Nevada, or, as I like to call it, “Snowfall,” may be poorly named after the blizzard of ads we’ve been seeing elsewhere in Florida, South Carolina, New Hampshire, and Iowa; but beneath the calmness and lack of exposure is a well-oiled strategic machine that is methodically getting out the vote.

If the latest poll is to be believed, Mitt Romney might just strike political gold in the “Silver State.” Romney is the favorite of 50% of likely GOP caucus-goers, according to the Democratic-leaning polling firm Public Policy Polling. He’s leading his next closest rival, Newt Gingrich, by 25 points. Ron Paul is third at 15 percent, and Rick Santorum is fourth at 8 percent.

Nevada has been particularly hard hit by the economic downturn, with a high number of home foreclosures and an unemployment rate that recently soared to an all-time high of 14.9%. In other words, Nevada’s looking for a turnaround; Nevada Republicans think that the guy who turned around the Olympics next door might be able to help.

For the Mitt supporters out there, Romney is doing especially well in the state that went for Barack Obama in 2008, with 55% of the vote. I quote the PPP poll:

Romney hits the 70% favorability mark in Nevada, something we’ve seen for him in very few states. Just 25% see him unfavorably. That’s partially due to an 89/8 standing with Mormons, but he’s at a still very strong 64/30 with non-Mormons as well. One thing that’s contributing to Romney’s strength in Nevada is a strong advantage on the electability question. 56% think he would be the strongest candidate against Barack Obama this fall with no one else topping 21%.

He has several things going for him that other candidates will have a hard time matching. The first is that a caucus, unlike a primary, discourages turnout, which helps Romney, who has had some of the most predictable polling of any candidate thus far. The second is that a well-organized caucus operation can be “turned on” to win a swing state later on. These two insights were what led Barack Obama, who narrowly lost the caucus to Hilary Clinton, to capture the nomination.

The way to think about Nevada is that it is really three different cultures, all of which are nominally tied together in a distant capital. There are two urban areas—Los Vegas and Reno—and the rest is about as rural as you can. That’s part of the reason it is so hard to poll. This became evident in 2008 when Nevada went 37.4% for Romney when only 5% was predicted.

Las Vegas, Nevada’s biggest city, itself tends to have very low turnout in general. Part of this is the transient population; part of it is also that everyone works all night and sleeps during the day. But there is, at least, on the GOP side, one major exception to this rule: the Mormons. Vegas, as with much of Nevada, was first settled by Mormons as part of the Mormon corridor. Nevada’s two senators, Dean Heller and Harry Reid, are both members of the church of LDS. Reid is a convert and the atypical Mormon Democrat. But even Mormon Democrats look upon Mitt Romney favorably.

But there are two groups that are going to help determine the general election: Latinos and Labor.

If Romney can do as well among Nevada Latinos as he did among Cuban Americans, he will win Nevada in the general election. It is one of the big open questions of this race as to whether or not the son of a Mexican Mormon can defeat the first black president, Barack Obama.

As to the second group, Romney just isn’t going to get the Labor vote, but he can help to fight it by aligning with its biggest foe and his biggest foe’s backer: Sheldon Adelson. Adelson became politically active when the labor unions that wound up endorsing Barack Obama began organizing in front of his non-union hotels. He was miffed, so he began donating to the Republican Party.

Were I Romney, I would make a quiet overture to Sheldon Adelson.  Not only will this suck the oxygen out of the Gingrich campaign—Adelson will be less likely to donate to Gingrich if Romney can show him that there is no space between them on key issues—but it will also send a signal to some of the other casino moguls leery about supporting Romney.

Though Mormons personally oppose much of what Vegas stands for, much of the hotel industry in the city is run and staffed by them. Indeed, Romney’s first name, Willard, comes from J. Willard Marriott, the hotel magnate and best friend to George Romney. Romney sat on the board of the Marriott hotels between 1992 to 2001. He ought to stress that, based upon that experience, he understands the issues facing casino and hotel owners and can fight against the demonization of Las Vegas by Barack Obama.

