How To Balance A Budget
States are in crisis. They will have to cut services, raise taxes and try a few tricks. Here's what to expect
By DANIEL KADLEC



SEVANS/AP
University of Massachusetts students protest cuts in state funding for tuition



Sunday, Dec. 01, 2002
If you think it takes a long time now to get a new driver's license, wait until next year. The line at your Department of Motor Vehicles (DMV) may well be out the door and around the corner ? assuming the office is even open. And when it's finally your turn at the counter, expect to pay more for that really bad mug shot taken by an especially grouchy DMV jock who has just been told not to plan on any pay raises before the kids leave home. You can only hope the experience doesn't leave you with an ulcer, because if you're on any kind of health-care assistance, you may find that you no longer qualify. Even if covered, you may find that the nearest hospital has been shut down, along with a wide range of state-funded facilities and services that will impose hardship on millions of Americans next year.

Though we hope nothing like this happens to you, get ready for the most severe state-budget crises since World War II. As Governors across the U.S.--24 of them newly elected ? prepare to ring in 2003, the only thing they are celebrating is that they have lots of company in their fiscal misery. Laws in all states except Vermont require a balanced budget. To achieve that in the current fiscal year, which in most cases runs through June 30, states must slash spending and tack on fees and taxes. What they are pondering ranges from the relatively painless (new taxes on tobacco and expanding gaming and lotteries) to the inconvenient (shortening hours at DMV and welfare offices) to the positively painful (closing hospitals, parks-and-recreation departments and libraries, cutting Medicaid, raising college tuitions and laying off thousands of state employees).


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The main source of the states' budget distress is plunging tax revenue stemming from the economic and stock-market downturns. State receipts, largely from sales and capital-gains taxes, fell 6% last year, the first decline in more than 50 years. The states are running an aggregate deficit that is expected to reach $68 billion by June 30. Not even a sudden economic revival would mend what amounts to bad luck (the recession) teamed with years of poor planning and an ancient state-tax system that largely ignores the fastest growing part of the economy: services. You don't pay tax to have a tooth pulled, your taxes done, your lawn mowed or a lawsuit filed. That may have to change. Goods bought over the Internet are often tax free, and that too might have to change.

In the meantime, the states have pressed Washington for money to pay for things it has demanded ? among them, homeland-security initiatives, election reform and broader Medicaid benefits for the poor. Beset by federal deficits, the Bush Administration is unlikely to provide much help at a time when it is focused on tax cuts and a possible war with Iraq. The states are being left to deal with their crises pretty much alone, but they plan to share their burdens in any way possible. One area ripe for cuts is state aid to municipalities and local transit authorities, so the crises are going to spill into how often your trash gets collected and when the bus runs.

The plight of Harrison township in southeast Michigan is typical. Through the 1990s, local authorities did next to nothing to increase tax revenue, counting on bountiful state pass-throughs as a booming economy and stock market boosted the state's sales-and capital-gains-tax revenues. Indeed, many states were able to support municipalities and cut tax rates at the same time, a strategy that critics say is backfiring and is more to blame than the recession for the states' fiscal mess. Michigan is cutting revenue to townships like Harrison. Governor John Engler is expected to announce some $470 million in total budget cuts this week. Harrison township has already had to shut down its recreation department, sell 12 vehicles, slash $16,000 earmarked to clear seaweed that hampers boat traffic near the Lake St. Clair shoreline and cut $19,000 for improvements to dirt roads. The town board had to approve a special assessment last week to cover police and fire protection. "People still don't have their eyes open," says newly elected township supervisor Mark Knowles, the first Democrat voted into that office in 33 years. "They're going around saying, 'You're raising taxes! You're raising taxes!' Yes. But they weren't paying enough to begin with. They just got caught sneaking into the movie theater."

The dire fiscal straits have been visible for some time, but state and local officials were able to paper over their problems by depleting rainy-day funds ? surpluses built during boom years ? and tapping other onetime sources of cash to keep the budget in balance without encroaching on the everyday lives of most people. But that tactic has been exhausted. Already, many states have broken a trend of tax cuts that began in 1994--raising taxes by an aggregate $9.1 billion last year.

Page 1 of 3 1 | 2 | 3 Next > >

A recent pair of bombshell reports has made clear the severity and scope of the crises. The National Governors Association said the states' cash reserves as of June 30 had dropped to $14.5 billion, from $48.8 billion three years earlier. This new figure is 2.9% of total state spending ? by that measure, the lowest cushion in a decade. Meanwhile, the National Conference of State Legislatures said two-thirds of states had collected revenue below forecasted levels through October of this year and that 26 states had lowered their revenue estimates for the rest of the fiscal year. "2003 will be a year of tough policy decisions," says Bill Pound, the group's executive director. The only states saying their budgets are on sounder footing are Florida, Hawaii, New Mexico, North Dakota, Rhode Island, Tennessee, Utah, Washington, West Virginia and Wyoming.

