Wednesday, November 17, 2010

Are TSA Patdowns Criminal Sexual Conduct?

Are Americans finally waking up to the explosive growth of the surveillance superstate that America is becoming?

Groups are popping up and challenging the new full-body naked scanners that are being implemented in airports across the nation (including in Grand Rapids). One such group,, has an excellent example of what these naked scans look like and an explanation of your right to "opt out."

If you do happen to opt out, however, you'll be subjected to a very intimate patdown of your entire body, including your genitals. There have been horror stories about what these patdowns involve. See here, here (an example of a three year old child getting felt up by the TSA), and here.

But I think an important question is when does this patdown cross the line and become criminal sexual conduct?

Michigan's Criminal Sexual Conduct statute has four degrees of criminal sexual conduct. The second and fourth degree crimes involve inappropriate touching of the genitals, even through clothing. For instance:

(1) A person is guilty of criminal sexual conduct in the second degree if the person engages in sexual contact with another person and if any of the following circumstances exists:
(a) That other person is under 13 years of age.
(b) That other person is at least 13 but less than 16 years of age and any of the following:
(iii) The actor is in a position of authority over the victim and the actor used this authority to coerce the victim to submit. (MCLA 750.520c)

CSC in the fourth degree is defined as follows:

(1) A person is guilty of criminal sexual conduct in the fourth degree if he or she engages in sexual contact with another person and if any of the following circumstances exist:
(a) That other person is at least 13 years of age but less than 16 years of age, and the actor is 5 or more years older than that other person.
(b) Force or coercion is used to accomplish the sexual contact. Force or coercion includes, but is not limited to, any of the following circumstances:
(ii) When the actor coerces the victim to submit by threatening to use force or violence on the victim, and the victim believes that the actor has the present ability to execute that threat.
(iii) When the actor coerces the victim to submit by threatening to retaliate in the future against the victim, or any other person, and the victim believes that the actor has the ability to execute that threat. As used in this subparagraph, "to retaliate" includes threats of physical punishment, kidnapping, or extortion.
(c) The actor knows or has reason to know that the victim is mentally incapable, mentally incapacitated, or physically helpless. (MCLA 750.520e)

Finally, how is "sexual contact" defined in the statue?

(q) "Sexual contact" includes the intentional touching of the victim's or actor's intimate parts or the intentional touching of the clothing covering the immediate area of the victim's or actor's intimate parts, if that intentional touching can reasonably be construed as being for the purpose of sexual arousal or gratification, done for a sexual purpose, or in a sexual manner for:
(i) Revenge.
(ii) To inflict humiliation.
(iii) Out of anger.  (MCLA 750.520a)

Keep in mind that if you believe you have been sexually assaulted by a TSA bureaucrat, it is fully within your rights to seek out a local police officer (the Grand Rapids airport has its own police force) and file a criminal complaint. If the airport police won't take your complaint, go to the Sheriff's department or another local police station.

It's time to end the expansion of the police state. Say "I opt out" every time you're asked to go through these scanners. Make sure the TSA agent is aware that you know about Michigan's Criminal Sexual Conduct statute.

PS: Don't forget that the very guy who was in charge of the TSA and placed the orders for these radiation naked body scanners now works for the company that manufactures them. It's corruption to the core.

Thursday, August 5, 2010

Bad Time to Buy a House?

The perpetually positive Realtors of the world are essentially always saying that it's a good time to buy. The government made it a matter of national policy, through the wasteful "home buyer's tax credit," to get more people to buy houses. But is it really a good time to buy?

One thing that I think many people don't understand is the relationship between house prices and interest rates. Yes, it looks very attractive right now to buy a house to utilize record-low mortgage rates (around 4.5% these days). Wow, that's an amazing deal, right?

But the point is that interest rates are at record lows. Where do they go from here? Naturally, the only way they can go, eventually, is up. What happens to home values when interest rates increase? They go down. Let me demonstrate.

Let's say you have $10,000 to put down on a house and you can afford a monthly payment of $800 a month. This means you can finance about $160,000 (this does not include taxes, insurance, etc).

What happens if interest rates go up to 5.5% Now you can finance about $142,000 for the same monthly payment.

How about if interest rates go up to 7%? Now you can only finance about $122,000.

Do you see how interest rates decrease home values? If suddenly everyone loses $20,000-$40,000 in purchasing power, home prices will theoretically drop by that much. This means that if you buy now and interest rates go up, your home value will drop and you will lose value. This is exactly what happened in the last three years and lending standards and defaults have dramatically changed the housing landscape.

But, then again, there's the counter argument that the unsustainable and destructive national debt can only be paid back through hyperinflation. You can gamble and hope that this happens, which would end up wiping out your debt for pennies on the dollar. Maybe that's the politicians' long term plan - hyperinflate so that a wheelbarrow of worthless money will pay off everyone's now-worthless mortgages. Then again, that wipes out everyone's life savings at the same time. Oh well, at least everyone will have a wheelbarrow of cash!

Wednesday, July 28, 2010

More Public Sector Union Terrorism

Just as we were warned by Grand Rapids' police chief before this year's income tax hike that a failure of the tax increase would result in 'increased risk' for city residents, the Police union in Bay, Michigan is actually threatening residents that they will be "beaten, shot, stabbed [and] robbed" if the city doesn't approve their latest employment contract.

Yes, here's a picture of the billboard:

State and local government budgets are only to get worse, and as I've repeatedly demonstrated, public sector benefits packages are inherently unsustainable. We will see much more of this type of taxpayer extortion. As the public sector unions demand more raises, more  benefits, and more pensions, the residents who pay for them will eventually wake up and realize that they've been scammed. This is just one example of a growing trend.