By focusing on how President Obama’s policies have made Nevada’s recovery nonexistent, Romney can use the springboard of his probable win tomorrow when he comes back in November. As Romney has put it, the economy is “my power alley.”

1. The Euro – A default by any other name:

Greece will default on its debt, probably within the next 60 days.  They’re working on a plan that will allow the EU leaders to call it something else, but whenever lenders get taken to the cleaners by a borrower there has generally been a default.  Greece’s lenders (bond holders) are soon to be taken to the cleaners (again) so we’re about to see the first default in a Euro Zone country.  Now this Econoblastoma has been under treatment for a long time with, we’re sorry to say, poor results.  The prognosis is dire.

The reader will recall that over a year ago, the private bondholders who loaned money to Greece (based on fabricated economic assurances by the Greek government) were informed they would have to take a 20% haircut in order for Greece to meet its obligations.  Then last July the bondholders were told that 20% just wouldn’t do it, and that a 50% haircut would be required.  Now the bondholders are being told,  “fifty percent?” well, “that was okay for starters,” but it’s not nearly enough to treat this particular Econoblastoma.

No, it seems the cure for years of Greek profligacy will require that the holders of about  $206 billion in Greek bonds will have to swap them for bonds that will pay, upon maturity, 60% less.

And, oh yes, that maturity date will have to be strung out somewhat longer too. And, did we mention, Greece wants the interest rate they will have to pay to be reduced to something under 4%, like maybe 3.5%.  Now, that’s within 375 basis points of what the United States of America pays for its long bonds.  And, to complicate matters more, the private creditors are insisting that if they have to take a 60% haircut (or more) than it is only fair that the public bondholders (think European Central Bank) take the same haircut. “It would be outrageous if the ECB doesn’t take part as keeping their Greek bonds to maturity would allow them to make a profit, while everybody else is taking 70 percent (losses) or even more,” one source close to the talks said.  To complicate matters even more the ECB is demanding greater austerity commitments by Greece, many of whose elected officials are facing elections in the spring.

Now, the real concern isn’t about the fate of Greece.  After all, Greece’s entire GDP is about the size of one major American city.  The reason Greece is creating such heartburn throughout Europe and, yes, here in the United States, is that if the coming default get’s sloppy, as we believe is likely, an entire gaggle of EU countries could see their cost of borrowing go through the roof as Portugal is experiencing as we write this essay.  That’s why the EU is cobbling together the biggest “firewall” it can.  What does all of this mean?  It means that the recession into which Europe has really already descended could rapidly deteriorate into an economic depression and that would have severe implications for America given the importance of Europe as the leading destination for American exports.

2. Declining Job Creation

This is the symptom we most want to avoid. Job creation ticked up nicely at year’s end and that’s good.  Net job creation is a far more important indicator of economic recovery, or lack thereof, than the monthly unemployment claim data on which the media tends to focus.  People taking poor jobs or multiple jobs just to make ends meet, or people who just throw in the towel and stop looking may lower the claims for unemployment compensation in a given month, but it doesn’t tell us much about the health of the economy.  Job creation data, however, do.  According to the Bureau of Labor statistics, 2011 ended with 200,000 new jobs created in the month of December.  That was encouraging, but whether it can be sustained month after month is questionable.

According to economist Nouriel Roubini of New York University’s Stern School of Business and Chairman of Roubini Global Economics, US job growth is still too mediocre to make a dent in the overall unemployment rate and on labor income. The US needs to create at least 150,000 jobs per month on a consistent basis just to stabilize the unemployment rate. More than 40 percent of the unemployed are now long-term unemployed, which reduces their chances of ever regaining a decent job. Roubini also notes that firms are still trying to find ways to slash labor costs in order to stay competitive and grow their companies.

While the trend has been in the right direction, the average seasonally adjusted number of jobs created per month last year was below Roubini’s estimate of what it takes just to break even.  Monthly Job creation is, perhaps, the most critical measure of the economic health of the country. We’ll closely watch this indicator.

