Can We Balance the Budget?

Can We Balance the Budget?

Before Social Security

The Cruise from Hell?

The Next Cisco?

First the Greeks rioted after their government imposed austerity measures designed to help the country climb out of its deep financial hole.

Then the French rioted over President Sarkozy’s plan to raise the retirement age from 60 to 62.  (He succeeded last week.)

Then the English rioted over their government’s plan to triple college tuitions as part of a multi-faceted effort to stop the country’s financial hemorrhaging.

But here in the U.S. … we haven’t had any serious unrest yet, and the reason is not because Americans are better behaved.

It’s because our government hasn’t really done anything to get out of the deep hole we’re in!

Republicans want to cut spending.

Democrats want to raise taxes.

And neither side wants to compromise, for fear of being perceived as soft, losing out on lobbyists’ backing and losing the next election.

In the meantime, our national debt grows.

The collapse of the housing industry under a mountain of bad debt was just a preview of what will happen if this trend continues.  If this mountain collapses-say the Chinese stop buying our bonds-millions of Americans are going to start envying those vacationers who were stranded on a cruise ship last week (more about them later).

So occasionally, a politician takes a stab at the problem.

In 1982, the Greenspan Commission focused on reforming Social Security, and after that the program was actually in the black for a while before falling back into the red.

In 1994, there was the Bipartisan Commission on Entitlements and Tax Reform, composed of 10 U.S. Senators, 10 members of Congress and 12 members of the public, along with a professional staff of 27.

According to the Federal Register, “The Commission failed to achieve consensus and went out of business without issuing any recommendations. Instead, its final report was a compilation of competing proposals,” which were ignored by the Administration.

In 2005, there was the President’s Advisory Panel on Federal Tax Reform, a bipartisan group that, among other things, called for trimming the tax deduction on home interest, a move that might have stemmed the over-inflation of the housing bubble that popped in 2007-2008.

And now we have the National Commission on Fiscal Responsibility and Reform, a bipartisan group tasked by President Obama in February with finding a sensible path out of our economic mess.

Of the 18 members in the group, six are members of the U.S. Senate, six are members of the U.S. House of Representatives and six were appointed by the President.

Ten are Democrats and eight are Republicans.

To be fair, what the group’s leaders, Alan Simpson and Erskine Bowles, released last week is not a final plan … it’s a “discussion draft,” which the leaders released early because leaks seem inevitable and-perhaps- because getting early feedback on the draft will help them shape the final recommendations into something that can actually be implemented.

And the good news is there’s a lot to like in this draft, as well as plenty for party stalwarts on both sides of the aisle to criticize.  Among the items the draft proposes:

First, reduce discretionary spending by $200 billion by reducing defense spending by 15%, closing one third of overseas bases, eliminating earmarks, and cutting the federal work force by 10%.  Sounds good to me.

Second, generate $100 billion in increased tax revenues by increasing the federal gasoline tax by 15 cents a gallon, increasing the capital gains tax to 28%, restoring the inheritance tax to 45%, eliminating the mortgage-interest deduction for second homes, home-equity loans and mortgages over $500,000 and eliminating the deduction for employer-provided healthcare benefits.  I think the last two have been instrumental in driving up the costs of housing and healthcare, and as for the gas tax, I’d raise it even more, while eliminating the EPA, which foolishly tries to determine what kinds of cars we should all drive.

Third, maintain the Medicare cost controls associated with the recent health care reform legislation, while offering doctors new protection against malpractice lawsuits and strengthening the ability of the Independent Payment Advisory Board to squeeze costs.  No comment; I’m waiting to see what they can do.

Fourth, reduce entitlements, including farm subsidies, civilian and military federal pensions and student loan subsidies.  Absolutely.

Fifth, reform Social Security by increasing the amount of income subject to the payroll tax from $106,800 this year to $190,000 in 2020, and increasing the retirement age from 67 to 69 … gradually. Yes, yes, yes.

The co-chairs also recommended reducing the corporate tax rate from 35% to a more internationally competitive 26%.

Again, this is a draft, not a proposal.  The final proposal is due December 1, and it needs to be favored by 14 of the commission’s 18 members to trigger a vote in Congress.

But it’s a start.

And I think that if anything remotely resembling this is actually enacted, it will provide a huge boost to the U.S. economy, as people will once again have more money to spend where they want to spend it, and not where their government foolishly spends it.

Of course, if the talk gets serious, no doubt there will be massive protests, and rioting, too.  But if that’s the price of progress, I look forward to it.

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On a related note, while researching the history of Social Security for the preceding article on Fiscal Responsibility and Reform, I discovered, deep in the bowels of the Social Security website, a nifty history of some plans that were developed by non-government actors before Social Security was enacted.