Thursday, June 24, 2010

Michigan Among the Highest Property Tax States in the Nation

No surprise here. Michigan is in the top 10 of highest property taxes of all the states. Wayne county, the highest property tax county in Michigan, is number 38 in the nation (among 790 counties). Is this a surprise? Wayne county is the most destitute, failed county - possibly in the nation.

Kent county is number 170 in the nation, in the top 21%.

More data is available here.

Monday, May 24, 2010

This Can't Last Much Longer

We learned today, via the Grand Rapids Press, that 40% of the city of Grand Rapids' population is on Medicaid and 34% of the city's population is on food stamps. This is, of course, part of the surging trend of food stamp recipients across the nation, which reached a record-breaking 40,000,000 people this month. 58,000,000 people receive Social Security. 10,000,000 people receive unemployment checks. 50,000,000 people pay no income tax at all.

The federal government has spent $800 billion more this year than it received in revenue. The full fiscal year deficit is expected to be about $1.5 trillion (which is even higher than last year's). Surprise, the new health care law will cost $150 billion more than estimated just a few months ago.

Frankly, this is all you need to know, visualized for your viewing pleasure:

I'm reminded of a quote from my favorite political economist, Frederic Bastiat, from the mid 19th century:
Self-preservation and self-development are common aspirations among all people. And if everyone enjoyed the unrestricted use of his faculties and the free disposition of the fruits of his labor, social progress would be ceaseless, uninterrupted, and unfailing.

But there is also another tendency that is common among people. When they can, they wish to live and prosper at the expense of others. This is no rash accusation. Nor does it come from a gloomy and uncharitable spirit. The annals of history bear witness to the truth of it: the incessant wars, mass migrations, religious persecutions, universal slavery, dishonesty in commerce, and monopolies. This fatal desire has its origin in the very nature of man — in that primitive, universal, and insuppressible instinct that impels him to satisfy his desires with the least possible pain.

Man can live and satisfy his wants only by ceaseless labor; by the ceaseless application of his faculties to natural resources. This process is the origin of property.

But it is also true that a man may live and satisfy his wants by seizing and consuming the products of the labor of others. This process is the origin of plunder.

Now since man is naturally inclined to avoid pain — and since labor is pain in itself — it follows that men will resort to plunder whenever plunder is easier than work.

History shows this quite clearly. And under these conditions, neither religion nor morality can stop it.

When, then, does plunder stop? It stops when it becomes more painful and more dangerous than labor.

It is evident, then, that the proper purpose of law is to use the power of its collective force to stop this fatal tendency to plunder instead of to work. All the measures of the law should protect property and punish plunder.

But, generally, the law is made by one man or one class of men. And since law cannot operate without the sanction and support of a dominating force, this force must be entrusted to those who make the laws.

This fact, combined with the fatal tendency that exists in the heart of man to satisfy his wants with the least possible effort, explains the almost universal perversion of the law. Thus it is easy to understand how law, instead of checking injustice, becomes the invincible weapon of injustice. It is easy to understand why the law is used by the legislator to destroy in varying degrees among the rest of the people, their personal independence by slavery, their liberty by oppression, and their property by plunder. This is done for the benefit of the person who makes the law, and in proportion to the power that he holds.

Friday, May 21, 2010

Austerity: From Greece to Grand Rapids

Most Americans probably haven't heard of the term austerity until recently. If you lived in Europe, it would be a daily topic of discussion. Austerity essentially means being forced to live with less, particularly as it relates to government benefits. As Greece has essentially entered a period of national bankruptcy, the government is finally being forced to spend less money. That's the ultimate end game of governments who cannot stop themselves. They are eventually forced to stop by external economic forces.

Greece, as well as many other European countries, has lived for a long time on soft socialism. As time went by, more and more "worker protections" were passed making it hard to fire people, giving away bigger and bigger government pensions, more and more civil servants on the payroll, more "bonuses" to those civil servants, and even lying to the rest of the world about how much money was actually being spent by governments. But, as anyone who can do a little math would conclude, this can't go on forever. You can't go on forever spending more money than you take in. I know, I know, many politicians and other apologist buffoons will tell you that we can indeed go on spending forever, but they are either stupid or lying.

I'd like to re-post some items from a blog I regularly visit, Mish's Global Economic Trend Analysis:

- Begin quote -

Social unrest continues to brew in Europe. This time in Romania and Greece. France is on deck as French President Nicolas Sarkozy battles unions who refuse any cuts in pension benefits. French unions have called for a general strike starting May 27.

Let's kick of the discussion with a look at Romania. The BBC reports Thousands protest over Romania austerity measures.
Tens of thousands of public sector workers have gathered in the Romanian capital Bucharest to protest against plans to cut wages and pensions. The gathering was one of the biggest on the streets of Bucharest was one of the biggest since the Romanian Revolution.

"We will not leave until the government quits," said Bogdan Hossu, leader of the Cartel Alfa trade union. Marian Gruia, head of the policemen's union, called on Romanians to unite, "as we did in 1989, when we overthrew the dictatorship" of communist leader Nicolae Ceausescu.

Romania's economy shrunk more than 7% last year and it needed an IMF bail-out in order to meet its wage bill. It says it needs to implement new austerity measures to qualify for the next installment of the 20m-euro ($25bn; £17bn) IMF loan.

The government has proposed wage cuts of 25% and pension cuts of 15% in order to reduce the country's budget deficit.

New Wave of Strikes in Greece Over Painful Austerity Measures

Please consider Greek unions hold new general strike against cuts
Unions plan to protest the painful austerity measures of Greece's cash-strapped government by holding a general strike Thursday that will close much of the country's public sector and shut down the country's ferries, trains and public transport.

Thursday's strike is to shut down schools, tax and local administration offices, ferries, trains and most other public transport options in Athens. State hospitals will have to operate with emergency staff only.

Most flights will be unaffected, as air traffic controllers will stay on the job. However, some regional airports will close, and Greece's Olympic Air carrier said it was canceling 30 domestic flights.