3. A Decline In US Exports

Our exporting industries are vital to the American economy, accounting for somewhere around 11% to 12% of our entire GDP.  We are the world’s leading trading nation although we import considerably more than we export.  Our goal, of course, is to sell more (abroad) than we buy.  While that is a goal we rarely achieve, a sustained net decline in exports will most certainly have a negative impact on the American economy.   As 2011 came to a close the United States was experiencing a decline in new orders for durable goods and that was probably a pretty reliable sign that Europe’s slowdown has begun to affect the U.S. economy.  While, overall, exports dropped 0.9%, exports to Europe fell more sharply — nearly six per cent. We believe Europe is in major trouble and the odds are that things will only get worse in the short to medium term, which will cut demand for American-made goods. Europe accounts for about 20% of all U.S. exports, so the mess in Europe (Euroblastoma #1 above) is also a mess for us. A decline in exports translates to a decline in US economic growth. Less production at factories and weaker revenue for U.S. companies obviously means a weaker US economy.

4.  More Quantitative Easing

Quantitative Easing is a euphemism for printing money in order to buy US debt, which, in turn, keeps the nation’s cost of borrowing down…at least temporarily.  When the Federal Reserve steps in and buys US debt at auction it creates what we think is pseudo demand for our debt.  Given the uncertainly about future demand for European sovereign debt, there may be no other place for bond holders to go, assuming they place a high priority on preservation of principle, so there may be no need for further Quantitative Easing.  There are three reasons to keep interest rates unrealistically low.  First, easy money generally stimulates an economy and our economy still needs plenty of stimulating (although not way the government chooses to stimulate the economy). Second, the government really can’t afford to pay higher interest rates on its debt and, finally, and somewhat cruelly, it forces almost everyone to take greater risks.  This causes generally conservative fixed income investors to turn to riskier equity investments, driving up the price of equities thereby generating an aura of wealth creation.  Unfortunately, our past experience with Quantitative Easing suggests that the price of commodities will also rise driving up the cost of many essentials.  Talk about Voodoo Economics.

5. Bond Vigilantes Turning the Tables On The Fed

The Fed doesn’t quite have the free hand many politicians think it has.  It is true that, so far, Quantitative Easing has created enough demand for our debt to keep down the government’s borrowing costs.  The ECB has been practicing it’s own version of Quantitative Easing in Europe and we’ve still seen great volatility in borrowing costs among troubled Euro Zone countries.  In other words, when bond purchasers dig in their collective heels and stay home when sovereign bond auctions take place, they send a sudden and drastic message.  They become bond vigilantes and they can and have forced up interest rates.

The United States has already had its debt downgraded by Standard & Poor’s, and should the bond vigilantes decide they deserve a greater return for the risk they take when lending to the United States the results could be catastrophic given the fragility of our economy.

For the time being, US Treasuries are a hot item with a $15 billion auction of Treasury Inflation-Protected Securities (TIPS) this month drawing the strongest demand in nearly a year even though yields on the notes average less than zero percent for the first time. Yields on all types of Treasuries are at or near record lows and, except for the 30-year bond, provide negative real returns net of the Consumer Price Index.  Given the paucity of fixed income alternatives, we do not see Bond Vigilantes lurking in the shadows, but it would be a very serious precursor of serious trouble ahead should they awaken from a long slumber.

6. A Decline in Consumer Spending

When all is said and done, if the American consumer won’t buy, the American economy won’t grow. The fourth quarter, which started out with a bang ended with a whimper, with December sales much weaker than expected.  The Wall Street Journal reported that sales all but stalled in December increasing only 0.1% from November.  December sales were driven by deep retailer discounts and the strong sales for the fourth quarter overall were a significant draw on consumer savings. Spending at retailers sagged each month as the quarter progressed.  It is expected that much of the first half of 2012 will see reduced spending as consumers replenish their savings.  A steep decline in consumer spending will be a severe blow to our recovery hopes, and the current politics of envy, whereby the Administration targets for tax increases the so-called 1.0% who happen to pay nearly 40% of all federal income taxes is, in our judgment, very ill-conceived.

