Friday, October 15, 2010


The word, "unsustainable" is defined as something that cannot be continued or maintained.

James Macdougald is the author of Unsustainable: How Big Government Taxes And Debt Are Wrecking America. It is easy to discredit the messenger, but the points raised in this book, which I will summarize below, are both mind-boggling and essential for all Americans to grasp.

Here are some of the essential details:

A) Facts and Conditions Which Have Created What Is Unsustainable:
There are 89,000 public sector entities employing 22 million people who are supported by taxes, fees and tolls. Macdougald argues that America currently has federal, state, and local governments which have redistributed so much income to themselves that tax revenues are no longer adequate to support the wages, pensions, and other benefits that they have promised themselves. The book points out that there are specific conditions which set the stage for growth and power of government. The first contributor is a serious economic crisis. The second condition is that the portion of the population either employed by or dependent on the government must be growing and vulnerable. Interestingly, approximately 47% of working American tax-filers pay zero income taxes today. That means 53% of working Americans have to fully support aid and services for all non-working citizens as well as all of the non-taxpaying citizens. The third condition is that scapegoats must be identified as the cause of the problems, motivating unification of the majority of voters.

B) Conflicts Between Public and Private Sectors:

Macdougald points out in blunt terms that the private sector is dying while the public sector is thriving. Within the ten years prior to 2009, the private sector lost 1.5 million jobs, and the public sector grew by 2 million within this same time period. While the private sector has been plagued with bankruptcies, lost wages, decreases in benefits and huge unemployment, the public sector has enjoyed job security, high pay, unparalleled health insurance and pensions that are payable as early as age 40, and routinely payable at age 50 or 55. The Bureau of Economic Analysis reported that in the first quarter of 2010, private sector workers earned $300 BILLION less than their counterparts did in the last quarter of 2007.

The private sector workers are squeezed because notwithstanding the fact that they are experiencing income deflation, they have to support the expenditure of a growing population and a growing government, whose benefits are richer than their own. This same Bureau conducted a study that showed that as of 2008, the average federal worker received $119,982 in compensation and benefits compared with the private sector average of $59,909. For public employees, the "benefits" component was $40,785, as opposed to the private wage earner whose benefits component only averaged $9881. With a total of 1.9 million federal workers, the difference in annual compensation was $114 Billion a year, and is supported by private sector businesses and their employees. Despite the impact of near record unemployment in the private sector in 2009, and massive increases in government debt, the government workers still received raises in terms of incomes and pensions for the year.

C) Uneven Accounting Standards:

Even more revealing is the fact that federal, state, and local governments and school districts are able to hide the actual costs of benefits that private citizens actually pay to them. For the private sector, the Federal Accounting Standards Board (FASB) recognized in the mid 1980's that corporations had pension plans that carried with them significant liabilities which were not shown on their balance sheets. The concern was that these future liabilities would impose financial strain on these corporations, a fact that was not readily discernable to investors. In reaction, the law was mandated requiring corporations to report these future liabilities on their balance sheets. This makes perfectly good sense to me. The problem and inconsistency is that the federal government is not subject to the FASB accounting and disclosure rules. The Government Accounting Standards Board (GASB) allows for off balance sheet accounting for government pension liabilities. This is a classic example of the golden rule. "He who has the gold rules".

D) Special Public Sector Retirement Goodies:

Many public sector pension plans permit the aggregation of unused sick pay or vacation pay or overtime to be paid during the final year before retirement. This policy known as spiking results in inflated earnings in the last years of employment, causing significantly larger pension payments throughout retirement. In Baltimore, the cost of paying pensions for firefighters and police could more than double in the year 2010 from the prior year. City officials predict an 11% increase in property taxes and cuts in services just to pay the pension bill.

E) The Social Security Crisis:

When Social Security was enacted in 1935, it was never perceived that life expectancy would extend from age 68 to age 80. As a result, it was never contemplated that the number of retirees would exceed the number of workers. In reaction to increased life expectancy and the diminishing population of workers to support the growing population of retirees, since 1983, the government has collected $2.5 trillion more in Social Security taxes than what was required to support current retirees. In essence, workers have paid social security taxes twice since 1983, once to provide benefits to existing retirees and a second time to pre-fund a significant portion of their own retirement benefits. Instead of putting our Social Security taxes in a trust which was to be spent only for future retirement benefits, the government spent the money elsewhere through massive government spending programs. It did this through depositing U.S. Treasuries, not real money, into the Social Security trust fund. Treasuries are IOU's. The government uses Treasuries to borrow from taxpayers and other governments. The government spent our social security savings knowing that there were only IOU's on the other side. This has resulted in the greatest Ponzi scheme of all time. Congress has "stolen" from the trust fund by issuing promises to repay though IOU's, and now after spending recklessly for decades, we learn that there is no money in the trust. Congress' proposed solution is to impose more taxes. Evidently twice was not enough. If these kinds of shenanigans occurred in the private sector, there would definitely be jail time.

