Wednesday, July 27, 2011

Washington Is Not Listening -- Let's Give Them Two Reasons to Do So

The Boehner Plan . . . The Reid Plan . . . both of them scarcely distinguishable from each other, yet they fill up and dominate the news from Washington these days. The reason they differ so little is that they are products of the same nursery, or (during these summer days, at any rate) hothouse. Washington is not listening to people outside the beltway, who have actually been there before, and have done this. (That's what happens when you become too accustomed to spending other people's money -- including money that pays for your salary and all your perks -- instead of your own.)

Herewith are two sensible proposals from outside the Beltway, both of which would introduce a novel element of self-interested feedback into trimming wasteful government spending. The first is a short-term one, tailored to the current crisis. The second is a longer-term one, which we could start to implement once we resolve the immediate crisis.

The short-term plan (kudos to Morgan Worstler, at Big Government blog):
No one understands “what” is going to be cut. Saying discretionary spending is going to be cut over ten years sounds like a Nigerian email scam.

So please Boehner, for the love of god, listen to your buddy Morgan…. Just cut federal employee pay.

Give Obama three choices:

1. Cut Federal Employee Pay in every department except Military by $30B per year (off baseline) starting 2012: Ten-year savings $300B

2. Cut Federal Employee Pay in every department except Military by $60B per year (off baseline) starting in 2012: Ten-year savings $600B+

3. Cut Federal Employee Pay in every department except Military by $90B per year (off baseline) starting in 2012: Ten-year savings $1T+.

Make Obama choose. He can’t win.

Tell him that if he chooses low, when the credit card is maxed out again, he is getting the same deal next time. Suddenly, ALL Federal public employees are with our program.

Do you see how simple this is, and how brilliant? Let's let Morgan spell it out:
Overnight, the entire Federal workforce will be desperate to help Republicans make real cuts. Overnight, our “servants” will be finally pushing out the deadwood, over the howls of their union bosses. Let’s get public employee interests aligned with the public.

To give you an idea of how easy these cuts would be, if we cut the full $90B off baseline, Federal Employees would be earning what they last received in 2008. A $30B cut is just paying them what they received this year.

Mr. Speaker, put Federal Employee pay on the chopping block, Americans will be grateful to know where it is coming from… and that is not coming from them. And the Tea Party Freshman will see you know which hostage to take.

The hero takes the bad guy as a “hostage,” and he chooses the bad guy who can actually DIFFUSE THE BOMB.

If we can’t trust Federal Employees to really help Republicans cut spending, they are the bad guys.
Given the overwhelming recent growth in Federal pay, I'd say this cuts right to the source of our current problem, and could be implemented in a heartbeat. Plus, it would teach a very valuable lesson: there is no free lunch on the People's Money. If the People start to hurt as a result of your bozo policies, then you, who devised and implemented those policies, will have to suffer some of that hurt, as well. (Incidentally, as an aside: did anyone else notice the name of the Standard & Poor's executive in charge of reviewing the grade for the government's debt? It's David T. Beers -- no known relation to the PB's Chancellor.)

The long-term plan builds on the same idea, but is even more permanent and fail-proof. I no longer know whom to credit for it; it was proposed by a long-forgotten economist in an article I read in the 70's in an obscure little journal called The Washington Monthly. The basic idea was so good, and so simple to grasp, that I've never forgotten it, although I've forgotten the name of its inventor:
1. The Government announces the creation of a new currency, to exist side-by-side with the dollar.

2. The purpose of the second currency is simple: it will be legal tender, and henceforth, the only legal tender, for all transactions involving the U.S. Government.
a. All payments made by or from the Government will be made only in the new currency.

b. All payments made to the Government (taxes, fees, customs duties, etc.) will also be made only in the new currency.
3. All future government budgets, calculations, projections, etc., will be produced in terms only of the new currency.

4. The dollar will cease to exist as a currency recognized by the U.S. Government. All dollar accounts held at Federal Reserve Banks will immediately be converted into units of the new currency, at an initial ratio of 1:1.
Now, this is the key point -- so read carefully:
5. The dollar will continue to be the basic, and only, legal tender for the private economy. All of our daily business will continue to be transacted in dollars, just as before.