Everywhere else is a different story. In California, whose projected budget shortfall over the next 18 months is $21 billion ? by far the largest in the land ? a special session of the state legislature is set to begin Dec. 9. Governor Gray Davis has said he will give lawmakers a package of $5 billion in budget cuts to consider. Over the past few weeks, Davis has eliminated 12,000 state jobs. Contracts that have not been finalized have been canceled. New-furniture and -equipment purchases are on hold. Nonessential travel has been stopped. Showing the local impact of the state's budget woes, it was disclosed last week that the agency that runs the Golden Gate Bridge is thinking about asking pedestrians who cross the bridge to make voluntary donations, a step that was derided as a humiliating, tin-cup approach to the crisis. Although California's problems are unusually severe, the outcry is sure to build across the land. Here's a preview:

Hurry Up and Wait
Visiting the DMV is rarely a pleasant experience anywhere. But in Virginia it has got far worse. Democratic Governor Mark Warner, who inherited a $5 billion shortfall from his Republican predecessor, closed 12 service centers and cut hours at others. Motorists stand in longer lines. State G.O.P. officers charge that the closings were politically motivated, given that 10 of the shuttered DMV offices are in districts represented by Republicans. But Warner denies it, and a DMV spokesman says only "absolute business reasons" were taken into account.

Longer lines and their accompanying political football will surface widely next year as officials cut hours at or close libraries, social-services agencies and state administrative offices. In Virginia, Warner moved the opening time at state-run liquor stores to 11 a.m. from 10 a.m. After nine caseworkers were cut from the welfare office in Holyoke, Mass., cases became so backlogged that employees posted a sign asking visitors to be patient: you might have to wait to see your worker.

Give Till It Hurts
Given the resistance to tax increases, look for states to raise revenue with sneaky fees and by further targeting such "sins" as alcohol, gambling and tobacco. In Virginia the DMV levies a service charge on credit-card payments. California is expected to triple motor-vehicle ? license fees, adding nearly $4 billion a year to the state's coffers. Higher income taxes for the wealthiest Californians are a possibility too, according to Democratic state senator John Burton. In New York City, Mayor Michael Bloomberg is weighing a surtax on those who earn more than $200,000 a year.

For the most part, elementary and high school programs won't be touched, but state universities will see funding cuts, driving up tuition. Virginia Commonwealth University in Richmond just raised tuition for the spring semester by several hundred dollars, a rare midyear hike.

In Nebraska, during the most recent session of the legislature, lawmakers increased taxes on retail sales (to 5.5%, up from 5%), cigarettes (to 64?, from 34? a pack) and income (a new average rate of 5.1%, up from 2.36%, starting in 2003). The hikes were vetoed by Republican Governor Mike Johanns, but the veto was overridden. The sales-tax increase targets some services, including software training, pest control, automobile cleaning and roadside assistance. That tax hike is expected to raise $100 million a year.

Coming Soon: More Casinos
More states are looking at starting or expanding betting ? seen as an easy way to boost revenues ? by adding new casinos, state lotteries and racetrack slot machines. In New York, Governor George Pataki signed contracts to permit three more Native American casinos in the western part of the state. He expects the 13-year deal to bring in $1 billion. Indiana and Illinois have raised taxes on riverboat casinos.

In the recent election, Arizona voters approved more slot machines, as well as tables for blackjack and poker. In Tennessee, one of only three states that had no legal gambling, voters overwhelmingly accepted a state lottery for next year. Critics have long argued that gambling revenues are a mixed blessing, increasing revenue but amounting to a tax on those who can least afford it.

Page 2 of 3 < < Previous 1 | 2 | 3 Next > >

A recent pair of bombshell reports has made clear the severity and scope of the crises. The National Governors Association said the states' cash reserves as of June 30 had dropped to $14.5 billion, from $48.8 billion three years earlier. This new figure is 2.9% of total state spending ? by that measure, the lowest cushion in a decade. Meanwhile, the National Conference of State Legislatures said two-thirds of states had collected revenue below forecasted levels through October of this year and that 26 states had lowered their revenue estimates for the rest of the fiscal year. "2003 will be a year of tough policy decisions," says Bill Pound, the group's executive director. The only states saying their budgets are on sounder footing are Florida, Hawaii, New Mexico, North Dakota, Rhode Island, Tennessee, Utah, Washington, West Virginia and Wyoming.

