Home Entertainment System? | TechCrunch

Google intends to adopt the Apple business model of controlling both hardware and software and compete with them head-on. Why else are they buying Motorola? The next 3 years in home networking and entertainment will be massively raucous.


I wonder how the Koreans and Japanese will fare in competing with both Google and Apple in the living room?


Hmmm, one more 'box' to add to my stack of devices servicing my TV screen...and a whole lot more it seems. Comcast, my cable and Internet service provider, can't be happy. Wonder if it will include a traditional WiFi LAN router?

"...According to WSJ’s sources, the device in development is a “home entertainment system” that can wirelessly stream music throughout users’ homes. Google has attempted to make inroads into the living room before with initiatives like Google TV, but this would mark the first time the search giant would be developing and selling products under their own name rather than relying on external hardware vendors..."

The NY Times reports on this move by Google:

"...Last November, Google introduced its own streaming music service to compete with Apple and Amazon in the wars for digital media. The service lets users access music from various Internet connected devices. By manufacturing its own device, Google can tether those listeners back to its own product.
Google’s larger goal, a person closely tied to the project said, was to connect everything in the home to the Internet, including light bulbs, speakers and TV sets. Google unveiled a “conceptual” version of a multi-purpose device last year at a developer conference..."

Google's Rumored Cloud Drive

This is a pleasant rumor. When i first rumbled in 2007, I felt certain Google would then offer a cloud storage service. It seems only natural. Google already offers a vast amount of free cloud storage as part of its various services like Gmail (8 Gbytes), Picasa (2 Gbytes) and Docs (at least 1 Gbyte, but unlimited for documents created there), YouTube, Music, Google+, etc. I have not pushed up against the limits, in these services individually, but if I did I could buy more at very cheap rates.

I'm guessing the new service will somehow combine all this existing storage into one 'master' storage account and make it easier for Google customers to access their various pieces for download to any supported device.

"Google has been rumored to be releasing a“G-Drive” in the past, and in SeptemberTechCrunch reported that the company was closing in on launching the service after initially killing the idea in 2008.Google Drive will not just compete against startups like Dropbox and SugarSync. Presumably, its ability to integrate its services with the Google Drive will also make it a prime competitor with rivals such as Amazon and Microsoft for storing users’ files.The Google cloud locker would likely work with Google Docs, which already lets users share a variety of document and music files with each other, and would sync across computers and mobile devices."

Mount Etna erupts, drive-through funeral parlor, winter freeze and more in the day in photos - The Washington Post

Mount Etna erupts, drive-through funeral parlor, winter freeze and more in the day in photos - The Washington Post

The first two photos are of Mt. Etna's eruptions. Scary stuff, but the volcano has never been peaceful. I was up at the top in 2008 when it was relatively quiet compared to this.

Scott Walker, fighting a good fight in Wisconsin - The Washington Post

Wow! I'm not usually a reader of the WaPo but with the NYT paywall rules, I'l read it more often, along with my paid subscription to the WSJ.

This opinion piece by Lane, is not only thought-provoking, but right (no pun intended) in its analysis.

Walker has taken the proper stance , withstood withering fire from the unions, and deserves to be elected in this recall initiative. All the accounts that I have read say that he has not only stood firm against the attacks, but his initiatives and policies backed by the Republican legislature have been successful in reducing Wisconsin's deficits, balancing the budget and enabling local municipalities to save a considerable amount of money. Meanwhile the public employees have given up very little, while the public interest has been substantially benefited.

"For public-sector unions, the Walker recall is no mere exercise in payback. The unions, upon which Democrats depend heavily for funding and foot soldiers, say Walker must be ousted and his reforms reversed for the sake of the middle class. Progressive values — even democracy itself — are in mortal danger.
Actually, the opposite is true. The threat to such progressive goals as majority rule, transparent government, a vibrant public sector and equality comes from public-sector unionism."

You can read Gov. Walker's state-of-the-state speech here. An excerpt:

"...Fortunately, we can have great schools and protect taxpayers at the same time. We just have to spend our money more wisely. For example, before our reforms, school districts often had to buy their health insurance from one company which cost them millions of dollars.Now, they can bid it out and that is saving school districts millions of dollars across the state. The Hartland-Lakeside School District saved nearly $700,000 by switching insurance providers. In Menomonee Falls they saved $2.4 million. In North Fond du Lac they were able to keep the same provider but saved over $300,000. That’s money that can go directly into the classroom.