6. In order to deal with the Government, persons holding dollars will need to convert them into the new currency. (We need a convenient name for the new currency. The original author, I remember, suggested the name "Budget Bucks", or "BBs" for short, and that will do fine for now.)

7. All persons having dealings with the Government -- federal contractors, members of Congress and their staffs, the President and his staff, all federal judges and their staffs -- will be paid in BBs, and so they will need to convert them to dollars in order to buy groceries and pay their normal bills.

8. Dollars will freely be convertible to BBs, and vice versa, at all banks, or at local post offices.

And that's it! See how simple it all is, once again? Consider these aspects of the plan:
A. The convertibility of dollars into BBs, and vice versa, will establish over time an exchange rate, which will be set by the market, just as with any foreign currency. (As we saw above, the initial official exchange rate, to be fair, will be exactly 1:1 -- but it will apply only to those holding accounts at Federal Reserve Banks. Immediately thereafter, the BB will be free to float on its own.)

B. If the supply of dollars exceeds the supply of BBs, the latter will grow in value to be worth more than the dollar.

C. But -- and here's the kicker -- if the supply of BBs grows without bounds, due to profligate government spending and "budgets", the value of a given BB will drop in terms of the dollar.

D. And the dollar, freed of its government tether, will actually have a value in proportion to all of the goods and services which people using it create.
The beauty of this plan is that it will let the politicians play with their money -- the BBs in circulation -- all they want, and will divorce from us their ability to mess with our money supply. To the extent the politicians bring their own house into order, and balance their budgets, they will be rewarded in seeing that their salaries are actually worth something in the real world, when they exchange their BBs for dollars. But to the extent they run wild, then the more they try to make up for the loss in BB purchasing power by raising their salaries and perks, etc., the more their BBs will depreciate. As I say, the scheme is self-regulating, and therein lies its simple genius.

Doubtless the implementation of a real dollar-BB system would require a conference of monetary scholars and economists to work out all the finer details of implementation. But the basic idea could be expressed in a law to be passed by Congress (since it already has the constitutional power to regulate money) -- and then enshrined as a Constitutional amendment once the kinks were ironed out, in order to prevent Congress from tampering with the idea for its own benefit.

So call or write your Congressional representatives, and let them know that you want them to implement the Worstler (federal pay reduction) plan tomorrow, and start the wheels churning for an eventual two-currency system down the road. You will have no trouble sounding rational and sensible, because those plans are far better than anything Washington has thus far come up with on its own.


  1. Dear Mr. Haley,

    As a current Federal employee, I can honestly state that the short-term proposal suits me just fine.

    The longer term proposal, however, will require a bit more thinking on my part to see if there are any issues. As I am also retired military, I am thinking that I don't want my military retirement, nor my monthly Social Security check (for which I will be eligible before the end of the year) paid in BBs, which the second plan would seem to dictate.

    I (and my employers—at least the private sector ones, but considering how the government designed and operates the SSS, I would not be surprised to find they pulled a fast one and didn't fund military retirement) faithfully paid the payroll tax on my earnings for my entire working life, and I view those two payments as contractual obligations, particularly military retirement. I would be pleased to opt out of Social Security provided only that the perpetrators of that Ponzi scheme* refund to me all of the contributions I (and my employer) paid in, adjusted for inflation and with an appropriate rate of interest for the years in question. I could use the refund to purchase a guaranteed annuity that would cover the balance of my life, on the open market. Possibly, something similar would work for the cash portion of my military retirement, although that would be defined not by contributions, but by the present value.

    In exchange for assuming the responsibility for my retirement funds, the refunds will need to be in dollars, not BBs. This has the benefit that it removes both SSS and military retirement from the unfunded liabilities column, and converts SSS to what amounts to a defined contribution plan.

    Anything less would simply be a breach of contract on the part of the U.S. government, in my humble opinion.

    I am unsure how my fellow current military retirees would react to such an alternative, but I would not be too surprised to find that many would agree to such terms.

    Pax et bonum,
    Keith Töpfer

    *—A fact admitted by J. Douglas Brown, one of the better known members of FDR's committee to design Social Security, in a Sunday Washington Post interview about two weeks before he died. I know this because I read the article that Sunday. I was stationed in the D.C. area at the time (early January, 1986) and had not yet cancelled my subscription to the rag.