Everywhere else is a different story. In California, whose projected budget shortfall over the next 18 months is $21 billion ? by far the largest in the land ? a special session of the state legislature is set to begin Dec. 9. Governor Gray Davis has said he will give lawmakers a package of $5 billion in budget cuts to consider. Over the past few weeks, Davis has eliminated 12,000 state jobs. Contracts that have not been finalized have been canceled. New-furniture and -equipment purchases are on hold. Nonessential travel has been stopped. Showing the local impact of the state's budget woes, it was disclosed last week that the agency that runs the Golden Gate Bridge is thinking about asking pedestrians who cross the bridge to make voluntary donations, a step that was derided as a humiliating, tin-cup approach to the crisis. Although California's problems are unusually severe, the outcry is sure to build across the land. Here's a preview:

Hurry Up and Wait
Visiting the DMV is rarely a pleasant experience anywhere. But in Virginia it has got far worse. Democratic Governor Mark Warner, who inherited a $5 billion shortfall from his Republican predecessor, closed 12 service centers and cut hours at others. Motorists stand in longer lines. State G.O.P. officers charge that the closings were politically motivated, given that 10 of the shuttered DMV offices are in districts represented by Republicans. But Warner denies it, and a DMV spokesman says only "absolute business reasons" were taken into account.

Longer lines and their accompanying political football will surface widely next year as officials cut hours at or close libraries, social-services agencies and state administrative offices. In Virginia, Warner moved the opening time at state-run liquor stores to 11 a.m. from 10 a.m. After nine caseworkers were cut from the welfare office in Holyoke, Mass., cases became so backlogged that employees posted a sign asking visitors to be patient: you might have to wait to see your worker.

Give Till It Hurts
Given the resistance to tax increases, look for states to raise revenue with sneaky fees and by further targeting such "sins" as alcohol, gambling and tobacco. In Virginia the DMV levies a service charge on credit-card payments. California is expected to triple motor-vehicle ? license fees, adding nearly $4 billion a year to the state's coffers. Higher income taxes for the wealthiest Californians are a possibility too, according to Democratic state senator John Burton. In New York City, Mayor Michael Bloomberg is weighing a surtax on those who earn more than $200,000 a year.

For the most part, elementary and high school programs won't be touched, but state universities will see funding cuts, driving up tuition. Virginia Commonwealth University in Richmond just raised tuition for the spring semester by several hundred dollars, a rare midyear hike.

In Nebraska, during the most recent session of the legislature, lawmakers increased taxes on retail sales (to 5.5%, up from 5%), cigarettes (to 64?, from 34? a pack) and income (a new average rate of 5.1%, up from 2.36%, starting in 2003). The hikes were vetoed by Republican Governor Mike Johanns, but the veto was overridden. The sales-tax increase targets some services, including software training, pest control, automobile cleaning and roadside assistance. That tax hike is expected to raise $100 million a year.

Coming Soon: More Casinos
More states are looking at starting or expanding betting ? seen as an easy way to boost revenues ? by adding new casinos, state lotteries and racetrack slot machines. In New York, Governor George Pataki signed contracts to permit three more Native American casinos in the western part of the state. He expects the 13-year deal to bring in $1 billion. Indiana and Illinois have raised taxes on riverboat casinos.

In the recent election, Arizona voters approved more slot machines, as well as tables for blackjack and poker. In Tennessee, one of only three states that had no legal gambling, voters overwhelmingly accepted a state lottery for next year. Critics have long argued that gambling revenues are a mixed blessing, increasing revenue but amounting to a tax on those who can least afford it.

Page 2 of 3 < < Previous 1 | 2 | 3 Next > >

A recent pair of bombshell reports has made clear the severity and scope of the crises. The National Governors Association said the states' cash reserves as of June 30 had dropped to $14.5 billion, from $48.8 billion three years earlier. This new figure is 2.9% of total state spending ? by that measure, the lowest cushion in a decade. Meanwhile, the National Conference of State Legislatures said two-thirds of states had collected revenue below forecasted levels through October of this year and that 26 states had lowered their revenue estimates for the rest of the fiscal year. "2003 will be a year of tough policy decisions," says Bill Pound, the group's executive director. The only states saying their budgets are on sounder footing are Florida, Hawaii, New Mexico, North Dakota, Rhode Island, Tennessee, Utah, Washington, West Virginia and Wyoming.

Everywhere else is a different story. In California, whose projected budget shortfall over the next 18 months is $21 billion ? by far the largest in the land ? a special session of the state legislature is set to begin Dec. 9. Governor Gray Davis has said he will give lawmakers a package of $5 billion in budget cuts to consider. Over the past few weeks, Davis has eliminated 12,000 state jobs. Contracts that have not been finalized have been canceled. New-furniture and -equipment purchases are on hold. Nonessential travel has been stopped. Showing the local impact of the state's budget woes, it was disclosed last week that the agency that runs the Golden Gate Bridge is thinking about asking pedestrians who cross the bridge to make voluntary donations, a step that was derided as a humiliating, tin-cup approach to the crisis. Although California's problems are unusually severe, the outcry is sure to build across the land. Here's a preview:

Hurry Up and Wait
Visiting the DMV is rarely a pleasant experience anywhere. But in Virginia it has got far worse. Democratic Governor Mark Warner, who inherited a $5 billion shortfall from his Republican predecessor, closed 12 service centers and cut hours at others. Motorists stand in longer lines. State G.O.P. officers charge that the closings were politically motivated, given that 10 of the shuttered DMV offices are in districts represented by Republicans. But Warner denies it, and a DMV spokesman says only "absolute business reasons" were taken into account.