7. Inflation

Conventional wisdom and generations of experience teaches that a surplus of money in the economy will, sooner or later, result in inflationary price increases.  Inflation, would, of course, torpedo any hope of economic recovery. Those on the left who advocate robust and muscular spending initiatives argue that we needn’t constrain government spending because the beast of inflation hasn’t raised its head.  That seems akin to a physician counseling a patient that there is no reason for him or her to stop smoking because there seems to be no evidence yet of lung cancer.  We would counsel such a patient to change doctors.

By Hal Gershowitz and Stephen Porter

Early in his presidency, President Obama made disparaging remarks about business owners whose companies had corporate jets. This was done in a blatant attempt to incite class warfare, despite the fact that the country was in a deep recession. By his words, the President willingly sacrificed the jobs of the very people who supported him through union dues. He knew the liberal media would not expose the tragic result his words would have on the private jet and airplane manufacturing industry.

In Wichita, Kansas, the home of private aircraft manufacturing has suffered tremendously, as thousands of union employees employed by Cessna and Beechcraft have been laid off, not to mention the thousands of jobs affiliated with general aviation lost across the country including manufacturers, part suppliers, fuel, pilots, mechanics, FBO services and insurance providers. Additionally, due to the loss of significant sales, use, income environmental and aviation tax revenues, thousands of local, state and federal employee positions, many of which were union jobs, have disappeared.

Adding insult to injury now the White House Defends User Fees of $100/flight on general aviation and corporate aviation to raise revenues in Obama’s continued class warfare and redistribution of wealth scheme in his effort to bring down America. Ironically this will cost more jobs, many of them union, as revenues ultimately will be reduced as fewer aircraft are purchased and general aviation travel is curtailed due to the added expense. The vicious cycle will continue to perpetuate itself at the expense of American jobs!

Further evidence was seen in December when Obama began his campaign against the Keystone XL pipeline (see White House, GOP Battle for Supremacy on Keystone) and again recently when he voiced his opposition of the Keystone XL pipeline that would have created or saved some 20,000 union jobs. He did so to cement campaign support from his environmental buddies. His reasoning:

The President says he’s turning down the project not because it isn’t worthy, but because of what he calls an arbitrary Feb. 21 deadline he was given by Congress to make a decision. The deadline was set by a GOP-written provision as part of a tax bill that Obama signed into law just before Christmas.

This is the same President that rejected a Republican controlled house offer in December 2011 to extend employee payroll deductions until December 31, 2012, and instead demanded a two month extension so he could further evaluate the Keystone XL pipeline (see Obama’s Keystone Delay Flouts the Law). This is despite the fact 56% Favor Building the Keystone Pipeline, Think It’s Good for the Economy (see Obama Ignores His Own Energy Goals in Rejecting Keystone XL). It should be apparent this President has no loyalty to anyone, except himself. It is another perfect example of his intent to Rule by Fiat and move America to totalitarian socialism!

Based on these comments, the President has riled certain labor leaders (see Job Killers-2, American Workers-0). It is apparent that some union members are now questioning who the President is looking out for!

Knowing he had to mollify union members and Big Labor bosses after throwing them under the bus the last three years, Obama recess appointed radical members to the National Labor Relations Board (NLRB) in an effort to achieve Card Check.  The Rogue NLRB has responded by reversing previous pro-business decisions and proposing new regulations designed to promote union Corporate Campaigns in a blatant attempt to achieve EFCA Through the Backdoor. Additionally, the NLRB decided to take on Boeing in an effort to further big labor power and suppress Right to Work in South Carolina and across the country. However, despite the fact that the Machinists’ union and Boeing came to an agreement and the NLRB has rescinded its charge this Sleight of Hand from the Rouge NLRB has actually resulted in the loss of union jobs, not reported by the liberal media. Boeing recently announced it will be closing its 85 year old plant in Wichita, which will result in the loss of approximately 2100 jobs, most of them union (see Kansas Common Sense – Kansans Troubled by Boeing’s Announcement to Close Wichita Facility).