Austerity Woes in France

Inquiring minds are reading Sarkozy Grapples With ‘Politically Unacceptable’ Deficit Cuts.
French President Nicolas Sarkozy’s popularity fell to its lowest since his 2007 election last month. Worse may lie ahead as he cuts spending and raises taxes in the wake of Europe’s financial crisis.

Sarkozy risks increasing voters’ ire two years ahead of presidential elections as he strives to meet promised deficit- reduction targets and pacify investors. The choices include the politically sensitive areas of lifting the top tax rate and tightening pension requirements.

“Austerity is economically necessary but politically unacceptable,” said Laurent Dubois, a professor at Paris’s Institute of Political Studies. “But he has no choice, the debts are too heavy.”

The dilemma facing the French leader, who took office three years ago this week, underscores the bind facing European Union politicians, whose response to the Greek debt crisis prompted them to pledge reductions in their deficits and public debt.

Sarkozy has said he will cut France’s deficit to 3 percent of economic output in 2013 from 8 percent now. His reliance on a spending freeze, economic growth and a pension overhaul will get him only partway there, according to Samuel-Frederic Serviere, a researcher at Ifrap, a Paris-based group that monitors government spending

“With just the measures that have been announced, at best we’ll get the deficit down to 5 percent by 2013, and that’s in the best of cases,” Serviere said. “What they’ve announced so far just isn’t sufficient given our European engagements.”

Union leaders say they won’t accept any change to France’s legal retirement age of 60 and have called a general strike for May 27. The opposition Socialist Party is also defending retirement at 60 and says higher taxes will plug the deficit.

- End Quote -

What does this have to do with Grand Rapids? We see our own microcosm of looming austerity here. As this blog has pointed out over and over, the city's pension plans are unsustainable. Rather than do anything about it, the city's leaders pleaded for, and got, a tax increase that will, at most, kick the problem down the road for 12 months. As I've demonstrated, the city's pension plans are a ticking time bomb that will bankrupt the city. Not might bankrupt the city. The city's pensions will bankrupt the city. The city's politicians don't want to deal with that now, though. They prefer to string the problem out as long as possible. In the mean time, they threaten us with reduced police and fire protection if we don't approve their pension bailout.

Well, it worked. Now the city's taxpayers get to pay more. The increased taxes will not restore or increase city services. In fact, the tax increase has guaranteed that city services will continue to be cut. How? Because we extended their pension failure by one year. All this extension does is guarantee that things will be worse next year by not addressing the root of the problem.

And that brings us back to the beginning of this article. Politicians do not stop overspending until they are forced to. Eventually Grand Rapids' politicians will be forced to fix the issue, but until then, they will do everything in their power to keep the failed pension plans going. This guarantees that more and more money goes to pensions and less and less money goes to doing what a city should actually be doing: police, fire, roads, etc. The citizens will suffer while the politicians cower and fail. The city's bureaucrats will eventually be forced into austerity.

We have tea parties (which were silent in regards to Grand Rapids' tax increase) who claim they want cuts in government, but it's clear people don't actually want any cuts, because so many people are dependent on the government's teat. We all want to live off someone else. That works fine for a while, then suddenly it doesn't.

I'll end this post with another prescient quote:
“Unlovely as they are, the Greek rioters are the logical end point of the advanced social democratic state: not an oppressed underclass, but a pampered overclass, rioting in defence of its privileges and insisting on more subsidy, more benefits, more featherbedding, more government.”

Monday, May 10, 2010

Subsidizing Doing Nothing

BREAKING NEWS: State bureaucrats surprised to learn that paying people to do nothing results in more people doing nothing.

From the Detroit News: Landscapers find workers choosing jobless pay
But B&L Landscaping in Oak Park finds the labor pool is noticeably weaker and less motivated, director Richard Angell said, even though the company still gets 80 to 100 applicants per week.

"We're just getting people coming in, filling out paperwork, hoping they won't get hired," Angell said. "... We're having a hard time finding quality applicants."

Saturday, April 17, 2010

The Grand Rapids Income Tax Increase Scam is Getting Worse

This past week the City of Grand Rapids has admitted that the pension fund deficit for this coming fiscal year (starting July 1, 2010) has gotten even worse than before. According to the Grand Rapids Press, the city's pension plan actuary (the people who run the plan and tell the city how much needs to be contributed for it to be fully funded) has increased the city's required pension fund contribution by $3.7 million.

This is on top of the $7 million pension deficit that was already budgeted for next year. This means that the pension fund contribution deficit (not the total amount due) is now over $10 million, just for next year.

And the city continues to maintain that the income tax increase on the ballot May 4th will "save" or "increase" city services. The income tax increase is expected to raise about $7 million next year. How exactly do they expect to "increase" or "save" city jobs when the new pension deficit alone is over $10 million. Now we're at a point where more than 100% of the income tax increase will go solely to the pension plans (as I demonstrated, using the city's own numbers). If the income tax increase passes, it will go straight from the wallets of city residents to the pension fund.

The city has been having a series of "town hall" meeting to explain and drum up support for the income tax increase. By the sounds of it, they aren't going so well:
Bill Kudlack showed up at Monday's town hall meeting on the fence about whether to support a city income tax increase over the next five years. He left still on his perch.

"There is a lot of government waste, and I always think you can cut somewhere else," said Kudlack, emphasizing he needs to be convinced officials have done everything possible to reduce costs before coming to taxpayers for a hike.

But Mike Farage said he left the meeting even more convinced he can't support a higher income tax.

"Clearly, their best is not good enough," Farage said of using taxpayer dollars efficiently. "They are also using the typical scare tactic when it comes to police and fire services."