Longer lines and their accompanying political football will surface widely next year as officials cut hours at or close libraries, social-services agencies and state administrative offices. In Virginia, Warner moved the opening time at state-run liquor stores to 11 a.m. from 10 a.m. After nine caseworkers were cut from the welfare office in Holyoke, Mass., cases became so backlogged that employees posted a sign asking visitors to be patient: you might have to wait to see your worker.

Give Till It Hurts
Given the resistance to tax increases, look for states to raise revenue with sneaky fees and by further targeting such "sins" as alcohol, gambling and tobacco. In Virginia the DMV levies a service charge on credit-card payments. California is expected to triple motor-vehicle ? license fees, adding nearly $4 billion a year to the state's coffers. Higher income taxes for the wealthiest Californians are a possibility too, according to Democratic state senator John Burton. In New York City, Mayor Michael Bloomberg is weighing a surtax on those who earn more than $200,000 a year.

For the most part, elementary and high school programs won't be touched, but state universities will see funding cuts, driving up tuition. Virginia Commonwealth University in Richmond just raised tuition for the spring semester by several hundred dollars, a rare midyear hike.

In Nebraska, during the most recent session of the legislature, lawmakers increased taxes on retail sales (to 5.5%, up from 5%), cigarettes (to 64?, from 34? a pack) and income (a new average rate of 5.1%, up from 2.36%, starting in 2003). The hikes were vetoed by Republican Governor Mike Johanns, but the veto was overridden. The sales-tax increase targets some services, including software training, pest control, automobile cleaning and roadside assistance. That tax hike is expected to raise $100 million a year.

Coming Soon: More Casinos
More states are looking at starting or expanding betting ? seen as an easy way to boost revenues ? by adding new casinos, state lotteries and racetrack slot machines. In New York, Governor George Pataki signed contracts to permit three more Native American casinos in the western part of the state. He expects the 13-year deal to bring in $1 billion. Indiana and Illinois have raised taxes on riverboat casinos.

In the recent election, Arizona voters approved more slot machines, as well as tables for blackjack and poker. In Tennessee, one of only three states that had no legal gambling, voters overwhelmingly accepted a state lottery for next year. Critics have long argued that gambling revenues are a mixed blessing, increasing revenue but amounting to a tax on those who can least afford it.

Page 2 of 3 < < Previous 1 | 2 | 3 Next > >

Get Out of Jail Free
To balance their budgets, many states are going soft on crime. In Oregon, starting March 1 and continuing until at least June 30, courts will stop processing small-claims cases and certain misdemeanors including shoplifting, trespassing and prostitution. The state's appellate, circuit and tax courts will be closed on Fridays. In all, the measures are expected to save $13.6 million.

A local prosecutor in Virginia Beach, Va., announced a similar plan: no new prosecutions of misdemeanor domestic-violence cases. "I deeply regret that the victims of domestic violence will not have a prosecutor on their side, while the defendants will be able to retain their own attorneys or have attorneys appointed for them if they are considered indigent," said commonwealth attorney Harvey Bryant, a Republican. "I can't afford to do everything." A spokesman for Governor Warner called the move by Bryant, an elected official, unfortunate, adding that "to throw out the whole category of domestic-violence cases is irresponsible."

Nebraska has cut spending for the 2003 budget three times over the past year, including closing a minimum-security prison in Hastings. It reopened the next day as a federal holding facility for people detained by the Immigration and Naturalization Service. Missouri is considering cutting the sentences of inmates to save money, and Illinois has closed prisons and mental-health facilities, prompting critics to warn of more crime.

Robbing Peter to Pay Paul
While states are salivating over the prospect of settlement payments stemming from the stock-research scandals on Wall Street, those probably won't be forthcoming in time to save this year's budget and won't amount to that much on the whole. But the states have won a lucrative settlement from tobacco companies in a 1998 agreement that has been valued at more than $200 billion. Many states plan to borrow against those future receipts in a process known as securitization. The Oregon house just approved selling $400 million of so-called tobacco-settlement bonds.

This strategy has a downside. States are essentially stealing from future revenues and paying interest to do so, leaving less for spending in the long run. Many investors, in turn, have recognized this strategy as a sign of a state's financial stress and have demanded even higher interest rates to buy any of the state's bonds, which further erodes the value of the tobacco settlement.

Doctor in the House?
Health costs, first among them Medicaid for the poor, have been the biggest drivers on the cost side of state budgets, and that will be a difficult problem to solve. Medicaid costs rose 13.2% last year. The Senate approved assistance to the states worth $9 billion last summer, but the bill stalled. What could force the issue, says Joy Johnson Wilson, who covers health care ? cost issues for the National Conference of State Legislatures, is the passage of time. "Medicaid programs will probably be in much worse shape by the time Congress comes back next year," she says. "That may force them to act." Meanwhile, surveys show many states are cutting payments to doctors and hospitals, requiring higher co-payments and taking steps to reduce Medicaid eligibility.