All were in response to the challenges of the Great Depression, and I’ve copied their main points here.

Every Man a King:

Huey Long was Governor of Louisiana from 1928 to 1932 and was elected to the U.S. Senate in 1930. A nominal Democrat, Huey Long was a radical populist. He wanted the government to confiscate the wealth of the nation’s rich and privileged. He called his program Share Our Wealth. It called upon the federal government to guarantee every family in the nation an annual income of $5,000, so they could have the necessities of life, including a home, a job, a radio and an automobile. He also proposed limiting private fortunes to $50 million, legacies to $5 million, and annual incomes to $1 million. Everyone over age 60 would receive an old-age pension. His slogan was “Every Man A King.”

The Share Our Wealth program immediately became a movement. Clubs were formed in every state in the nation. By 1935 the movement claimed 27,000 local clubs with 7.7 million members.    

The Townsend Movement:

Francis E. Townsend was a lean, bespectacled doctor from Long Beach, California. In 1933 he found himself unemployed at age 66 with no savings and no prospects. This experience galvanized him to become the self-proclaimed champion of the cause of the elderly. He devised a plan known as the Townsend Old Age Revolving Pension Plan, or Townsend Plan for short.

The basic idea of the Townsend Plan was that the government would provide a pension of $200 per month to every citizen age 60 and older. The pensions would be funded by a 2% national sales tax. There were three eligibility requirements:

* the person had to be retired;
* their past life was “free from habitual criminality;”
* the money had to be spent within the U.S. by the pensioner within 30 days of receipt.

Dr. Townsend published his plan in a local Long Beach newspaper in early 1933 and within about two years there were 7,000 Townsend Clubs around the country with more than 2.2 million members actively working to make the Townsend Plan the nation’s old-age pension system.    

Fire & Brimstone:

Another influence on Depression-era public policy was the Union for Social Justice movement led by a radio preacher by the name of Father Charles E. Coughlin. Father Coughlin had a weekly radio program with 35-40 million listeners, which he used to mix a little religion with a lot of politics. His enemies, in addition to the devil himself, were Roosevelt, international bankers, communists, and labor unions, and he was not shy in describing them in interchangeable terms. At the height of his popularity, Father Coughlin had a greater share of the weekly broadcast audience than Howard Stern, Rush Limbaugh, Paul Harvey and Larry King combined.

Although Father Coughlin’s main effort was to pillory his enemies, he did have a broad program of social reforms that included a deliberate inflation of the currency and the nationalization of all banks. He was also an anti-Semite and isolationist whose views were so extreme that the Catholic Church finally censured him and forced him to cease his political activities. In 1936, Coughlin, along with Townsend and the remnants of Huey Long’s Share the Wealth Movement, would join to form a third party to contest the presidential election in the hopes of preventing President Roosevelt from being re-elected.    

A Writer & his EPIC:

Upton Sinclair was a famous novelist and social crusader from California, and an avowed Socialist, who in 1933 was asked by a dissident group of Los Angeles Democrats to help them draft a platform proposal for dealing with the state’s economic problems. They were so impressed by Sinclair’s plan-which he christened the End Poverty in California, or EPIC plan-that they persuaded him to change his registration to Democratic and to run for the party’s nomination for governor in 1934.

Sinclair’s EPIC scheme was a 12-point program to remake the Californian economy. It involved the issuance of scrip currency, the creation of large state-run bartering enterprises, a tax on idle land and floating a large state bond for $300 million. Point 10 of the plan was a proposal to give pensions of $50 a month to all needy persons over 60 who had lived in California for at least three years. There was a state pension plan in operation in California at the time, but its benefits were very low, and the eligibility requirements were so severe that most elderly Californians could not qualify. (This was true of many of the state pension programs around the country.) Sinclair’s pension proposal was very popular because in one fell swoop it reduced the minimum age for pensions by 10 years, almost doubled their value, and eliminated restrictive eligibility requirements.    

Sinclair’s EPIC program, and especially its pension proposal, had a great appeal in Depression-weary California. Sinclair and his supporters organized EPIC clubs, published newsletters, formed ad hoc organizations and found a large chorus of supporters with unlimited enthusiasm for his ideas. In short order, Upton Sinclair’s EPIC movement captured the Democratic party and Sinclair became the Democratic nominee for governor in the election of 1934. The party’s platform became the EPIC program, including the pension plan.

When the votes were counted, Upton Sinclair got 37% of the vote, the Republican candidate got 48% and a third-party progressive candidate took another 13%. Had it been a two-man race, Upton Sinclair might have become Governor of California and the EPIC pension plan might well have become the California model.

