Federal Government Policy Issues

Discussion and information on selected policy issues concerning tax, foreign relations, energy and other significant policies. The intent is to provide data and analysis that will assist in determining the appropriateness of the policy. Any posts containing rants, personal attacks on officials or other posters or which do not concisely present a point of information will not be published.

Monday, July 03, 2006

 

Miscellaneous

Posts on all other topics related to Federal Policy issues should be placed here.

Comments:
Some say that the policy in Iraq is saving US lives by preventing terrorist attackes in the US. Even if you find this claim credible, you should ask whether the $400b spent or allocated to the war in Iraq is the best way to save lives. Consider the following alternatives for which federal budget dollars could be spent to save US lives.

1) The National Institute of Health (NIH) funds research projects that are intended to save lives by finding cures for major illnesses such as heart disease. Since the start of the Iraq war, the NIH budget has been frozen. See the NIH 2007 Budget; for more details.

2) Each year, more than 2 million Americans acquire infections during their hospital stays of which 103,000 die. It is estimated that over half of the deaths could be prevented. See Hospital Infection Rates; for details.
 
US Insurance Industry

In 2005, the insurance industry collected $1,142,912,000,000 ($1.1 trillion) in premiums which works out to an average of about $4,000 per person (every man, woman and child) and represents approximately 9% of the total GDP in 2005 according to a report Issued by Swiss Re, a leading re-insurer. The $1.1 trillion in premiums collected in the US represents about 33% of the total premiums collected in the world in 2005.

2005 was the most profitable year in history for insurers. With almost 9 cents of every dollar earned in the US in 2005 going to insurance premiums, this seems like a key area that legislators should focus on. Congress is currently considering legislation that would change the way the industry is regulated, reduce costs to the insurance industry and increase competition in the insurance industry that should lead to a reduction in premiums. The changes being considered would enable insurers to operate under a federal charter much likes banks do rather than working under a myriad of state charters and would require that foreign insurers have the same capital ratios as are required of US insurers. Currently, the higher capital ratios required of foreign insurers protect US insurers from competition by increasing the costs of foreign insurers.
 
Where have the $'s gone?

In the US, the percent of total national income going to corporations has increased from 7% in mid-2001 to 16% today while the share going to the top 1% of earners has gone from 8% in 1980 to 16% today. During this time period, the real wages of all Americans has fallen by 4% and the real wages of college graduates has fallen by 6%. Even if this trend doesn't continue and it probably will, there seems to be an issue with more income going to corporations and the wealthy at a time when the tax rates for these groups have been significantly reduced. Who will pay the bill? Is such extreme income inequality a problem for the US and, if so, what can be done about it?
 
The Democrats Should Wait

The Democrats seem poised to take control of the House and possibly the Senate in the November 2006 mid-term elections. However, this strategy is questionable. It is unlikely that either party will be able to achieve a clear success on doemstic challenges such as social security or foreign policy issues in Iraq, Iran or North Korea over the next 2 years. It may be better if the Senate and perhaps the House were left in Republican control so that the Democrats would be able to claim that they were the alternative to failed Republican policies in the 2008 Presidential elections. If the Democrats win now, they will be seen as sharing the responsibility for the failure going in to the 2008 elections.

The Democrats should have saved the $'s they are spending now for the 2008 elections, work on developing candidates and issues and work on forging ties, possibly supporting, moderate Republican Congressional members such as Lincoln Chafee from Rhode Island. Doing so would make the Dems more acceptable to moderate Republicans, give some leverage over the next 2 years should they not gain control of Congress and make it easier to legislate after 2008 in a bi-partisan manner assuming that they win the Executive and/or one or both houses of Congress.
 
India and Nuclear Weapons

Both India and Pakistan have developed nuclear weapons which the US was not aware of until they tested the weapons. India is not a signatory to the NPT (Non Proliferation Treat). The NPT is intended to halt the spread of nuclear weapons capable countries and to assist countries which sign and adhere to the NPT with developing and operating civilian nuclear programs for energy production. By treaty, no NPT country is legally able to help another country which has violated the treaty or has not signed the treaty, such as India, to develop or operate a nuclear program.