The Kids Aren't All Right
With the popular and effective State Children's Health Insurance Programs facing shortfalls, the states tried to get some $3 billion from Washington, but the effort failed. "There was no consensus on how to get that money to the states, so there was no action," says Wilson. She is not hopeful that the new Congress will be able to come to an agreement either.

States are also cutting aid to people like Cindy Bishop, 33, of Kansas City, Mo., who has enjoyed being a foster parent for six years. These days she wonders if continuing to do so is economically viable, given her rising costs and falling state aid. "It isn't that the state needs to be responsible for everything you need to do for a child, but there are basic things our kids won't get because we can't afford it," says Bishop.

With elections having just taken place, the hard work is only getting started. Most state officials say they are steadfastly against raising taxes and that no program is safe from cuts. But they don't say where the ax will fall. In most cases the states have until February to come up with a plan. That's when Governors start offering their budgets for approval. As reality starts coming down to real numbers, you're not going to like what you see.

-- REPORTED BY SALLY DONNELLY/WASHINGTON, KAREN BOUFFARD/LANSING, SARAH STURMON DALE/MINNEAPOLIS AND LAURA A. LOCKE/SAN FRANCISCO

Page 3 of 3 < < Previous 1 | 2 | 3

Get Out of Jail Free
To balance their budgets, many states are going soft on crime. In Oregon, starting March 1 and continuing until at least June 30, courts will stop processing small-claims cases and certain misdemeanors including shoplifting, trespassing and prostitution. The state's appellate, circuit and tax courts will be closed on Fridays. In all, the measures are expected to save $13.6 million.

A local prosecutor in Virginia Beach, Va., announced a similar plan: no new prosecutions of misdemeanor domestic-violence cases. "I deeply regret that the victims of domestic violence will not have a prosecutor on their side, while the defendants will be able to retain their own attorneys or have attorneys appointed for them if they are considered indigent," said commonwealth attorney Harvey Bryant, a Republican. "I can't afford to do everything." A spokesman for Governor Warner called the move by Bryant, an elected official, unfortunate, adding that "to throw out the whole category of domestic-violence cases is irresponsible."

Nebraska has cut spending for the 2003 budget three times over the past year, including closing a minimum-security prison in Hastings. It reopened the next day as a federal holding facility for people detained by the Immigration and Naturalization Service. Missouri is considering cutting the sentences of inmates to save money, and Illinois has closed prisons and mental-health facilities, prompting critics to warn of more crime.

Robbing Peter to Pay Paul
While states are salivating over the prospect of settlement payments stemming from the stock-research scandals on Wall Street, those probably won't be forthcoming in time to save this year's budget and won't amount to that much on the whole. But the states have won a lucrative settlement from tobacco companies in a 1998 agreement that has been valued at more than $200 billion. Many states plan to borrow against those future receipts in a process known as securitization. The Oregon house just approved selling $400 million of so-called tobacco-settlement bonds.

This strategy has a downside. States are essentially stealing from future revenues and paying interest to do so, leaving less for spending in the long run. Many investors, in turn, have recognized this strategy as a sign of a state's financial stress and have demanded even higher interest rates to buy any of the state's bonds, which further erodes the value of the tobacco settlement.

Doctor in the House?
Health costs, first among them Medicaid for the poor, have been the biggest drivers on the cost side of state budgets, and that will be a difficult problem to solve. Medicaid costs rose 13.2% last year. The Senate approved assistance to the states worth $9 billion last summer, but the bill stalled. What could force the issue, says Joy Johnson Wilson, who covers health care ? cost issues for the National Conference of State Legislatures, is the passage of time. "Medicaid programs will probably be in much worse shape by the time Congress comes back next year," she says. "That may force them to act." Meanwhile, surveys show many states are cutting payments to doctors and hospitals, requiring higher co-payments and taking steps to reduce Medicaid eligibility.

The Kids Aren't All Right
With the popular and effective State Children's Health Insurance Programs facing shortfalls, the states tried to get some $3 billion from Washington, but the effort failed. "There was no consensus on how to get that money to the states, so there was no action," says Wilson. She is not hopeful that the new Congress will be able to come to an agreement either.

States are also cutting aid to people like Cindy Bishop, 33, of Kansas City, Mo., who has enjoyed being a foster parent for six years. These days she wonders if continuing to do so is economically viable, given her rising costs and falling state aid. "It isn't that the state needs to be responsible for everything you need to do for a child, but there are basic things our kids won't get because we can't afford it," says Bishop.

With elections having just taken place, the hard work is only getting started. Most state officials say they are steadfastly against raising taxes and that no program is safe from cuts. But they don't say where the ax will fall. In most cases the states have until February to come up with a plan. That's when Governors start offering their budgets for approval. As reality starts coming down to real numbers, you're not going to like what you see.