F) Unions and the Public Sector:

Public sector employees, hired by taxpayers, have a monopoly on the services that they are paid to provide. Unions collect as dues about 1% of public sector's salaries. The unions use the income derived from these dues to provide financial support to politicians who support their agenda. This is a classic conflict of interest. As taxpayers, we are funding the salaries of public sector employees. And these public sector employees are using the income we paid to them to support their agendas which are in conflict to the interests of us the taxpayers, who are after all their employers. Public sector unions have tremendous clout because they operate in a non-competitive environment. We cannot buy police or fire protection elsewhere even if the costs that the unions negotiate is too high.

G) Unsustainable Realities:

I was so moved by his findings that I telephoned Jim MacDougald. We had a lengthy conversation. His basic position is, as taxpayers, we should know for what we are paying. There is no true accounting for the real unfunded pension liabilities. When we go to the polls and support programs, we don't know what our current expenses are, and therefore the true budgetary impact of legislating programs. I asked Jim about our military spending, and what percentage the military comprises of GDP. Jim informed me that no one really knows because there is no accounting or accountability for weapons or aircraft versus pension costs. Everything is lumped together, and there is very little transparency. What he did say is that the "best guess" is that the federal debt is $120 trillion. This equates to the average worker in the U.S. owing $1.2 million today. If the interest rate to service this debt were just 5%, it would cost each worker $60,000 just to cover interest costs without ever reducing principal. And this is utterly UNSUSTAINABLE.

H) My Takeaways:

Last year Jim helped to found The Free Enterprise Nation to rectify these disparities. The organization has no political affiliation. The unsustainable situation was fostered by both Republicans and Democrats, and the solutions to the plight are education, advocacy, and cooperation of all Americans to end politics as usual and to accept compromises and sacrifices. As a nation, we are at a philosophical crossroads. It is too easy to pigeonhole Democrats as being for the little guy and the underprivileged, and Republicans as heartless and only caring about their wallets. However, I believe that today the debate has moved much deeper than these stereotypes. The real philosophical tug of war is whether we should look towards the government to make lives better, or whether private citizens should be most empowered. I believe that being Republican or a fiscal conservative and having a bleeding heart and caring for the underprivileged are not mutually exclusive. In fact, though I am really an Independent, I have come philosophically to abhor big government. I think its effect is to keep the underprivileged, well, underprivileged. When governments get too much power, historically bad results follow. This has been true for World War Two Germany, Russia, China, African nations, etc., etc., etc. I am not comparing the current U.S. government with any of these regimes. I am just saying that too much power and control, militarily and/or economically, scares me.

I believe in the genius of mankind manifested through true entrepreneurial spirit. Furthermore, our government gets a big "F" for energy policies, public schools, postal service, railway systems and ethics. Therefore, I want them out of healthcare and anywhere else they seek to exert and overextend themselves. This is far deeper and wider than a liberal or conservative sound bite. Governments hired by us have forgotten for whom they work. They have demonstrated absolutely no fiscal responsibility, and I have come to agree with MacDougald that big government has made our nation's optimism for a brighter tomorrow unsustainable.

I) Conclusion:

Last year Jim helped to found The Free Enterprise Nation to rectify these disparities. The organization has no political affiliation. The unsustainable situation was created by both Republicans and Democrats, and the solutions to the plight are education, advocacy, and cooperation of all Americans to end politics as usual and to accept compromises and sacrifices.

I asked Jim if he would consider speaking to a group of our clients and friends. He said that he would. So, if you would be interested in getting more facts on these matters and being able to speak directly with the author, please let us know. These facts are crucial for all Americans to appreciate. Therefore, I encourage you to forward this letter to anyone who should also be in the know.

The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.

This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. We suggest that you discuss your specific tax issues with a qualified tax advisor