Only about 40 people showed up at Union High School for the first of six scheduled town hall meetings, and many of those were city employees. The meetings are designed to examine city finances and inform voters about the two May 4 ballot requests.

The word is getting out there: the income tax increase will do nothing to save or improve city services.

The city bureaucrats and politicians are desperate to prop up the failing pension systems at all cost, no matter how much it costs taxpayers. They want to continue to make sure the problem is put off as long as possible. But math is a simple thing - it always works. Not even the Grand Rapids city commission can repeal the laws of compounding numbers. The pension plans will fail. The question is how long will we, as residents, tolerate cutting our family budgets just to fund Cadillac pension plans for city workers?

Wednesday, April 7, 2010

Finally, Someone at City Hall Gets It

Grand Rapids' Chief Financial Officer, Scott Buhrer, updated the city's Fiscal Outlook through 2014 on February 12. You can read the report here. My first reaction was, "Finally, somone at City Hall gets it!"

I will quote extensively from his comments and bold the comments that I believe are important to note. This financial report is extremely relevant to the upcoming income tax increase on the ballot May 4th. For more information on that subject, see my posts on the income tax increase (Grand Rapids Tax Increase: It's the Pensions Stupid, and Grand Rapids Fires Police, Firefighters, Keeps Parking Lot Sweepers).

By approving this tax increase, the taxpayers of the city will simply be kicking the can down the road one more year. As I've already demonstrated, if the tax increase passes, the city will be forced to come back again next year for even more money because the pension plans are killing the city's budget.

Here are CFO Scott Buhrer's comments. I know it's long, but reading it is a must for all city residents:
Today it is obvious that the U.S. economy has far more capacity to produce goods and services than the demand for those goods and service. So any increase in demand will result in little price change. This will be the case until our underemployment rate of over 17% (the U6 measure) drops by a considerable amount and we begin to use our factories well above our current 72% utilization rate. In his book The Return of Depression Economics and the Crisis of 2008, Paul Krugman, winner of the Nobel Prize in Economics, correctly predicted that monetary policy (i.e. zero interest rates) would not lead us out of this financial crisis, and subsequently, as a columnist for the New York Times, Krugman has written of his belief that much more federal stimulus funding is required. But, at the end of the day, can you solve a problem that at its very heart emanates from excessive debt by continuing to fuel demand underwritten by government debt?

Over the last year I have provided assessments of National, State, and local economies. On September 15th I reported that the federal government had spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the United States last year (i.e. Gross Domestic Product, or GDP).

Which brings us to today. Irrespective of whether the economic recovery has begun or not, the United States (and much of the rest of the industrialized world for that matter), will face a long and difficult stretch of time as we deal with the excessive debt levels that have been accumulated over the past two decades.

The 19th-century British journalist Walter Bagehot claimed that during each speculative upturn merchants and bankers “believe that the prosperity they see will last always, that it is only the beginning of greater prosperity.” A boom in U.S. stocks in the early 1900’s was remembered by Alexander Dana Noyes, the financial editor of the New York Times in the 1920’s, as “the first of such speculative demonstrations in history which based its ideas and conduct on the assumption that we were living in a New Era; that old rules and principles and precedents of finance were obsolete; that things could be done safely today which had been dangerous and impossible in the past.” This mode of wishful thinking has continued up to the present day.

Instead of providing beneficial warning, economists have more often played the role of enablers during each successive New Era. The noted and early neoclassical economist whose work is perhaps more respected now than when he was alive, Irving Fisher of Yale, notoriously opined in September 1929 that stocks had reached a “permanently high plateau,” justifying this view with the claim that Prohibition had enhanced worker productivity and that businesses were employing new “scientific” management practices.

More recently, just a few short years ago, Federal Reserve Chairman Ben Bernanke and a number of other academic economists hailed the “Great Moderation,” arguing that rising institutional debt levels were tolerable, thanks to better monetary policy and better risk reducing financial innovations. During the boom years, Mr. Bernanke pronounced that rising house prices were a sign of improved economic fundamentals rather than speculative excess. It turns out that the Great Moderation was, in fact, a trap - a time of overindulgence of borrowing and risk-taking that would eventually destroy wealth rather than create it. Financial catastrophe is invariably preceded by periods of prosperity and New Era rationalizations.

The same Irving Fisher first highlighted the fact that an economy’s debt level could have harmful impacts on the economic growth, if it is excessive. In 1933 Fisher published his debt deflation theory that pointed out that the contraction of debt levels (which is currently occurring) usually results in prolonged economic distress. Borrowing binges invariably unwind, often quite precipitously, with sharp declines in asset prices, consumption, and high unemployment.

Housing prices are a remarkably accurate predictor of banking crises. Banking crises often follow periods of financial liberalization or deregulation. For all its “this-time-is-different hubris”, the United States has proved no exception. Rapidly rising housing prices should have set off alarm bells. Especially when the cumulative real price (i.e. inflation adjusted) increase in the United States between 1995 and 2006 rose 92%, more than three times the 27% gain for the preceding 100 or so years – and the total value of mortgages reached 90% of GDP. In 2005 alone, at the height of the bubble, real housing prices rose more than 12%, which was six times the rate of GDP growth.

International institutions (e.g. the International Monetary Fund) might help avert crises by promoting greater transparency in reporting financial data. Although it’s better than most, the United States government “runs an extraordinarily opaque accounting system.” In the past two years, the federal government (including the Federal Reserve) added huge off-balance-sheet guarantees and trillions of dollars of difficult-to-price assets to its books - and to date the Federal Reserve has refused to disclose details about these assets to the U.S. Congress. Bloomberg (a media company providing business and financial news and information) has sued in an attempt to compel disclosure.

What we do know is that Congress authorized up to $300 billion to bail out Fannie Mae and Freddie Mac. Quietly, on Christmas Eve, Treasury pledged unlimited support for the two agencies, without any additional Congressional approval.