The US passed legislation (HR 5682, Senate vote 270) in December 2006 which makes an exception for India. Basically, India has agreed that it's civilian nuclear facilities will now be subject to the inspection and safeguards of the NPT but that military facilities will continue to be exempt. India has reserved sole authority to declare which facilities are military. In return, the US will provide technical assistance, nuclear fuel and technology to assist India's civilian nuclear program. India was facing a challenge in further developing it's nuclear capabilities due to a lack of fuel and technology. The new treaty will enable India to divert more of it's scarce nuclear fuel and technology to the military facilities so the new treaty can not be considered as solely supporting the civilian nuclear program.

Furthermore, India's Prime Minister, Manmohan Singh, assured the Indian Congress in August 2006 that India would not be bound by laws passed in other countries.

The US has rewarded evasion of the NPT and by doing so risks encouraging other countries to develop nuclear weapons capabilities. It is difficult to understand how this legislation could have so easily passed in the US Senate with a vote of 85 supporting the legislation.
 
China as a Military Threat

If the US becomes involved in a major war in the next 25 years, it will likely be with China as an opponent. Only China appears to be likely to have the resources and the technology to engage the US in a world wide conflict. If the US becomes involved in a conflict with China it will likely result from a conflict between Taiwan and China or a conflict between the US and North Korea.

China has significantly increased their investment in both conventional and advanced military capabilities. The irony in this is that the US, through significant imports of Chinese goods, is providing the funding for the development. Chinese foreign reserves are expected to increase to over $1 trillion this year (2007). Also of concern is the advanced technology being incorporated in Chinese military systems. One of the major advantages that the US military has are the advanced weapon systems produced by the US. Developing these advanced systems is very expensive and takes years of R&D. A major concern should be that some of the most advanced US military technology is being sold to China by Israel which is the second biggest military supplier to China after Russia. The US has, over the years, provided a number of advanced weapons systems to Israel and, unusually, entered into the joint development of a number of advanced weapons systems with Israel. The joint development process requires that computer code, manufacturing processes and other proprietary information is given to Israel to enable them to produce the military system. The technology used by China to destroy one of their own spaced based satellites with a ballistic missile used US military technology provided by Israel to the Chinese.

According to the findings of a past US congressional committee chaired by Representative Christopher Cox (Republican-California), Israel has "offered significant technology cooperation to the People's Republic of China, especially in aircraft and missile development", including helping China build its current F-10 fighter jet. The Chinese F-10 is virtually identical to the discontinued Israeli Lavi fighter, an aircraft designed using $1.5 billion in US aid. The Lavi program, funded by the US and based largely on the F-16, was intended to provide Israel with its first domestically built fighter jet. Israel also transferred to China its STAR-1 cruise missile technology that incorporates US stealth technology and is a version of Israel's Delilah-2 missile, which contains US parts and technology. In the past, Israel has sold to China a number of weapons systems including an unmanned attack drone called the Harpy, in 2003 a plane equipped with is own airborne radar system called the Phalcon and technology developed by the US for incorporation into the F-35 Joint Strike Fighter which is being developed as a replacement for the current US fighters.
 
the desparity of wealth in this country will only continue to grow until we the people stop mindlessly consuming and stand up and demand real wages and rights... 1984 is only around the corner and so mindless zombies don't see it coming.
 
VA Costs

There has been a great deal of discussion lately regarding the quality and cost of healthcare for US veterans at the Veterans' Administration facilities.

Most people are not aware of the fact that all veterans, even those who were not injured as a result of their service, are entitled to life long care at the VA.

I was talking to a vet the other day who spent 3 years in the 50's driving a truck for the Air Force at a base in upstate NY. He has no service related disabilities or injuries. He now receives all of his medical care from the VA because he is a vet and has a low income. He even cancelled his Medicare so he doesn't have to pay the $93 per month for the Medicare premium. He pays a $15 co-pay each time he sees a VA doctor but the rest is no charge.

I think that US taxpayer owes full medical care to US vets for any service related injuries or illnesses for as long as is required. However, providing life long care to any vet for nonservice related injuries reduces the resources for vets who are owed medical assistance and is an unfair charge to the US taxpayer.
 
