All eyes will be on President’s budget proposal

President Bush will release his budget in early February, and the experts tells us there will be cuts in spending – appropriate given the current budget deficit of around $500 billion. The question is, will the cuts be articulated in the budget, or will the President leave the hard work of identifying specific cuts to members of Congress?

Either way, balancing the budget over the next several years will be a monumental task. Scott Brown, the chief economist for the investment firm of Raymond James and Associates, explained it like this: The on-budget deficit is larger than the total amount of non-defense, discretionary spending. That means you could cut out all non-defense, discretionary spending completely, and you’d still be running a deficit budget.

The deficit and the country’s mounting debt is one problem, complicated by another problem – our ability to service that debt. Historically, the country has financed its debt by selling long-term securities, but in recent years the government has shifted toward short-term debt instruments. Given the low interest rate environment, that move has paid off handsomely; the honeymoon, however, may be coming to an end. The Federal Reserve controls the short end of the interest rate curve and it is beginning to edge rates up. After dropping rates 13 consecutive times to a historic low of 1 percent, the Fed began raising rates last year. The federal funds rate now stands at 2.25 percent and nearly every expert expects the Fed to continue raising rates until it reaches a rate somewhere between 3.5 percent and 4.5 percent. This is a rate the Fed has called “neutral” – that is, a rate that neither helps nor hurts the economy.

A doubling of interest rates, however, would substantially increase our country’s cost of servicing its debt. That means the government could substantially reduce its budgeted expenses but still see its debt servicing costs increase. That’s because those costs are directly tied to interest rates, which have little to do with the budget. The government could revert back to issuing long-term debt, but that could prove costly as well. Debt on the long end of the yield curve is more market sensitive than short-term debt; rates on the long end of the curve would likely increase if there were suddenly a greater supply of long-term securities due to increased government selling.

Brown explained that long-term rates have held low primarily because foreign governments are buying so much of our debt. The United States is running a huge trade deficit – 5.6 percent of GDP in the third quarter, probably around 6 percent in the fourth quarter – which foreign investors are financing to the tune of $2 billion per day. China has been buying U.S. debt at a tremendous rate. Chinese foreign currency reserves increased by $200 billion last year. If China were to slow down its purchase of U.S. debt, long-term interest rates would rise.

And that would be bad for our country’s economy. Mortgage rates are low because long-term interest rates are low. Low rates encourage home building, buying and selling. Most of the country has enjoyed a substantial increase in the value of homes. People are tapping into their home equity at a rate never seen before. People are spending that money, stimulating the economy. Even those who are not tapping into their home equity are reacting to the “wealth effect” that many people are feeling from the increased value of their homes.

Brown does not expect the housing bubble to burst, but it is a worry that most economists are aware of. Particularly frightening is the international nature of the housing market. Brown said home prices all around the globe are up, and that if they come down in the United States, housing markets in other countries are likely to suffer as well.

Fortunately, the jobs picture in the United States is encouraging – certainly better than it is often portrayed in the media. Brown noted that the U.S. economy created 186,000 jobs per month in 2004. “That’s pretty good, that’s better than a sustainable pace,” said Brown, noting that the economy needs to add 145,000 jobs per month simply to keep pace with the increasing size of the nation’s working age population.

Brown also said capital spending at corporations is improving. Spending was robust at the end of the 1990s, and there was a strong correction in 2002-2003. “Since then, things have bottomed out and have started to improve,” Brown said. “We are seeing corporate cash flows improve, and that is supportive of improved capital spending going forward.”

Brown acknowledged uncertainty caused by high oil prices, but he said the situation is not nearly as serious as it was in the 1970s. “If you look at energy consumption as a percentage of personal spending, it accounts for a much smaller portion of personal spending than it did in the 1970s,” he said. “In the 1970s, the magnitude of the oil shocks was much greater than what we are seeing today.”

Brown, speaking to a business group in Minneapolis on January 19, was optimistic about the strength of the U.S. economy, notwithstanding the potential problems associated with the government’s budget deficit. It will take great effort to craft a budget that reduces the deficit yet does nothing to slow the momentum that seems to be building in our economy.

Bankruptcy reform debate could guide our country's approach to abortion policy

The 109th Congress will likely consider reforms to the country’s bankruptcy laws, an on-going legislative effort that has been held up by a curious amendment advocated by Sen. Charles Schumer of New York. Schumer doesn’t want people convicted of damaging abortion clinics to escape monetary penalties by filing for bankruptcy. An amendment codifying this stipulation has derailed bankruptcy reform in the last two Congresses, even though bankruptcy reform is supported widely in the House and Senate.

Advocates for bankruptcy reform argue that people who could afford to pay are sidestepping debt repayment by exploiting the bankruptcy code. Too many people instantly file for the wipe-out-all-your-debt Chapter 7 version of bankruptcy, they say, instead of working through the pay-what-you-can Chapter 13 version. Reform bills considered since the late 1990s would initially funnel more people into Chapter 13 bankruptcy before permitting them to file for Chapter 7. Previous Congresses passed such legislation but former President Clinton vetoed it; President Bush promised to sign but Congress won’t pass a bill with the Schumer amendment tacked on.