Here’s another example, a few years ago long before I was governor, a young woman was named the Outstanding Initial Educator by the Wisconsin Council of Teachers of English. Not long after she received the award, she was laid off.Why? Well, under the old collective bargaining system she was one of the first to be laid off because she was one of the last ones to be hired. It didn’t matter that she was one of the best teachers in the state.To correct problems like that, our reforms now allow local school districts to staff based on merit and pay based on performance. That means we can put the best and brightest in our classrooms - and we can keep them there..."

Labor Efficiency: The Next Great Internet Disruption | TechCrunch

Disclaimer:  I view this story as partially a sales pitch for his company by the author, but the underlying thesis and facts clearly signal a growing trend that cannot be ignored.

The story is geared to private sector service businesses, but the technological revolution, what I call RDP (Rapid Digital Productivity), also affects America's factory floors. And, in due time, this trend may well affect government functions, too, which will dissolve the expected job security of public employees.

The benefits to business are obvious and are well described in the story. This revolution cannot be stopped and political rhetoric notwithstanding, we will need fewer people at less cost to continue to grow the economy for many years.

We need a broad national discussion about this reality because the social implications are enormous for the United States and all advanced societies and the expectations of their people.

We have government and institutions that remain based fundamentally on an industrial model, yet technology has enabled a digitally enhanced work that is not fully understood by policy-makers and politicians. Or, if it is, public discourse has not embraced it. The "Create Jobs" and "Grow the Economy" mantras are a simplistic attempt to garner votes. but the reality is that far fewer employees with different skills can grow the economy. A more realistic and substantive discussion must evolve that recognizes the RDP reality.

"The Rise of the Independent Worker

...Over the past couple of years, there has been a huge increase in the number of workers who operate as some sort of independent, free-agent contractor or consultant. Though the numbers vary greatly, the consensus seems to be around 20 percent of the U.S. workforce, and growing (with some estimates up to 50 percent by 2020). Think about that, one in every five workers are currently unattached to any one company!


Expert explanations for this rise vary as much as the number itself, but I believe the two most important factors, by far, are: Technology and the Economy..."

Be everywhere: Google’s real social strategy | ZDNet

A well-reasoned take on why Google+ will continue to grow and thrive, a view I share. While Facebook may be today's social media leader with ~850 million users, Google has deep penetration in so many key areas that its ecosystem can drive long term adoption and use of Google+. Of course, the battle is really about where people will spend their time online whether from smartphones, tablets or PCs.

I admit to being a Google junkie because I find so much value in the plethora of services offered. While I have accounts on all the major social media sites, I spend far more time 'with Google' than with all the others combined.

"...All of this is not to say that you should abandon Facebook and Twitter and LinkedIn for Google+. Google+ is not a Facebook-slayer, at least not in its current iteration. At the same time, however, Google has such a dominant footprint in key distribution channels such as search, browser, email, mobile, TV and video, that it cannot be ignored. For brands and authors, in particular, the incentives are simply too great to pass up."

Physicians speak out on healthcare — True North Reports

Many Vermonters believe the notion that the Legislature (via Act 48) and the appointed five member Health Care Board have a plan for health care reform that will offer better access and reduce costs.

They have few believers in the medical community as evidenced by the comments of the providers in this forum held recently in Rutland.

The business community also expressed deep concerns at a recent public hearing on H.559 that their costs would rise dramatically under Vermont's proposal and they don't believe the propaganda given the dearth of information on costs and coverage plans compared to today's environment.

"The strong need to contain healthcare costs was addressed. Dr. Susan Blish and other physicians voiced concerns that if patients gain easier access to health care services, but don’t share more responsibility for both healthy living and cost-containment, then how can we expect to keep costs under control. Dr Mel Boynton endorsed consumer-driven health care as a means to better engage patients in controlling health care costs and several physicians voiced that health savings accounts (HSAs) were a good vehicle for patient involvement in cost control."

My contention remains: There is no way to control health care costs except by rationing of services to recipients in an environment with universal access and little responsibility on the part of people who receive care. No rhetoric has convinced me otherwise. Yet, rationing is not part of the debate...and it should be.