Again, Obama’s media friends provided little coverage of this disastrous loss of jobs seemingly oblivious to the fact America Needs an Effective Leader, Not a Politician! Their liberal ideology blinds them to the fact Obama’s Rule by Fiat is A Death Penalty for Employees and Employers. When Will the Main Stream Media Wake Up and realize they are adding and abetting the loss of the very middle class they claim to support?

It is inconceivable that rank and file union members will continue to allow the Big Labor bosses and the President to sell them down the river. However, with little mainstream media coverage most of them are going about their daily lives taking care of their families, doing their jobs and trying to enjoy life. It is a shame that the President’s delusional ambition of Political Aspirations & Payback Ahead of American Jobs combined with Big Labor boss greed and quest for survival are rapidly destroying the middle class dream they purport to defend. Each union rank and file member needs to realize that America needs a new leader and it is time for a change at the top, before the American dream is gone forever.

According to economists surveyed by USA Today, much of the excitement around December retail sales was “hype,” and the fourth-quarter bounce was largely driven by post-earthquake/tsunami activity in Japan, not domestic policy. (When the economy suffers, the President blamed the earthquake; when it recovers, curiously, no earthquakes merit mention).

No longer buying Obama - in China or at home (Photo: CNN)

There is continued uncertainty in Europe, and even new uncertainty about slower Chinese growth. But the great drag on the economy remains the American housing market, according to economists, even though many of them expect prices to stop falling this year. Government interventions and bailouts under Obama and his predecessor may have deferred some pain but have prevented markets from full correction and recovery, reinforcing deep uncertainty.

The eagerness of many journalists to report the (real) positive developments of the past several weeks may have had as much to do with providing the president with a good message for the 2012 election year as with delivering good news to a public desperate for positive signs.

The 112th Congress has succeeded in restoring some fiscal and regulatory stability, but the president’s refusal to compromise on debt and deficit reduction has created new financial uncertainty. The U.S. is still the borrower of choice for global lenders–but only because the dollar remains the global currency, and because the rest of the world is in worse shape.

The President, for his part, continues deliberately to seek confrontation with his political opponents over even the most obscure details–confusing “taxes” and “revenues,” for example, in an attempt to paint Republican opposition to the former as intransigence on the latter. The result is a sense that the country is rudderless, its stagnant economy restrained by a government that insists on controlling more and more yet capable of managing less and less.

Government welfare is addicting.  It creates dependency by the recipients and control for the government.  Federal welfare takes many forms.  We tend to focus on the part that is meant for the poor but that may be the least offensive version.  The program is ineffective and immoral but at least we can see the need.

From an economic point of view, many of the other versions are far more dangerous; welfare programs distort market signals.  They reward and encourage inefficiencies, wastefulness and even corruption.  These programs are not charity, they are vote buying.  Charity is when you give YOUR OWN money, not someone else’s.

But, the federal dependency has many more facets.  There are countless businesses lined up at the trough to get their taxpayer feeding.  Solyndra is but one example and even it is not the most egregious for the simple fact that it received a grant, a one-time thing.  These are bad enough and there are plenty of other examples but the real culprit in all of this is the entire dependency system that the federal government encourages and perpetuates.

The government’s perpetual intervention into the economy, mostly in the capital markets contributes to undermining the free operation of the economy.  Prices are a communication system.  We know what job to take based on the compensation offered; we know where to invest based on the profits and losses of the firms we are considering.  When the government intervenes, it distorts prices and then the communication system is full of static and false signals.  These interventions take several forms, all of which should be eliminated entirely.