Financial over-indulgence knows no boundaries and has no expiration date. Human nature is at the heart of the financial disasters. A recurring theme: investors, lenders and policymakers repeatedly delude themselves during economic booms into thinking that business cycles have been repealed and that the good times will go on and on. Indeed, after the recent financial collapse, 140 banks failed in 2009. If you think banking failures are declining and the financial crisis is over, consider this: the Federal Deposit Insurance Corporation’s (FDIC) board recently voted to approve the 2010 budget, which includes $2.5 billion for staffing to resolve failed banks taken over by the agency. That does not include the cost of winding up the affairs of these failed banks, which is almost impossible to estimate. That FDIC budget for staffing to resolve the affairs of the failed institutions is up 92% from $1.3 billion in 2009. The hiring plans will bring the number of FDIC employees to 8,653. Sheila Bair, Chairman of the FDIC, said the budget approved for 2010 “will ensure that we are prepared to handle an even larger number of bank failures next year, if that becomes necessary and to provide regulatory oversight for an even larger number of troubled institutions.” The number of problem banks on the FDIC’s confidential list as of September 30th more than doubled to 552 – the highest level in 16 years – up from 250 at the start of the year.

Three important factors pertain to the present situation in the United States and the world.

First, when debt becomes excessive, regardless of whether the government or the private sector is accumulating the debt, countries lose the ability to grow their way out of the problem; they must go through the time consuming and often painful processes of debt repayment and increased savings.

Second, whether the debt is owed externally or internally is not as critical as the excessiveness of the debt. Economic damage occurs as a result of extreme over-leverage, whether the barometer of performance is economic output, the labor markets, or asset prices.

Third, government actions, even involving sizable sums of money, are far less helpful than they appear. Further increasing government debt to solve the problem of over-indebtedness in the private sector only leads to greater systemic risk and general economic underperformance.

The question that is currently being debated is “are we headed for massive inflation or deflation”? As is widely feared here in the U.S., many countries have had the right
circumstances and mechanisms to inflate away their debt overhang, and, in fact, have done so by debasing their currency. This approach poses the most risk to those individuals who are on fixed incomes. Those particular circumstances, however, are not currently present in the United States, not with underemployment in excess of 17% and industrial capacity utilization at 72%.

I view the present inflationary environment as benign because: 1) the U.S. economic system is overleveraged and academic research confirms that this circumstance leads to deflation; 2) monetary policy is, and will continue to be, ineffectual as efforts to spur growth are thwarted by declining asset prices, loan destruction, and adverse regulatory influences; and 3) the federal government’s stimulus spending will ultimately lead to increased taxes and governmental borrowings must inevitably rise, further stunting any economic growth. These factors ensure that inflation will remain contained. Interest rates easily can and do rise for short periods, but remaining elevated in a disinflationary environment is contrary to the historical experience. If we do see higher interest rates it could be coupled with stagflation.

Fisher’s 1933 “Debt-Deflation Theory of Great Depressions” and modern “quantitative” methods have now essentially confirmed this conclusion: over-indebtedness and major contractions, particularly those that involve geographical regions (or in the present situation, extend worldwide) lead to deflation, not inflation.

The U.S. response and the world-wide response to the financial crisis have been remarkable.

But, we may find that at the end of the road, the cure could be as deadly as the illness. In 2009 the book This Time is Different – Eight Centuries of Financial Folly by Carmen M. Reinhart and Kenneth S. Rogoff compiled a database by looking at over 250 financial crises in 66 countries over a period of 800 years. The common theme in explaining the crises is that debt was excessive relative to national income (GDP). They make the compelling case that this old rule still applies and this time is not different. After studying data spanning 800 years, Reinhart and Rogoff characterize the current financial crisis as the “ Second Great Contraction.”

Broadly speaking, financial crises are protracted affairs. More often than not, the aftermath of severe financial crises such as the one that we are currently experiencing, share three characteristics:

First, asset market collapses are deep and prolonged. Declines in real housing prices average 35% stretched out over six years, whereas equity price collapses average 56% over a downturn of about three and a half years.

Second, the aftermath of banking crises is associated with profound declines in output and employment. The unemployment rate rises an average of seven percentage points during the down phase of the cycle, which lasts on an average more than four years. Output falls (from peak to trough) more than 9% on average, although the duration of the downturn, averaging roughly two years, is considerably shorter than that of unemployment.

Third, the amount of government debt tends to explode; it rose an average of 86% (in real terms, relative to pre-crisis debt) in the major post-World War II episodes. The main cause of debt explosions is not the widely cited costs of bailing out and recapitalizing the banking system. The upper-bound estimates of the banking bailout costs pale next to actual measured increases in public debt. The biggest driver of the governmental debt increase is the inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged output contractions.

The Reinhart and Rogoff book is very sobering. It provides extensive empirical data that supports my belief that we have a lot of pain left to experience because of the bad choices our nation has made. We, in this case, is the entire developed industrialized world, and the emerging world will suffer, too, as we go through it. It is not a matter of pain or no pain. There is now no way to avoid it. It is simply a matter of when and over how long a period. The lesson of history, then, is that even as the economy and financial institutions improve, there will always be a temptation to stretch the limits. Just as an individual can go bankrupt no matter how rich she starts out, a financial system can collapse under the pressure of greed, politics, and profits no matter how well regulated it seems to be.

Yet the ability of governments and investors to delude themselves, giving rise to periodic bouts of euphoria that usually end in tears, seems to have remained a constant. No careful reader of Friedman and Schwartz will be surprised by this lesson about the ability of governments to mismanage financial markets, a key theme of their analysis. As for financial markets, we have come full circle to the concept of financial fragility in economies with massive indebtedness.