-- REPORTED BY SALLY DONNELLY/WASHINGTON, KAREN BOUFFARD/LANSING, SARAH STURMON DALE/MINNEAPOLIS AND LAURA A. LOCKE/SAN FRANCISCO

Page 3 of 3 < < Previous 1 | 2 | 3

Get Out of Jail Free
To balance their budgets, many states are going soft on crime. In Oregon, starting March 1 and continuing until at least June 30, courts will stop processing small-claims cases and certain misdemeanors including shoplifting, trespassing and prostitution. The state's appellate, circuit and tax courts will be closed on Fridays. In all, the measures are expected to save $13.6 million.

A local prosecutor in Virginia Beach, Va., announced a similar plan: no new prosecutions of misdemeanor domestic-violence cases. "I deeply regret that the victims of domestic violence will not have a prosecutor on their side, while the defendants will be able to retain their own attorneys or have attorneys appointed for them if they are considered indigent," said commonwealth attorney Harvey Bryant, a Republican. "I can't afford to do everything." A spokesman for Governor Warner called the move by Bryant, an elected official, unfortunate, adding that "to throw out the whole category of domestic-violence cases is irresponsible."

Nebraska has cut spending for the 2003 budget three times over the past year, including closing a minimum-security prison in Hastings. It reopened the next day as a federal holding facility for people detained by the Immigration and Naturalization Service. Missouri is considering cutting the sentences of inmates to save money, and Illinois has closed prisons and mental-health facilities, prompting critics to warn of more crime.

Robbing Peter to Pay Paul
While states are salivating over the prospect of settlement payments stemming from the stock-research scandals on Wall Street, those probably won't be forthcoming in time to save this year's budget and won't amount to that much on the whole. But the states have won a lucrative settlement from tobacco companies in a 1998 agreement that has been valued at more than $200 billion. Many states plan to borrow against those future receipts in a process known as securitization. The Oregon house just approved selling $400 million of so-called tobacco-settlement bonds.

This strategy has a downside. States are essentially stealing from future revenues and paying interest to do so, leaving less for spending in the long run. Many investors, in turn, have recognized this strategy as a sign of a state's financial stress and have demanded even higher interest rates to buy any of the state's bonds, which further erodes the value of the tobacco settlement.

Doctor in the House?
Health costs, first among them Medicaid for the poor, have been the biggest drivers on the cost side of state budgets, and that will be a difficult problem to solve. Medicaid costs rose 13.2% last year. The Senate approved assistance to the states worth $9 billion last summer, but the bill stalled. What could force the issue, says Joy Johnson Wilson, who covers health care ? cost issues for the National Conference of State Legislatures, is the passage of time. "Medicaid programs will probably be in much worse shape by the time Congress comes back next year," she says. "That may force them to act." Meanwhile, surveys show many states are cutting payments to doctors and hospitals, requiring higher co-payments and taking steps to reduce Medicaid eligibility.

The Kids Aren't All Right
With the popular and effective State Children's Health Insurance Programs facing shortfalls, the states tried to get some $3 billion from Washington, but the effort failed. "There was no consensus on how to get that money to the states, so there was no action," says Wilson. She is not hopeful that the new Congress will be able to come to an agreement either.

States are also cutting aid to people like Cindy Bishop, 33, of Kansas City, Mo., who has enjoyed being a foster parent for six years. These days she wonders if continuing to do so is economically viable, given her rising costs and falling state aid. "It isn't that the state needs to be responsible for everything you need to do for a child, but there are basic things our kids won't get because we can't afford it," says Bishop.

With elections having just taken place, the hard work is only getting started. Most state officials say they are steadfastly against raising taxes and that no program is safe from cuts. But they don't say where the ax will fall. In most cases the states have until February to come up with a plan. That's when Governors start offering their budgets for approval. As reality starts coming down to real numbers, you're not going to like what you see.

-- REPORTED BY SALLY DONNELLY/WASHINGTON, KAREN BOUFFARD/LANSING, SARAH STURMON DALE/MINNEAPOLIS AND LAURA A. LOCKE/SAN FRANCISCO

Page 3 of 3 < < Previous 1 | 2 | 3

Hey, Michael Alexander, call your agent: You got scooped!

From the New York Times:

16-Year Slump? If So, Blame It on the Boomers

A new study of American demographic patterns and the stock market predicts that while the market may rally periodically, its overall direction will be downward until around 2018.

This bearish forecast is based on a model devised by three finance professors ? John Geanakoplos of Yale, Michael J. P. Magill of the University of Southern California and Martine Quinzii of the University of California at Davis. In a study titled "Demography and the Long-Run Predictability of the Stock Market" (http://papers.ssrn.com /sol3/papers.cfm?abstract_id=329840), they report that their model has done a good job of explaining the bull and bear markets of the last century. But its accuracy as a forecasting tool, of course, is untested.