Government Sponsored Enterprises

Exhibit A  are the Government Sponsored Enterprises (GSEs) and the foremost among them are Fannie Mae and Freddie Mac.  They have been proudly screwing up the housing market for years, since 1938 and 1970 respectfully.  They have been serving as outplacement firms for displaced politicians for years and so naturally they are run much like the federal government; at a loss and begging for more taxpayer’s money.  Of the Fortune 100 for 2011, six firms report a net loss, Chrysler, Bank of America, Sprint, Rite Aid, Fannie Mae and Freddie Mac.  The government sponsors two and “bailed out” two others.  All are a money pit of wasted capital.

Subsidies

But, the GSEs are only part of the issue and subsidies are more insidious.  The federal government hands out subsidies and money to so many it is hard to track.  Dairy, sugar, corn, wheat, barley, oats, cotton, rice, and many more agricultural producers get subsidized as do all the energy producers and countless other firms and industries.  Subsidies create an over-supply by propping up inefficient producers and thus wasting resources.  Subsidies push prices down to the over-supply thus creating a “need” for more subsidies.

Loan Programs

Then there are the loan programs.  Small businesses have loan programs, minority owned small businesses, women owned small businesses, small businesses owned by minority women, loan guarantees for big businesses and student loans to name a few.  I am a huge fan of small businesses.  I have written and done research on entrepreneurship and there is no bigger supporter of the entrepreneurial process.  But, I am an even bigger fan of efficient use of resources and if a business cannot make it without a government loan its resources should be bid away by better firms.  If we, as consumers choose not to patronize the business, why should we as taxpayers be forced to support it?

And then there are student loans.  The next bubble, the collapse in waiting.  I am a college professor, among other things.  A large portion of my income is dependent on people wanting and getting a higher education.  But the entire industry save Hillsdale College is dependent on federal grants and loans.  Want to know why the drop out rates are so high and college degrees are not that valuable, part of the explanation is that the student loan programs allow marginal students to attend.  Colleges, hungry for money lower academic standards to get a year’s tuition from a student that would not have gone to college fifty years ago.  And might I mention that at the bigger schools a potential faculty member’s prospects are partially dependent on how much federal research grant money he has.

State Aid

I spent five years as a senior budget analyst for the State of Maryland.  It is obscene how much money the federal government gives back to the states (with strings attached).  The states are dependent on federal programs for highway construction, national guard, law enforcement, all sorts of health programs, education, public broadcasting, environmental regulations, subsidized housing and on it goes.  In 2011, Maryland received almost 12 percent of its total budget from the federal government, over $81 million.  That may not sound like much but Maryland is a small state and the funds are not just blanket funds.  The federal government targets things that they want to control.  If a state wants its transportation money, it will abide by the federal guidelines on drinking age and speed limits and so forth.  There is a reason the states seemed to have lost their sovereignty and they all sort of look alike in policy, the feds have them all on the same string.  Brandeis’ laboratories of democracy have become craven teat suckers.

Conclusion

Dependency is becoming a way of life and it is destructive.  In a recent article former Obama official, Steve Rattner argues that capitalism is flawed and bailouts are the new normal.  To put it simply; he is wrong.  What is flawed is the government’s constant and persistent interventions into the market in ways large and small that distort incentives and lead to misallocation of resources.  Rattner argues that the government had to bailout the auto industry because there were no private funds but he never sees that there may have been funds if Freddie Mac was not losing an average of $25 billion a year here of late.  Maybe there would have been private funds if the government was not taxing and borrowing so heavily to finance its massive subsidy program.  Or maybe, just maybe some of these firms should have closed.  Here is a list of the Dow Jones 30 from 1928 and 2007 side by side.  Many of the nation’s largest firms in 1928 no longer exist and yet the country is wealthier and better off now.  A growing economy is dynamic, not locked into the stagnancy of dependency.  If we are to grow there MUST be creative destruction as the newest firms replace the older ones, as new methods replace old ones, and new technologies replace older ones.  One hundred years ago this administration would bailed out the buggy makers.  Thirty years ago it would have been saving the typewriter industry.  I think it is still considering a bank teller bailout.  .

