Saturday, December 20, 2014

The Defined Benefit Hoax

There has been a long standing debate about which pension plan is best for workers -- "defined benefit" or "defined contribution." 

A db (defined benefit) plan is like the US social security plan.  It simply promises to pay specific amounts of money defined by worker income history and other data.  The issue of where the money comes from to fund the promises is left hanging.

A dc (defined contribution) plan is like an IRA plan.  It receives contributions during working years.  Those contributions are invested.  Ultimately, the contributions plus their accumulated earnings become available for retirement or for any other purpose (such as bequests to the next generation).

The real difference between these systems is that a db plan can become "unfunded," while a dc plan cannot become "unfunded" (by definition).

Supporters of db systems have always claimed that such plans (most public employee systems such as those for public school teachers and state and local government employees are db plans) are "guaranteed."

Detroit public employees recently found that the "guarantee" is nonsense.  All db plans can have the benefits revised or eliminated, contrary to what supporters of db plans claim.  As everyone knows, social security will never be able to pay the benefits currently written into law for future beneficiaries.  Huge, largely unexpected, benefit cuts await most future social security recipients.

In today's Washington Post, Michele Singletary, an outstanding financial advice columnist, notes that Congress last week formally opened the way to cutting db benefits for multi-employer db plans: "Tucked into the federal spending bill were provisions that allow certain struggling multi-employer pension plans to reduce benefits already being received by retirees."

Read that last sentence again.  For folks already retired, this new law allows the plan to cut payments.

So much for the main argument for db plans.  When the money they are supposed to provide is needed for retirees, they, like Lucy, can simply pull the football away and let Charlie Brown kick the air.

Db plans were built on a foundation of hope, optimism and misrepresentation.  Only dc plans will be fully funded.  Those who expect to survive on db plans will be disappointed (and impoverished).

Friday, December 19, 2014

The Cuba Opening

President Obama has moved to "normalize" relations with Cuba.  This is a good idea.

But, in a bold admission, the Obama administration admitted frankly that sanctions have done no good in Cuba.  They have not only done no good in Cuba, but are doing no good in Iran or Russia as well.  Sanctions are a poor substitute for a serious foreign policy.  Sanctions are easy to violate and usually constitute a very loud admission of weakness by those imposing the sanctions.  So let's end sanctions -- in Cuba, Iran and Russia.

Trade with Cuba, a tiny country with less than 12 million inhabitants and a pygmy per capita income (variously estimated between $ 7,000 and $ 18,000 per capita), is not going to move anyone's needle.  But trade is almost by definition a win for everyone.  So, we should not only deal diplomatically with Cuba, we should trade freely with this small island nation.

Trade restrictions always have unintended consequences. We should have no trade restrictions, excepting products that are directly related to national security concerns.  Letting Coca Cola and McDonalds operate in Cuba, Iran and Russia makes good sense and should not be prohibited.

Monday, December 1, 2014

What The Drop in Oil Prices Mean

Oil prices are collapsing and that will change things.

Countries like Russia, Iran and Venezuela are finding out that fortune quickly turns to misfortune, when your economy depends overwhelmingly on a single natural resource.  Similarly, areas of US economic growth -- Houston, for example -- may be in for a time of anxiety.

Decisions made at $ 110/bbl look problematic when oil falls below $ 70/bbl.  It is not all good news.

The main recipients of good news are oil consumers -- which includes most folks.

But decisions made that depend upon incorrect future information destroy resources.  Think about investments in "alternative energy." Are these investments worth anything at the current barrel price of oil? Wind and solar energy look even more ridiculous now than they did just a few months ago.  How about "energy efficient" transportation?  The government's subsidies of "alternative energy" can now be characterized as money poured down the drain.

For an economy as weak as the current US economy, the struggles of the oil industry could put a huge damper on the economy.  The only bright spot -- technology -- could be threatened by the demonic regulatory agenda of the Obama administration.

Meanwhile, Europe is weakening and the emerging markets are getting crushed.  Not a pretty picture.

Wednesday, November 26, 2014

Liquor and Drugs on Campus

Without doubt, heavy use of alcohol and drugs have contributed to the overall culture of the modern elite University.  Most students (and often parents as well) think alcohol and drug laws are meant for someone else.  This is the problem with such laws.  Everyone thinks that they and their children should be exempt from enforcement.