Liquidity Crisis

Regarding the liquidity crisis and the call for the Federal Reserve to lower rates, first of all, there is no liquidity crisis. According to Thomas Datastream, in the year to June 2007, the broad money supply in the Euro area increased 10%, about 13% in Britain and over 6% in the US. A rough rule of thumb for economists is that the money supply growth rate should increase at the rate of nominal GDP growth. In all of the above areas the broad money supply increased much faster than the rate of growth. There has also been a significant amount of discussion about the collapse of housing prices and the large number of foreclosures. Most of the calls for the Fed to lower their rate cite the need to save homeowners from foreclosures and therefore save the economy. Lowering the federal funds rate by even as much as ½ percent would only save some home owners about $95 per month which is not enough in the vast majority of cases to save them. Also, the rate reduction would only benefit adjustable rate mortgage holders whose rates were going to be reset in the next few months. It would not help those who have already had their rates reset or those people who bought the homes as an investment and are not able to sell or rent out their properties. Also, many of the people could not afford the mortgages they had without refinancing periodically as house prices increased and borrowing to pay their bills. The only thing that would save them would be if housing prices continued to increase at a rapid rate and that is not going to happen nor would it be desirable. There is an oversupply of housing in many areas and prices will not stabilize until the oversupply has been worked off. Also, the average American has about $13K in credit card debt which has been growing at about 6% per year. Many Americans can not afford the debts they have at any interest rate.

The federal government could do more to lower housing costs by working to reduce the rates of property insurance which have increased substantially as home values have increased or property insurance.

Lowering the federal funds rates could actually cost most people more than what would be saved by the adjustable rate mortgage holders. Many people, especially seniors, have savings and the rate of return that they earn will be reduced by a rate cut. In 2004, taxable interest income in the US was $114.5 billion. A ½% reduction would equate to an annual reduction in interest income of about $557 million. Also, a rate reduction would lead to a weakening of the dollar that would lead to higher prices for imports.

The only interests that would benefit from a rate reduction are corporations with large non-US operations who would profit from a weakening dollar, the stock market over the short term and private equity funds who would have access to cheaper funds to use for buyouts.

So, the problem is not a liquidity crisis but a consumer that is over leveraged and should never have been given the credit that they have. The best way to avoid this in the future is to prohibit no verification loans and credit and perhaps to set ratios for credit or debt to income.
 
Bubbles and Liquidity

On 3/12/08, Carlyle Capital announced that it expects lenders will soon take possession of "substantially all" of its remaining assets after it was unable to meet surging margin calls on its portfolio of residential-mortgage-backed securities. On CNBC on the 13th, the experts used Carlyle's situation as an example of how the liquidity crisis was causing otherwise healthy companies to fail. It was noted that substantially all of the mortgages in Carlyle's portofolio were paying, i.e., not in default, and that the market was considering the income from the performing mortgages as being worth zero. The analysts used this example to explain that the US Government needs to do more to save healthy companies from an over reaction in the market. As an aside, it was noted that Carlyle's investment was leveraged 32 to 1. This means that for every dollar invested by someone in the fund, Carlyle borrowed another $32 that was used to purcahse mortgage backaged securities. The extreme leverage is really the issue and the cause of the current problems in the financial market. With a leverage ratio of 32 to 1, a drop of even 3% in the Carlyle's portofolio values would wipe out 99% of the total capital invested in the fund. In other words, Carlyle's loans had no collateral left to back them up. Many of these investment funds were borrowing short term and investing long term with their profit being generated by the slightly higher interest rates earned on their long term loans compared to the interest rate they were borrowing short term money with. Say by example that Carlyle was paying 5% to borrow the money and earning 6% on the mortgage backed securities that they purchase. In this case, their profit is 1% of the capital. However, with a 32 to 1 leverage ratio, they were earning a wopping 33% rate of return on their invested capital. This situation could not last. Either an increase in short term rates (they would have to pay more when they rolled-over their short term loans) or even a minor rate of defaults would wipte out their total invested capital.

I can't imagine that anyone would have lent to Carlyle Capital and Carlyle Capital is only one of perhaps thousands of investment vehicles that used the same strategy.

The sad part of the current financial market meltdown is that the same situation has now developed in the commodities markets and the currency markets (carry trade). Just wait until commodity prices start to drop or the US dollar increases and we will see the same situation develop all over again.
 
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