  2. My dear MA,

    Thank you for that helpful comment -- this is part of the shakedown process for any proposal. No, of course it would not be fair to have current recipients of SS or VA benefits suddenly start receiving their benefits in BBs. There would have to be an equitable transition process, perhaps involving some sort of lump-sum settlement based on past contributions and present values, as you indicate. But all future contributions to Social Security and Medicare would have to be made in BBs, and paid out in BBs, until people's contributions to those Ponzi schemes became so cheap (in BBs) as to be worthless. Of course, they could use their ongoing payouts in BBs to pay the bills for care at Government and VA hospitals . . . but those hospitals would probably go out of business before long if government didn't bring its budget into balance, because they would have to buy their supplies from vendors in real-world prices, which would skyrocket if the BB depreciated.

    The self-regulating feature of this plan is its best feature. It is absolutely ruthless, and allows for no smoke and mirrors whatsoever. WTH, it might even eventually make politicians per se obsolete -- why would anybody even listen to their promises? We could possibly just end up actually electing some real statesmen. (!)

  3. Just to take up Martial Artist's point regarding Social Security, to have been a flat-out Ponzi scheme, wouldn't its architects have to have KNOWN from the outset that contributions would not be ring-fenced and that the age pyramid would certainly invert by the end of the century.

    I'm not sure if anyone in the 1930s would have predicted the dramatic demographic transformation that began in the 1960s, nor do I get the sense from the early debates over Social Security that its receipts were envisaged as simply another source of government income.

    To me, Ponzi scheme implies intent. That doesn't mean that the current system isn't broken, because it is, but it's as much the result of naivete and inaccurate predictions as malfeasnce.

  4. @Jeremy Bonner,

    You ask: "to have been a flat-out Ponzi scheme, wouldn't its architects have to have KNOWN from the outset that contributions would not be ring-fenced and that the age pyramid would certainly invert by the end of the century."

    You are correct with the exception of your assumption that it would have to be by the end of the century. Professor Brown acknowledged that they did know, because the system was designed from the outset to pay current retirees from the receipts of current workers.

    Prof. Brown was quoted(*) in the profile article, that the members of the Commission "knew that the system would go bankrupt. They calculated that it would happen" in about 2050, by which time "they would all be dead, and what could anyone do to them then. The only mistake they made" was to underestimate the acceleration "in the rate of change of life expectancy(#)" that subsequently occurred in the five decades between the passage of the bill and the time of the interview.

    It is, and was designed to be, a Ponzi scheme. Quod Brown erat demonstrandum.

    Pax et bonum,
    Keith Töpfer

    (*)—My words are a very close paraphrase of the quotation because the WaPo digital archives appear not to contain the article in question. I know not whether this is because it was earlier than the start date of digital archiving, because it was in a non-news section of the paper, or it was excluded for unspecified reasons. It may exist in a physical morgue of old issues at the paper. The words I remember exactly from my reading in 1986 are in quotation marks, the rest of the italicized portion is the paraphrase.

    (#)—Stated another way they assumed that the time rate of change in life expectancy over some previous relatively long period would continue with, at most, minor increases in rate. Instead, we experienced an increase in the rate at which the change in life expectancy increased. In mathematics this latter amount would be the second derivative of the function.

  5. My dear Mr. Haley,

    Given your agreement with respect to current moral (even if not legally enforceable) commitments by the U.S. government, please consider me enlisted in the cause.

    Pax et bonum,
    Keith Töpfer

  6. To elaborate on the ponzi scheme meme:

    Remember that Bismarck chose 65 for Germany's retirement age because that was above the life expectancy at the time. Today we should have raised retirement age to something comfortably above 70 to reach the same state.

    Secondly, the architects of state supplied 'old age' pensions neglected to realize that since the only retirement security in olden times was children, that state welfare (and it is welfare) for oldsters would act to depress the birth rate.

    On another topic in the original post:
    It is essential that the military be cut (and massively) as well. If you don't want to cut military pay, cut head count. Ending our witless wars would go a long way towards accomplishing this. Our empire is bankrupting our country as much or more than any of the other sources of expenditures. Many 'conservatives' prefer not to consider this.