Ham & Eggs:

During the 1930s California was a virtual hot-house for new pension schemes, and one of the most creative (and dubious) of the pension schemes of the 1930s went by the unlikely moniker of “Ham & Eggs.” Ham & Eggs was the brainstorm of a self-promoting huckster aptly named Robert Noble. The scheme was based on a call for the state government to issue special currency called “scrip” that would be paid each week to every unemployed Californian age 50 and older. Questions about the validity of the economics did not dampen the enthusiasm of the movement’s supporters, nor even did the numerous scandals, financial and otherwise, involving the movement’s leaders. The eventual form of the plan called for the state to issue “$30 every Thursday,” which became the rallying cry of the movement. The simplicity of the movement was expressed in a bit of doggerel from the organization’s newsletter, the National Ham and Eggs:

“Let’s stay away from politics
Regardless of who hollers
Let’s not be fooled by childish tricks
LET’S GET OUR THIRTY DOLLARS”

The Ham & Eggs movement had more than 300,000 members–and many more supporters. In 1938, the successful Democratic candidate for governor, Culbert Olsen, openly supported the plan and a proposition was placed on the ballot to adopt the Ham & Eggs plan as California state policy. The proposition was narrowly defeated by a vote of 1,143,670 in favor to 1,398,999 against.

The Ham & Eggs movement was based on dubious economics, it was founded and run by a succession of characters of questionable integrity, it suffered from internecine rivalries and frequent scandals, and yet, at the peak of its influence in 1938, more than a million Californians, including the state’s Governor, believed that it was the solution to the problem of income security for the aged. That such a poor candidate for a public policy would be so widely embraced is strong evidence of how hungry the public was for action to address the problem of income security for the elderly.

Bigelow Plan:

In Ohio, Reverend Herbert S. Bigelow initiated a proposed State amendment to guarantee an income of $50 a month ($80 for married couples living together) to those over sixty years of age who were without gainful employment. This particular plan was to be financed partly out of an increased tax on real estate (2% hike on land valued at more than $20,000 an acre), and partly out of an income tax equal to one-fourth the federal income tax paid by individuals and corporations. The Bigelow pension plan garnered nearly half a million voters before it was defeated. As some experts of the time calculated, the plan would cost more than the existing state budget for two years.

General Welfare Federation of America:

His organization was headquartered in Washington, D.C., and founded by Arthur L. Johnson, who denounced the newly established Social Security Act as a “great American fraud.” He was just as severe in attacking other organizations such as the Townsend, Ham-and-Eggs, and Bigelow plans as “crackpot” pension schemes. ??Mr. Johnson’s plan, like most of the others, wiped out the elaborate system of employment records kept under the present Social Security Act. Instead, it provided for a pension to every citizen on or after reaching the age of 60, with the simple stipulation that they not engage in gainful employment, that they spend their pension for American goods and services, and that they not maintain able-bodied male dependents between the ages of 30 and 60.?The pension would be fixed at not less than $30 a month and not more than $60 a month. The actual amount would be determined by dividing the total funds available by the total number of annuitants. The funds would be derived from a gross income tax of 2% on individuals and corporations, with exceptions to protect charitable, religious, cooperative and similar organizations. The proponents of the this plan did manage did get it introduced in the House of Representatives, however, the bill died in committee in 1939 before ever reaching a House vote.

Technocracy

Out of America’s fascination with technology came another eccentric “reform” movement known as Technocracy. Founded in 1918 by a California patent attorney it would briefly flare as a serious intellectual movement centered around Columbia University; although as a mass-movement its real center was California where it claimed half a million members in 1934. Technocracy counted among its admirers such men as the novelist H.G. Wells, the author Theodore Dreiser and the economist Thorstein Veblen.

Technocracy held that all politics and all economic arrangements based on the “Price System” (i.e., based on traditional economic theory) were antiquated and that the only hope of building a successful modern world was to let engineers and other technology experts run the country on engineering principles. Technocracy’s rallying cry was “production for use,” which was meant as a contrast to production for profit in the capitalist system. Production for use became a slogan for many of the radical-left movements of the era. Upton Sinclair, among others, affirmed his belief in “production for use” and the Technocrats briefly made common cause with Sinclair, and even Huey Long, in California. But the Technocrats were not of the political left, as they held every political and economic system, from the left to the right, to be unsound.

The Technocrats believed that the solution to all problems of economic security were the same, the rigorous application of engineering principles in a system freed from the Price System. They conceived of retirement as being made possible at age 45 for everyone due to the vast prosperity the new age of Technocracy would usher in. Rejecting all forms of traditional political science, the Technocrats refused to even use standard geographical maps because their boundaries were political, so they would refer to states only by their geographical coordinates. Names, too, were suspect for some reason so members of the movement in California were designated only by numbers. A speaker at one California rally was introduced only as 1x1809x56!