It is well known that drinking and drug use are widespread in the modern college culture (as well as widespread in many high school settings).  The world would probably be better off without these laws, since they tend to be selectively enforced.  This contributes to the "elite" atmosphere.  Laws are meant for others, but not for us.

If law breaking is the norm, then why stop at alcohol and drugs.  Why not break other laws as well.  We the elite, students often think, should pick and choose which laws should apply to us.  After all, we are the elite.

Perhaps law enforcement should give some thought to enforcing laws regardless of where that might lead -- including to fraternity houses at elite colleges.  It is not as if there is anyone who thinks drinking and drug use are hidden activities on today's campuses.  This stuff is very much out in the open.

Is there any student, who is unaware of the existence of "fake ids?"  What percentage of students have or have had fake id's.  It is pretty easy to solve this problem.  Criminally prosecute those who have fake ids (forget about those who make them, because other makers will replace them).

More and more schools compete for admissions by extolling the "club-med" aspects of university life.  Perhaps an increasing focus on education and simple enforcement of the law on college campuses would go a long way toward improving the "culture" of the modern elite universities.

Monday, November 24, 2014

Re-examine the "Privacy" Laws

While we are on the subject of higher education, it is worth rethinking the so-called "privacy" laws that prevent universities, so they say, from alerting parents when students face serious, even life-threatening, problems. 

This past week, to add to other woes, the University of Virginia suffered one more suicide among its undergraduates.  Suicides can be prevented by the proper intervention.  But, privacy laws often leave parents completely uninformed.  Parents learn, often only after the fact, that their child had been thinking about suicide for many months.  The authorities at the schools were aware that the child was suicidal, but were prevented, so they say, from alerting the parents because of "privacy" laws.

If alerting parents could save a child's life even though violating privacy laws, then, by all means, violate the privacy laws.  How is this decision even close?  Parents should be informed when their undergraduate child is in trouble, especially when the trouble is serious enough to threaten the child's life. 

If modern privacy laws are threatening the interests of our undergraduates, then change the laws.  If such laws could lead to the death of a child, then violate the laws and inform the parents that their children are at risk.

Friday, November 21, 2014

Confusing the Mission

The Rolling Stones article, that appeared this week focused on allegations of criminal violence at the University of Virginia, shows what can happen when institutions depart from their main mission.

At the first hint of criminal activities occurring in the University environment, the police should have been alerted.  Had this happened on each occasion that criminal allegations were alleged, it is very likely that the types of things described in the Rolling Stones article would, by now, be a thing of the past.  Nothing gets the point across better than seeing the perpetrators draw long jail terms for their criminal activity.  No amount of moralizing can make up for simply turning the problem over to the proper authorities.

The publicity that would result from police investigations of criminal activity -- perp walks and all -- would provide solid and useful information for undergraduates about the real dangers that may exist for them in raucous party environments.  Every parent of every college student and every college student should read the Rolling Stones article.  This information should not be suppressed or ignored.

Imagine that the young people involved in the events described in the RS article had not been students, but instead been working members of the community.  No doubt, the likelihood of police involvement at an early stage would have been much more likely.  Would University staff dealing with the situation respond in the same way, if the assailants were non-students? 

Universities don't belong in the criminal justice system.  That's what we have police and courts for.  If it's an allegation of a crime, turn the information over to the police.  Period.

The prime mission of a university is education -- not criminal justice.  

Monday, November 17, 2014

What Japan's Problems Foretell

The Japanese economy continued its downward path according to data released yesterday.  This surprised pundits who believe in QEs -- central bank purchases of government debt.  The QE's seem to have had no impact in the US other than balooning the Federal Reserve balance sheet.  Looks like a similar outcome has emerged in Japan.

What is important in the Japanese story is the enormous level of Japanese government debt, moving toward 2 1/2 times GDP at a rapid rate.  Japan is running out of room.  So is the rest of the developed world.

At some point, enormous debt levels proscribe policy alternatives and that is precisely what has happened in Japan.  Higher and higher debt levels eventually will reach a tipping point and further sustained economic progress becomes impossible. Europe is probably there already.  Japan is showing, with the recent data, that it is there as well.

So, what about the US?  We seem to purring along while the rest of the developed world stagnates. Can this continue?  Our national debt has doubled in the last six years while GDP has moved sluggishly forward.  We can't be far behind Japan and Europe.