The professors' approach is complex, but it depends on a simple indicator: the ratio of the number of middle-aged people to the number of young adults in the population. When this ratio rises, the overall market's price-to-earnings ratio will rise, too, the professors predict. When the age ratio declines, as it is likely to do until about 2018, the market's P/E will also decline.

Demographics are the most important factor in determining long-term market trends, according to the professors, who believe that individual investment behavior largely depends on age-related patterns. Younger adults, those from 20 to 39, are generally consumers. Middle-aged people, 40 to 59, tend to invest in stocks. Retirees are likely to sell more stocks than they buy.

Market performance is strongly affected by the relative numbers of people in each of these three life stages, the professors say. When more people are entering middle age than retiring, for example, the market tends to rise because more people will be buying than selling. If the next generation of investors is smaller, the trend will reverse when the middle-aged investors retire.

The major influence of the next two decades will be the aging of the baby boomers, the approximately 79 million people born in the United States from 1945 to 1965. This generation has about 27 million more people than the one that preceded it, and about 10 million more than the one that followed.

The big difference in the sizes of these generations has already led to wide swings in the stock market, the study found. As the first baby boomers approached middle age in 1985 and began investing heavily, their buying more than offset the selling of the older generation then entering retirement. Stocks entered a multiyear bull market.

That trend is reversing, according to the model, which predicts that the market has entered a long decline caused by baby boomers selling stocks as they approach retirement. The sales will be only partially offset by the purchases of the smaller group entering middle age.

The model predicts that this long-term trend will not turn positive again until after 2018, when retirees' stock sales will be more than offset by the purchases of younger investors. This trend will strengthen as the larger baby boom "echo" generation, born between 1985 and 2005, enters middle age.

Since the professors began circulating their research as a working paper in August, critics have been skeptical that the model will apply to other periods or countries as it has to American history. Professor Magill is using it to study Japan, and so far it appears to hold up well. The model suggests that much of the long-running bear market there can be explained by the high ratio of retirees to middle-aged people.

To derive from the model a long-term forecast for the American market, it is necessary to estimate how fast corporate earnings will grow. Assuming that they grow at the same rate as they have over the last two decades, the model predicts that the market, after inflation, will lose more than half its value through 2018.

Still, the model holds out hope for truly long-term investors. After all, if the professors are right, a bull market lasting more than a decade will begin after 2018.





Posted for discussion purposes only.

Hey, Michael Alexander, call your agent: You got scooped!

From the New York Times:

16-Year Slump? If So, Blame It on the Boomers

A new study of American demographic patterns and the stock market predicts that while the market may rally periodically, its overall direction will be downward until around 2018.

This bearish forecast is based on a model devised by three finance professors ? John Geanakoplos of Yale, Michael J. P. Magill of the University of Southern California and Martine Quinzii of the University of California at Davis. In a study titled "Demography and the Long-Run Predictability of the Stock Market" (http://papers.ssrn.com /sol3/papers.cfm?abstract_id=329840), they report that their model has done a good job of explaining the bull and bear markets of the last century. But its accuracy as a forecasting tool, of course, is untested.

The professors' approach is complex, but it depends on a simple indicator: the ratio of the number of middle-aged people to the number of young adults in the population. When this ratio rises, the overall market's price-to-earnings ratio will rise, too, the professors predict. When the age ratio declines, as it is likely to do until about 2018, the market's P/E will also decline.

Demographics are the most important factor in determining long-term market trends, according to the professors, who believe that individual investment behavior largely depends on age-related patterns. Younger adults, those from 20 to 39, are generally consumers. Middle-aged people, 40 to 59, tend to invest in stocks. Retirees are likely to sell more stocks than they buy.

Market performance is strongly affected by the relative numbers of people in each of these three life stages, the professors say. When more people are entering middle age than retiring, for example, the market tends to rise because more people will be buying than selling. If the next generation of investors is smaller, the trend will reverse when the middle-aged investors retire.

The major influence of the next two decades will be the aging of the baby boomers, the approximately 79 million people born in the United States from 1945 to 1965. This generation has about 27 million more people than the one that preceded it, and about 10 million more than the one that followed.

The big difference in the sizes of these generations has already led to wide swings in the stock market, the study found. As the first baby boomers approached middle age in 1985 and began investing heavily, their buying more than offset the selling of the older generation then entering retirement. Stocks entered a multiyear bull market.

That trend is reversing, according to the model, which predicts that the market has entered a long decline caused by baby boomers selling stocks as they approach retirement. The sales will be only partially offset by the purchases of the smaller group entering middle age.

The model predicts that this long-term trend will not turn positive again until after 2018, when retirees' stock sales will be more than offset by the purchases of younger investors. This trend will strengthen as the larger baby boom "echo" generation, born between 1985 and 2005, enters middle age.