All too often, periods of heavy borrowing can take place in a bubble and last for a surprisingly long time. This time may seem different, but all too often a deeper look shows it is not. Deficit spending only provides a transitory boost to the economy. It initially raises GDP, as it did in the second half of 2009, but then the effect dissipates and later is reversed, as financial resources available to the private sector are reduced.


The enormous amount of federal borrowing and stimulus programs are likely to serve to restrict long-term economic growth. The slow U.S. economic growth environment will obviously lead to continuing budget challenges for the City and the State. If we continue to push expenses into future years it will assure that our future will be challenging even if the economy improves.

Friday, March 19, 2010

Grand Rapids Fires Police, Firefighters; Keeps Parking Lot Sweepers

In a story that was the same time baffling and a bit funny, the City of Grand Rapids has decided to keep six full time parking lot attendants on the payroll, even though their jobs were replaced with automated parking lot machines. Here's a quote from the article:
"When automated ticketing machines took over her job, Grand Rapids Parking Facility Attendant Leah Leonhardt feared being laid off.

On Thursday, parking leaders agreed to a plan that would save her job and five other full-time positions, as well as scrap plans to privatize about 20 seasonal employees.

Now, Leonhardt spends her days shoveling snow, cleaning ramp decks, and collecting and counting cash, but that's fine with her.

So let me get this straight: The city fired 44 police officers and 25 firefighters, but has decided to keep 26 parking lot sweepers and other seasonal employees?

Oh, and of course the city is claiming that they need a $7 million tax hike in May, 100% of which will go straight to the city's underfunded pension plan.

What you're witnessing is the breakdown of government's ability to make rational decisions. Look for a lot more bad decisions as revenue continues to decline and unions press harder on their city government puppets to curry more favors, at our expense.

Thursday, March 11, 2010

Michigan Tax Revenue Shows Sharp Decline in February

The state's monthly revenue report for February was released today and my reaction was, "Recovery? What recovery?"

This statement from the report sums it up well: "Revenue from Michigan’s General Fund and School Aid Fund earmarked taxes totaled $474.3 million in February, down 28.8% from last year's level . . . February tax collections were approximately $132.3 million below the level expected. . ."

Year over year revenues are down 28%. This is stunning. A couple of points stand out as potentially contradictory. First, state income tax and business tax revenues are down 8.6% and 67.4%, respectively, on a year over year basis. That's a pretty dramatic drop, particularly for the business taxes. Frankly, that could be considered a collapse in revenues.

But, at the same time, strangely, sales tax revenues are up on a year over year basis. February saw a 5.2% increase over last year. How can these figures be reconciled? On the one hand, personal incomes are down and business incomes are way down, and on the other, sales are up?

There is some chatter lately that these sales tax increases over the last two months have more to do with income tax return money flowing back to taxpayers. For instance, in the state's revenue report, it is shown that the state issued $731 million in tax refunds last month, a 20% increase over February 2009. Federal statistics are showing a similar patter where taxpayers are filing taxes earlier than usual to collect refunds.

So, it might make sense after all that people are collecting large refunds and then spending much of that money, thus resulting in a boost in sales tax revenues. But this is hardly a true economic recovery, it's just another temporary residual blip based on factors that actually point to further economic decline.

Another case in point from today's news: Kent county home foreclosures up 42% in February from January. Hardly a sign of recovery.

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Monday, February 22, 2010

Grand Rapids Income Tax Increase: It's the Pensions, Stupid.

The Grand Rapids City Commission voted last week to place a 15% income tax increase on the ballot May 4th. The vote was 6 to 0 in favor, showing a remarkable lack of leadership and critical thinking on the part of any of the city commissioners. I guess replacing Jim Jendrasiak in the 1st ward didn't matter after all. This tax increase request will be on a typical low turnout election day, which is always by design. It's easier to manipulate election results that way. Surely the city will mail out fliers listing the "benefits" of the proposed tax increase, without any obvious "vote yes" language, to get around state campaign financing laws.

However, the bottom line is this: 100% of the tax increase will go directly into the city's retirement pension system. This system is rapidly becoming unsustainable for a couple of reasons, which I'll outline below. The city manager is trying to make the case that this tax increase will somehow increase fire department coverage downtown, but that's a smokescreen to distract voters from the real fiscal disaster waiting in the wings.

The first, and most obvious reason for the sudden pension crisis is, of course, the current Great Recession. We're lucky in that the city publishes lots of information on their pension plans. You can peruse the information here: City of Grand Rapids - Retirement Systems. We can glean several things from the monthly pension reports. The graph below summarizes the balances of the pension funds.

The city maintains two pension funds. One is for the police and fire employees, the other (general) for all other employees. As of December 31, 2007, the combined balance of both funds was $753 million. As of December 31, 2008, the combined balance was $493 million, a stunning loss of $260 million, or -35%. This tells us important information. Much of the city's pension funds are clearly invested in risky assets, probably equities (stocks). For comparison, the S&P 500 stock index dropped 38% during the same period. This is an example of how the city's bureaucrats can promise bigger and bigger pension benefits during the good times. Since the pension fund obviously is sensitive to the market's ups and downs, the good times inflate the value of the pension funds, making it look like it's easier to offer better and better benefits without having to increase the city's costs.

But, then comes reality, crashing things down. When the market began to tank in 2007, it took the city's pension fund with it. This sort of drop slaughters the pension fund's solvency, and this is why the city must now contribute much more money just to keep the fund afloat. Of course, you'll notice that the fund has recovered, as of December 31, 2009, to the level of $590 million. This is an increase of approximately 20%, while the S&P 500 increased by 27% during the same period. The problem is that the current market rise has run out of steam. Over the last three months, the market is essentially flat and appears to have entered a new down trend.