Oddly enough, alone among this collection of radical movements of the 1930s, the Technocracy movement survives, if not quite thrives, into the present day.    

Moving on again, here’s my two cents on the “tragedy” of the cruise ship Carnival Splendor that caused vacationers to endure three days without electricity last week as it was towed to port.

I wish I was one of them!  And why?

Because Carnival is giving all of them a full refund, PLUS reimbursement for travel and hotel costs PLUS a free cruise.  Which means you get a great adventure, a story you can tell the rest of your life, plus a real cruise, all for tolerating a few days without electricity.  A few days without TV.  A few days without elevators.  A few days of lukewarm water or beer or wine.  A few days of spam sandwiches.  

Yes, these are inconveniences, but for the vast majority, the “ordeal” involved no pain, and no mental anguish.  They were all safe, and they knew that very soon they’d be back on dry land.  

But some people are complaining.

With the exception of the aged and infirm who rely on electricity for medical care and need elevators because stairs are too difficult, I have no sympathy.  To me, the most difficult part of that experience would be tuning out the complainers!

And I think anyone who calls a few days sitting on an unpowered cruise ship off the coast of Mexico a “nightmare” should take a lesson from Louis Zamperini, the subject of Unbroken, the new book from Lauren Hillenbrand, who became famous for Seabiscuit.

After competing as a runner (5,000 meters) in the 1936 Olympics, Zamperini joined the Army Air Forces, survived the crash of his B-24 into the Pacific, endured 47 days on a liferaft with two other men-then one-was captured by the Japanese, and spent two years in POW camps, where he was singled out by a particularly sadistic jailer for special abuse.

Yet he survived, damaged but unbroken.  After the war he found peace and fulfillment in Christianity and motivational speaking.  And today, at 93 years of age, Hillenbrand claims that he hasn’t gotten angry about anything for some 40 years.

Interestingly, Zamperini’s goal is to become an inspirational mainstay on cruise ships!

As for the market, we’ve just had a great 10-week surge, in the big 2010-2011 bull market.

But now it’s time for a rest, what technicians call a correction.

The correction, according to fundamentalists, began when Cisco’s management said the future was not so rosy, and it accelerated when fears of a Chinese interest rate hike spread.  If you need such “news” to explain the decline, I understand.

But here’s my two cents.  

The market needed this correction.  It was too strong, too overheated.  It needed a bucket of cold water dumped on it.  And now it needs to inflict a little pain, most likely on the investors who bought most recently, near the recent top.

So it will.

But this correction, regardless of whether it runs two more days or six more weeks (my outside guess), is not the end of the bull market, and here’s why.

Bull markets top out slowly.  They’re characterized by divergences, and narrowing leadership, and we’ve seen none of that recently.

Furthermore, bull market tends to end quietly, with the market turning down while the official news is wonderful.

And that’s not the case today.

So I’m happy to see Cisco’s dour projections.  And I’m happy people are worried about Chinese interest rate hikes.

It tells me there’s more upside ahead, and not until I hear the “all is well” signal from the mainstream press will I truly start to worry.

So what to buy?

Well, how about the next Cisco?

I suggest Riverbed Technology (RVBD), a San Francisco company whose hardware/software packages improve the performance of a wide variety of applications over wide area networks.  Named Steelhead and Whitewater, these appliances optimize the performance of wide area networks.  They accelerate the performance of applications.  They optimize the use of bandwidth.  And they consolidate IT resources, so management gets more productivity for its investment.

And business today is booming!

In fact, revenue growth at the company has been accelerating in recent quarters, and if you’ve been reading my letters a while, you know this is one of my favorite metrics for a stock.

In the third quarter of last year, revenues grew 18% to $102 million
In the fourth quarter of last year, revenues grew 22% to $113 million
In the first quarter of this year, revenues grew 27% to $112 million
In the third quarter of this year, revenues grew 39% to $126 million
In the third quarter of this year, revenues grew 45% to $148 million

In that same quarter, after-tax profit margins were a robust 18.0%

And every time the company grows faster, analysts have to revise their estimates upward … which brings new buyers into the stock … which pushes the stock higher and higher.

Where it will end, I don’t know, but I do know the whole world is getting more wired every day, depending on big networks for information and entertainment.

And I know this company is a pipsqueak compared to tired old Cisco, so it has much more growth potential ahead.

So, you could simply buy the stock here, but I suggest that you first take a look at what Michael Cintolo is recommending.  Mike is the editor of Cabot Market Letter, which recommended the stock back at the end of July, when it was trading at 18 (split-adjusted).  It’s now 29, for a profit of 61% … in less than four months!

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Publisher
Cabot Wealth Advisory

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