Abortion and bankruptcy seems an unlikely match at first glance but, in fact, Schumer may be on to something. Abortion and bankruptcy share numerous similarities and it makes me wonder whether a legislative approach similar to the one Congress is taking on bankruptcy reform might not be appropriate for the country’s policy on abortion. Consider these similarities:

About the same number of abortions are performed every year as number of personal bankruptcy cases filed (between 1.2 million and 1.5 million).

Women age 20-24 make up the largest group getting abortions; people between 18 and 24 make up the largest group filing for bankruptcy.

The reason most women give for having an abortion is “insufficient finances,” the same reason most people give for filing bankruptcy.

The Supreme Court says abortion and bankruptcy are constitutionally protected rights.

Bankruptcy and abortion both purport to solve immediate individual problems in exchange for potential long-term consequences. Bankruptcy filers can have trouble obtaining credit for years after they file; some people who have an abortion suffer angst or more serious disorder years later.

Bankruptcy and abortion both exact a price on society. Bankruptcy reform advocates say every American pays $400 per year in additional costs that make up for the money lost to bankruptcy cases. The value of more than 42 million Americans lost to abortion since 1973 is impossible to quantify; however, had the population grown by that much in the last 32 years, we would not be having a big public debate about financial stress on our nation’s Social Security system.

Finally, and most importantly, bankruptcy and abortion represent a failure on the part of our culture to help individuals achieve their personal potential. Although bankruptcy reform advocates focus on the small percentage of people who game the system, many people who file for bankruptcy do so because of catastrophic personal loss completely outside their control, such as astronomical medical bills not covered by health insurance. Existing social services or economic systems fall short and the victim files because they really have no other choice. The same can be said for many people who have abortions. Their partner abandons them, and the women feel unprepared to raise a child on their own. Publicly available prenatal care and social systems to assist single parents are so inadequate that the women feel they have no choice but to abort.

The idea behind bankruptcy reform is that bankruptcies are undesirable and that even though people have a right to bankruptcy, the public should make efforts to reduce the number of cases filed. Bankruptcy reform legislation typically includes provisions designed to prevent people from abusing the system and for educating sincere filers about avoiding circumstances that may contribute to future financial difficulty.

Shouldn’t our approach to this country’s abortion policy be similar? Even though abortion is legal, most people don’t want to see a high number of abortions. Just as it has with bankruptcy, Congress should take steps designed to reduce the number of abortions. Those steps could include improvements in publicly available prenatal care, better adoption programs, and additional assistance for single parents so that pregnant women abandoned by their partners feel carrying their child to term is a hopeful option.

A small effort can help a lot of people

Starting a small business is not easy; I know. It took a while to get NFR Communications running smoothly after its launch in 1992. But when my brother-in-law Eric said he was going to move his wife and two kids to a small town in north-central Missouri from the Twin Cities to open a grocery store, I encouraged him. His career wasn’t really going anywhere in Minneapolis, so why not go to a town of 500-some people where your work could really make a difference?

His grocery store opened in Keytesville last March. Moving into a building that had been abandoned by a previous grocer, Eric fixed the place up and set up shop. I had a chance to visit last July. It’s a clean, inviting store. His father-in-law is butchering meat and his wife handles product display and marketing.

Eric has worked through all the typical small business launch challenges: figuring out staffing levels, assessing product mix, determining the best hours of operation, building credibility in his marketplace, and more. A small customer group is patronizing the store but it’s not easy. There is a Wal-Mart 30 miles away offering most of the same products at prices that are simply impossible to match. And, a lot of people are still shopping elsewhere; old habits are hard to break.

My wife and I wanted to help Eric out – Susan, because Eric is her brother, and me, because I knew how much a fledgling business owner appreciates any help he can get. Susan and I figured we could buy groceries from him; we certainly buy a lot of groceries and it really doesn’t matter where most of them come from. So we e-mailed Eric our grocery list and he sent the food up via UPS. We tried that for a few weeks but the delivery costs really made this approach impractical. We thought about it some more and that’s when we came up with another idea.

Certainly there are charities in the Keytesville area that give food to people who have trouble making ends meet, we thought. We’d be willing to donate to such a charity if it agreed to buy the food at Eric’s store. It seemed like a win-win solution. People on hard times would get the food they need and the store would get some additional business. If the store succeeds, it may even contribute to the economic development of the town; that could mean new jobs and opportunities so fewer people would have to rely on charity to get their food.

When we were visiting Eric’s family last July, he introduced me to the local banker, who had helped him get started. I remembered the banker -- Norman Bentley at the Citizens Bank & Trust in Keytesville – and gave him a call. Did he know of any local charities that might be willing to work under such an arrangement? He said he would look into it and get back to me.

Within a few weeks, he had worked out an arrangement through the Chariton County Community Foundation and the Salisbury Food Pantry. Keytesville is in Chariton County. The foundation had been formed years ago to funnel donated funds to local charitable efforts. Keytesville doesn’t have a food pantry but the neighboring town of Salisbury does. So the foundation said it would be happy to accept donations earmarked for the Salisbury Food Pantry, and the food pantry said it would be happy to use those funds to purchase food from the Keytesville Grocery.