This dependency culture leads to distorted incentives that often lead to perverse results.  The brilliant but underrated economist, Gordon Tullock observed on his trips to Asia that beggars often mutilated themselves to look more pitiful in the eyes of potential donors.  He also noted that Americans do the equivalent in order to look more needful to government aid granters.  Towns leave the main roads unrepaired and whenever a state is in trouble it threatens to end vital services and student loan applicants always look poor and destitute.  Americans must decide; are we dependents or are we achievers.  Right now we say we are achievers but many of our policies lead to dependency and it needs to end if we want to return to real and sustained economic growth.

The brilliant and humorous French politician and economics writer, Frederic Bastiat may have summed up how government works as well as anyone:

The state is the great fictitious entity by which everyone seeks to live at the expense of everyone else.

In line with Bastiat, the three largest expenditure categories in the federal budget are programs that transfer wealth from some people to other people. Federal expenditures (since there is no enacted budget) totals approximately $3.6 trillion.  Over half of that goes to the big three; Social Security, Medicaid/Medicare and income stability (welfare) programs.  Eliminate these three and the budget is in surplus, which is a fascinating statement since these three programs have parallels in the private sector that are profitable.

However, it is not reasonable to make extreme changes to programs people have on which people have counted and planned.  But, that reasoning cannot prevent the sort of long term changes that are needed.  There is no denying the budget math:

Social Security, Medicare/Medicaid and Welfare are the major drivers of our budgetary problems.

Anyone denying this fact is irresponsible and should not be trusted with any decision-making authority.

Why The Waste?

I am often asked why the government wastes so much money.  There is no denying this, even if you think the government is too small, $600 toilet seats is enough to make you a believer.

The answer to this question is really quite simple; the government has no incentive to be efficient.  From a personal perspective, there are two sources of money; yourself and other people and there are two spending targets; yourself and other people.  This leads to four possible combinations as displayed in the table below:

Spending Efficiency Levels

Level 1 Efficiency is you spending your money on yourself.  This is efficient since you will purchase the quantity and quality you desire and nothing more.  Your incentive is to get what you want but not pay a dime more than necessary.

Level 2 Efficiency is one of two options.  If you are the target but using other people’s money you get what you want but overspend.  This is the traveler on an expense account or the undisciplined teenager with dad’s credit card at the mall.  The other level 2 is you spending your money on someone else, gift giving comes to mind this time of year.  You have an incentive to be careful with the spending but you may well miss getting what it is the other person wants.  The number of teens on credit card restriction, audits of travel accounts and return lines at the stores after Christmas attest to the inefficiencies of level 2.

Level 3 Efficiency is most of government spending, it is the government spending other people group A’s money on other people group B.  There is no incentive to spend carefully since saving the money has no benefit to the spender and there is no incentive to actually purchase anything group B wants.  So we get big, expensive one size fits all programs that no one likes.  There is no common parallel in the private sector for a reason.

The goal is to move as much out of level 3 as possible.  That is the only way to bring government spending under control.

Actions

With this framework in mind, below are my recommendations on federal spending.

Social Security (20 percent of federal spending)

In 1935, when social security went into effect, the life expectancy of an American was 63, so the retirement age was set at 65.  Since 1935, we have had the audacity to live longer (about 80 years now) and so the system faces imminent collapse.  The solution is for many of us to take up unhealthy habits and start dying earlier, it is your patriotic duty.  Social Security is a typical government program, it is inflexible and designed to be optimal (if it was ever optimal) with the way things used to be.

Privatize and Choice: The statists talk about a public option for health care, how about a private option for social security?  There is no economic or constitutional justification for a government-run pension program.  To tax employers and workers to finance this near Ponzi scheme called a pension program reduces employment and income in exchange for lousy returns and a system under a cloud of bankruptcy.  There should be an opt out clause available to anyone.  People should be free to use ALL their income as they see fit.  Let people choose and may the best program win.