If the city had simply invested in safer and more stable securities, such as US government bonds, the funds would be in far better shape. For instance, if the pension fund were invested in 30 year treasury bonds, the annual return would have been about 4.5%. Compounded annually, the city's pension funds would stand at about $836 million today, instead of $590 million (or a loss of around $246 million). But, a safe and secure growth rate like this would have constrained the city's ability to offer greater and greater levels of benefits. A conservative and thoughtful path of sustainable benefits was possible, but the city's leaders chose not to got that way.

So, what are the real consequences and costs of this problem? The graph below shows us the increase in the city's pension system contribution costs.

As you can see, the pension contribution cost is estimated to be $5.009 million this fiscal year (2010). This will increase to an estimated $26.66 million cost in 2015. That's a whopping 532% increase in just five years. Again, that's assuming a 7.5% stock market growth rate, so the reality may be much worse. But the important point of data is the difference in pension contribution costs between the current year and next year (2011). As stated, the current year's pension cost is about $5 million. Next year's is estimated to be $12.019 million. An increased cost of $7.01 million. Wait a minute. Where have I heard that number before? Ah, yes. Here:

News Headline: "Grand Rapids income tax increase could raise $7 million"

What's the logical conclusion? The entire tax increase will be spent on pensions. Oh, and that's just the first year. In 2012 the increased pension cost will be another $4 million. The year after that, an additional $3.5 million, and so on. By 2015, the city will have to raise taxes by $21 million a year, or three times more than the proposed tax increase, just to pay for pensions.

Are you ready to pony up?

But wait, there's more. Before readers try to make the argument that things would be fine without the current stock market conditions, please look deeper into the pension funds' built-in collapse. That's right - built-in collapse. This is the second reason for the current pension crisis.

It's been in front of our city leaders, but they have chosen not to deal with it. What am I talking about? The city receives an annual report on the pension system's health. You can read these reports here. The chart below is taken from this report (click on the chart to view it full size).

This chart shows us the number of active employees at the city who are participating in the pension plan versus the number of retired employees who are drawing benefits. This is generally referred to an active/retired employee ratio. In 1975 there were approximately 2.6 active employees for each retired employee. This means that the contributions made on behalf of the active employees were likely higher than the benefits being drawn by retired employees. Contrast this with the current ratio of close to one active employee for each retired employee. This means that active employees' and the city's pension contributions are likely just going straight out the door to pay for currently-retired employees. This trend will result in failure. It's the same principal as a Ponzi Scheme. Current "investments" just go right out to the door to pay benefits to others.

The following chart (from the same report) shows us the cost of pension benefits as a percentage of current employees' payroll (click to view full size):

This is the cost of unsustainable defined-benefit pension plans. As you can see, in 1975, the city contributed $5 for every $100 in payroll. This cost has ballooned to nearly $45 per $100 of payroll cost. You are now seeing exactly why the city budget has been squeezed. Even with fewer employees and a relatively flat budget, the city continually runs out of money and is forced to cut services.

We, as citizens, are seeing a degradation of basic city services so that pensions can be fully funded.

To put a cherry on top, the below is an excerpt from the pension report (Page B-1):
Voluntary Retirement. A member may retire after 30 years of service regardless of age, or after attaining age 62 and completing 8 years of service. Effective January 1, 2001, members covered by the Emergency Communications Operators Bargaining Unit, after attaining age 55 and completing 8 years of service. [emphasis added]

This means that if you're 62 and have worked for the city for only eight years, you get a lifetime pension. If you're part of the Emergency Communications Operators union, you can retire at 55 after only eight years of service. And you'll notice that this was approved as recently as 2001 by our city's leaders. The problem was compounded that recently. Now they think that citizens should pay for this through higher taxes.

The end result is that, due to our city leaders' absolute failure to manage finances well, they are trying to push the cost off onto taxpayers without doing anything to address the underlying problem. The politicians find it easier to raise taxes than deal with angry unions - and that's exactly what they are doing again. The city commission is afraid to tackle the real problem, so the easier path is to "kick the can down the road" and try and deal with it later. The problem is that eventually you are forced to deal with it. Instead of dealing with the issue when it was easy to manage, the city has gone beyond the point of being able to fix it without disruption. The current path of the city's pension fund is bankruptcy.

It's easy to spend and make promises when the times are good. But now the residents (and taxed non-residents) of Grand Rapids are being asked to pay for the politicians' and bureaucrats' inability to think ahead and act in their fiduciary capacity as representatives of the citizenry. Who do they work for? The city's unions or the city's citizens?

Tuesday, February 16, 2010

Michigan Unemployment Insurance Fund is Bankrupt

A little-discussed news item is that, as the Great Recession drags on, states are getting crushed under piles of borrowing to continue to pay unemployment benefits. As states run out of money, they begin to borrow from the Federal Government.

Why is this issue important? Because the state will eventually have to repay this borrowed money. We're talking about billions of dollars.

According to the web site Pro Publica, Michigan is the number two borrower of federal funds to pay unemployment benefits (behind California). The negative balance of the state's unemployment fund now stands at $3.429 billion. This negative balance is rising almost exponentially. In December alone, the state paid out $243 million more than it collected in unemployment taxes from employers.

2009's "stimulus" law contained a provision that allowed states to avoid interest payments through 2011, but the bill will eventually come due. The kicker is that higher unemployment taxes on employers will be imposed to attempt to pay this shortage back, but that will just serve to kill more jobs as businesses are saddled with even more costs of doing business.

As the private sector has collapsed under the weight of debt saturation, government has begun to take on the debt load.This won't end well.

The problem is that so many people are now dependent on government handouts, the political will to fix the situation will be almost impossible to come by. The entitlement  culture will only be curtailed where there is no other choice. And that may be sooner than we think.