But the people at the food pantry came up with an important improvement to the idea. Instead of giving people food purchased from the grocery store, it would give people vouchers that they could redeem at the store. This way, the food pantry could offer people meat and produce, as well as the canned and boxed goods that food pantries typically offer. For Eric, that means new people in his store, and some of those new customers might even spend a little more than the value of their vouchers.

The Salisbury Food Pantry serves 220 families consisting of 578 individuals, including many children. The food pantry provides a very important service, as Chariton County is one of the poorest counties in the Heartland. If this goes well, food pantries in other neighboring towns may join in the effort.

Susan and I were so pleased with the arrangement that we made a donation to kick things off. We have tried to spread the word to friends and family that this is a great opportunity to alleviate hunger right here, close to home. While of course it is important to consider the needs of the tsunami victims and other charitable causes, it is important to remember that there are people right here in the middle of the country who need help. What a shame that there should be so much hunger in the most affluent country in the world. A contribution to the Chariton County Community Foundation helps our neighbors work through personal economic challenges, helps a small fledgling business, and creates some hope for economic development in a town that doesn’t typically see a lot of new opportunities.

I invite you to join Susan and me in this effort. Consider making a tax-deductible donation to the Chariton County Community Foundation; add this charity to your on-going charitable giving plan.

Make your check out to:

The Chariton County Community Foundation

Send it to:

The Chariton County Community Foundation
c/o: Citizens Bank & Trust
P.O. Box 204
Keytesville, MO 65261

Your help can make a big difference to a lot of people. Thank you for your consideration and generosity.

Book offers perspective on democracy’s potential

One of the best things anyone could do to start their new year is read “The Future of Freedom: Illiberal Democracy at Home and Abroad” by Fareed Zakaria. I had chance to hear Zakaria speak at an industry meeting I attended in October and was intrigued enough to take home a copy of his book. It turned out to be the most interesting political work I read all year.

I read the book at the tail end of the lengthy presidential campaign, which seems like appropriate timing. But it might be even more appropriate to read “The Future of Freedom” now, given the spate of very important elections that are taking place around the globe. In the Ukraine, Viktor Yushchenko has just been elected president, a pronounced move to the West for the former Soviet satellite. Palestinians are set to elect a successor to Yasser Arafat on Sunday, and by the end of the month, Iraq is suppose to conduct an election.

What can we expect from these elections? Do elections mean democracy? And, even if they do, does democracy necessarily mean freedom? Zakaria, the editor of the international edition of Newsweek magazine, gives us a sound primer for tackling these questions.

The first third of the book gives us background on democracy and the meaning of the term “liberal” in the context of characterizing a political culture. We learn that countries with a certain per capita income have a better chance of transitioning to liberal democracies, that is, democratic countries where people enjoy fundamental freedoms. We learn that an abundance of natural resources don’t necessarily give a country a better chance of achieving liberal democracy. And we learn that the number of countries that feature the seemingly contradictory combination of democratic elections and authoritarian rule is increasing around the world.

But the book’s later chapters offered the material I found particularly meaningful. In a chapter he calls “The Islamic Exception,” Zakaria gives us a glimpse into the Arab League, where not one of its 22 member nations is an electoral democracy. (Sixty-three percent of the countries around the world are.) He has some interesting observations about authority, noting, for example, the lack of a central authoritarian figure in the Islamic religion. “The decision to oppose the state on the grounds that it is insufficiently Islamic belongs to anyone who wishes to exercise it,” he writes. “This much Islam shares with Protestantism. Just as any Protestant with just a little training – Jerry Falwell, Pat Robertson – can declare himself a religious leader, so also any Muslim can opine on issues of faith. In a religion without an official clergy, bin Laden has as much – or as little – authority to issue fatwas as does a Pakistani taxi driver in New York City.”

In a later chapter, “The Death of Authority,” Zakaria describes a process of democratization underway in the Western world that is knocking down old caste systems. Just about everyone can have a say in almost anything these days, but accountability is lacking and it is getting much harder to accomplish anything in a system where everyone has access to the same information and resources. Leaders who have emerged in the late 20th Century have done so solely because of wealth, and many of those folks lack the sense of social responsibility that civic and cultural leaders held a century ago.

In his chapter, “The Way Out,” Zakaria argues that in the United States we have too much democracy. Earlier, he cites California with its propositions, as an example of an elective system that has advanced itself right into gridlock. He likes bodies such as the Federal Reserve and the Supreme Court as models for elective legislative bodies. They are political, but they enjoy a high level of insulation from political distractions.

I like the way Zakaria brings together examples from around the world, from religion, and from American culture into a coherent essay about the state of our world. We all love democracy, but Zakaria reminds us that democracy in and of itself is not Utopian. Like any man-made construct, democracy has its limits. It is preferable to any other form of government, but like anything else of value, its maintenance requires proper care. Prepared with the observations and ideas presented in “The Future of Freedom,” I think we might be better equipped to offer that care.