Reform the System: The political reality is the government run system is here, maybe forever but certainly for some time but it needs to be adjusted.  The original plan set the retirement age two years after half the population was expected to be dead.  I do not believe we should be as deceptive as FDR but the plan should be indexed to life expectancy.  Retirement is not a right and the notion that we could spend 20 plus potentially productive years in leisure is a relatively new and odd notion.  The qualification age for social security should be set at 90 percent of life expectancy at the time of birth.  The babies born this year would be eligible at age 72 (90 percent of the expected life span of 80 years).

Medicare and Medicaid (20 percent of federal spending)

The entire system should be scrapped and a means tested voucher program should replace it.  A large number of people in these programs are older and wealthy and to tax the poor to give the wealthy a benefit is immoral.  There is no constitutional or economic justification for either of these programs.  This moves 20 percent of federal spending (over $650,000,000,000) from level 3 to level 1.

Income Security and other Transfer Payments (18 percent of federal spending)

A compassionate people should look after the poor and down trodden.  However the federalization of these programs has converted charity into a government program moving a large amount of spending from level 2 to level 3.  Ideally, these programs should all be localized and private; you know…charity.  It is the local pastors, charity operators and so forth who know whom the free loaders are and who is truly in need.  The closer we can connect the providers of the funds to recipient of the funds the closer we get to level 1.

Everything Else (42 percent of federal spending)

There are two aspects to everything else; waste and diseconomies of scale.  I could discuss specific programs and agencies we should eliminate and that is a useful and necessary discussion, but these programs are pennies, especially since defense (19 percent of total spending) is almost half of this category.  To put this in perspective, we could zero out every agency in this category; defense, education, state, interest, etc., and the federal government would still have a deficit. However, it does not mean we should ignore these agencies, they are too big and wasteful.

Just Cut Something

Every president in living memory has vowed to eliminate the fraud and waste in the government but none ever seem to have much to show for their efforts.  So, the next government needs to abandon these silly and unfulfilled promises and just cut 10 percent across the board, including defense.  Defense is an essential function but is also a government agency at level 3 efficiency.

Any organization that has had uninterrupted expansion for decades as the government has had, can be cut 10 percent without disrupting essential services.  The federal government should move to a snow emergency schedule when only essential personnel report, the rest of these positions can be considered for elimination.

Just Too Big

The government is just too big.  I do not mean this from a moral or constitutional perspective, although that is true, but from a management perspective.  There is nothing special about the government, it is an organization that needs managed and any organization can be too big to manage.  When an organization gets too large, management talent is spread too thin, resources are cannibalized and the organization not only fails to do the extra tasks well but has trouble with accomplishing its core duties as well.  There is an efficient size for any organization, there is a reason McDonald’s stores are the size they are and Wal Marts are the size they are.

One example of diseconomies of scale in government is when the Johnson administration decided to fight poverty and the North Vietnamese.  The government does not fight poverty very well but it had a pretty good record in fighting wars but in this case both of these efforts ended in failure.  Interestingly enough it took about 30 years to recover from each, in one case with Gulf War I and in the other with the Clinton era welfare reform (which was more of a start of a solution rather than a finish).

Just Takes Political Backbone

The issue is easy to see and the solutions are not that complicated, firms all over the world have undertaken pension reform, changed their health care benefits and downsized, the difference is they were reporting to stock holders who wanted these changes and politicians report to voters who do not.  In large part we have the government we want, we like government as Santa Claus, providing benefits to us paid for by people we do not know and are not even born yet.  Politicians are jellyfish, we must give them their backbone, we must demand these changes or we will keep getting silly useless band aid programs that make people feel good but accomplish nothing.

WASHINGTON (AP) – Consumers spent at a lackluster rate in November as their incomes barely grew, suggesting that U.S. households may struggle to sustain their spending into 2012.

The Commerce Department says consumer spending rose just 0.1 percent in November, matching the modest October increase. Incomes also rose 0.1 percent. That was the weakest showing since a 0.1 percent decline in August.

Both the spending and income gains fell below expectations. Economists have said that solid increases in spending could boost economic growth in the final three months of what has been a disappointing year.

While the economy remains vulnerable to threats, particularly a recession inEurope, the job market has improved, lifting hopes for next year.

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