We see our own microcosm of this with the crushing pension costs in Grand Rapids. The city's commission is asking for an income tax increase, 100% of which will go to pay pension costs. And that's just for the first year. They will have to come back to taxpayers to cover the tens of millions more they will need to pay just to keep the pension fund solvent. Let me repeat, just so it's clear. This income tax increase will do nothing to improve or prop up city services. It will go only to pay for pensions.

Multiply this by all the cities in Michigan by all the states in the nation by all the people on federal benefits.

Friday, February 12, 2010

Housing and Taxes

The City of Grand Rapids and several surrounding areas are considering tax increases this May to shore up local budgets. Of course, much of the reason is the Great Recession we are currently in. Much of the problem is that city governments outspent themselves and sold taxpayers down the road by promising unionized municipal workers very generous and unsustainable pension benefits. We'll address that issue soon because we are doing research on the coming budget armageddon in Grand Rapids due to the pension ponzi scheme problem. However, another piece of the puzzle is the decline in housing prices, which also leads to lower city government revenues.

We're hearing bleats from the likes of the National Association of Realtors that housing may be turning around and that prices are up. Prices may have ticked up slightly in some areas. This is due to a few government and bank policies that are distorting the market - temporarily.

First, The Federal Reserve has printed nearly $1.25 trillion of counterfeit money to buy Mortgage Backed Securities from Freddie Mac and Fannie May. This has had the affect of creating a market for mortgages that wouldn't have been there otherwise. This has kept rates low and loans easier to get. This program ends in March.

Second, we all know about the $8,000 first time homebuyer tax credit that was set to expire last year and was extended to April of this year. This also bumped up demand and prices, but at the expense of future demand and prices.

Third, banks and the government mortgage entities tried foreclosure moratoria to give borrowers time to catch up and work out loan modifications. This has been a failure and foreclosures are picking up again.

Some suggested reading material to learn more about these market-distorting policies:

According to Trulia, if you bought a house in Grand Rapids in 2005, the value of your house has dropped 25% or more. Anecdotal looks at housing in my personal experience shows a 30-40% decline.

The point is that the decline is not ending and more pain is to come. Foreclosures are increasing and more and more people are realizing that paying on a mortgage for a house that will take decades to regain its value is a waste of time, money, and worry. As I previously posted, the option of walking away from your mortgage is rapidly becoming more and more attractive. This is a good thing. Why? Because it clears the market more quickly and gets us to where we need to be (and will eventually end up anyways) in order to begin rebuilding the economy. The government has wasted, literally, trillions of dollars to prevent the inevitable.

Banks are trying very hard to make people believe that walking away from your mortgage is somehow immoral or shirking your responsibility. Yet banks and businesses walk away from mortgages all the time, because it's simply an economic decision.

See the article Double standard in mortgage walkaway:
NEW YORK — Tishman Speyer Properties walks away from 11,232 Manhattan apartments because it can't pay its mortgage. That's good business.

Rick Gilson, a college custodial supervisor in South Dakota, wants to walk away from the mortgage on his mobile home. If he does, he'll be a deadbeat.

Those two borrowers face the same financial dilemma: Their mortgages far exceed the values of their properties. Yet one gets to walk away without guilt, while the other can't.

Gilson is too scared to dump the mortgage on his mobile home. He owes $31,973, but the home is only worth about $14,000.

"I have 12 years of money put into this property that I will never get out," said the 50-year-old Gilson, from Rapid City, S.D. "But I am still paying because this is what I have been told to do. That's what I think is right."

Until now, the focus of the real estate crisis has been on individuals. One in four U.S. homeowners, or nearly 11 million Americans, are underwater on their mortgages. In some parts of the country — Florida, Nevada, Michigan, California and Arizona — the share tops 40 percent.

Some experts say it makes sense for some people to walk away if they're deeply underwater, even if doing so could wreck their credit score for seven years. It may not be worth it to keep paying a mortgage when they can find comparable rental housing for considerably less money.

The argument against walkaways is that they will wreak economic havoc if a lot of people do it. Banks will have more bad loans on their books. They'll make fewer loans. Home prices will plunge more.

The rules are different, though, for the walkaway of all walkaways.

That title is reserved for what happened to one of New York's trophy properties, the 56-building Stuyvesant Town and Peter Cooper Village complex. Spanning 80 acres on Manhattan's east side, it's the largest single-owned residential area in the city. Its red brick buildings, built by Metropolitan Life in the 1940s for World War II veterans, are still a haven for the city's middle class.

Commercial real-estate firm Tishman and its partner, investment firm BlackRock, paid $5.4 billion to buy the property from MetLife in late 2006 — right at the market's peak. They hoped to make money by converting rent-regulated apartments into luxury condos and raising rents.

Then the housing crash hit. The value now: $1.8 billion.

And you thought you overpaid for your house.

I suggest you read the entire article.

Just look at it this way - if it's significantly cheaper than your mortgage payment to rent a property similar to your current home, you're underwater and losing money each month.

Of course, if you decide that fixing your family's balance sheet is more important than propping up a bank, you should consult an attorney who specializes in foreclosure and short sales. Every state is different in terms of its real estate law, so you must get good advice before making the decision.

More on the local impact, and reaction, coming soon...

Wednesday, February 3, 2010

Appeal Your Grand Rapids Property Tax Assessment

2010's property tax assessment documents were sent out last month and you have a very small window of time to appeal your assessment. In many cases, taxable values went up while property values went down. The city of Grand Rapids has a web page with the required documentation you need to fill out for an appeal, available here.

There are several tools available online to see the values of homes that recently sold in your area for comparison to your own, such as and Be sure to look for the "recently sold" sections of those web sites. Since property values have dropped approximately 30% in the area, it's well worth it to challenge your taxable property values.

The Michigan Taxpayers Alliance also offers a DVD workshop that helps you with the process, for $10. You can check it out here.

State Representative Dave Hildenbrand offers a useful guide for appealing here.

Be aware, the deadline for filing appeals is February 12th!