Since the professors began circulating their research as a working paper in August, critics have been skeptical that the model will apply to other periods or countries as it has to American history. Professor Magill is using it to study Japan, and so far it appears to hold up well. The model suggests that much of the long-running bear market there can be explained by the high ratio of retirees to middle-aged people.

To derive from the model a long-term forecast for the American market, it is necessary to estimate how fast corporate earnings will grow. Assuming that they grow at the same rate as they have over the last two decades, the model predicts that the market, after inflation, will lose more than half its value through 2018.

Still, the model holds out hope for truly long-term investors. After all, if the professors are right, a bull market lasting more than a decade will begin after 2018.





Posted for discussion purposes only.

Originally Posted by Marc Lamb

Hey, Michael Alexander, call your agent: You got scooped!

From the New York Times:

16-Year Slump? If So, Blame It on the Boomers

A new study of American demographic patterns and the stock market predicts that while the market may rally periodically, its overall direction will be downward until around 2018.

This bearish forecast is based on a model devised by three finance professors ? John Geanakoplos of Yale, Michael J. P. Magill of the University of Southern California and Martine Quinzii of the University of California at Davis. In a study titled "Demography and the Long-Run Predictability of the Stock Market" (http://papers.ssrn.com /sol3/papers.cfm?abstract_id=329840), they report that their model has done a good job of explaining the bull and bear markets of the last century. But its accuracy as a forecasting tool, of course, is untested.

The professors' approach is complex, but it depends on a simple indicator: the ratio of the number of middle-aged people to the number of young adults in the population. When this ratio rises, the overall market's price-to-earnings ratio will rise, too, the professors predict. When the age ratio declines, as it is likely to do until about 2018, the market's P/E will also decline.

Demographics are the most important factor in determining long-term market trends, according to the professors, who believe that individual investment behavior largely depends on age-related patterns. Younger adults, those from 20 to 39, are generally consumers. Middle-aged people, 40 to 59, tend to invest in stocks. Retirees are likely to sell more stocks than they buy.

Market performance is strongly affected by the relative numbers of people in each of these three life stages, the professors say. When more people are entering middle age than retiring, for example, the market tends to rise because more people will be buying than selling. If the next generation of investors is smaller, the trend will reverse when the middle-aged investors retire.

The major influence of the next two decades will be the aging of the baby boomers, the approximately 79 million people born in the United States from 1945 to 1965. This generation has about 27 million more people than the one that preceded it, and about 10 million more than the one that followed.

The big difference in the sizes of these generations has already led to wide swings in the stock market, the study found. As the first baby boomers approached middle age in 1985 and began investing heavily, their buying more than offset the selling of the older generation then entering retirement. Stocks entered a multiyear bull market.

That trend is reversing, according to the model, which predicts that the market has entered a long decline caused by baby boomers selling stocks as they approach retirement. The sales will be only partially offset by the purchases of the smaller group entering middle age.

The model predicts that this long-term trend will not turn positive again until after 2018, when retirees' stock sales will be more than offset by the purchases of younger investors. This trend will strengthen as the larger baby boom "echo" generation, born between 1985 and 2005, enters middle age.

Since the professors began circulating their research as a working paper in August, critics have been skeptical that the model will apply to other periods or countries as it has to American history. Professor Magill is using it to study Japan, and so far it appears to hold up well. The model suggests that much of the long-running bear market there can be explained by the high ratio of retirees to middle-aged people.

To derive from the model a long-term forecast for the American market, it is necessary to estimate how fast corporate earnings will grow. Assuming that they grow at the same rate as they have over the last two decades, the model predicts that the market, after inflation, will lose more than half its value through 2018.

Still, the model holds out hope for truly long-term investors. After all, if the professors are right, a bull market lasting more than a decade will begin after 2018.

Yeah, I got a copy of their paper. I'm going to cite it in book#3 as an example of academic confirmation of my basic thesis.

Originally Posted by Marc Lamb

Hey, Michael Alexander, call your agent: You got scooped!

From the New York Times:

16-Year Slump? If So, Blame It on the Boomers

A new study of American demographic patterns and the stock market predicts that while the market may rally periodically, its overall direction will be downward until around 2018.

This bearish forecast is based on a model devised by three finance professors ? John Geanakoplos of Yale, Michael J. P. Magill of the University of Southern California and Martine Quinzii of the University of California at Davis. In a study titled "Demography and the Long-Run Predictability of the Stock Market" (http://papers.ssrn.com /sol3/papers.cfm?abstract_id=329840), they report that their model has done a good job of explaining the bull and bear markets of the last century. But its accuracy as a forecasting tool, of course, is untested.

The professors' approach is complex, but it depends on a simple indicator: the ratio of the number of middle-aged people to the number of young adults in the population. When this ratio rises, the overall market's price-to-earnings ratio will rise, too, the professors predict. When the age ratio declines, as it is likely to do until about 2018, the market's P/E will also decline.

Demographics are the most important factor in determining long-term market trends, according to the professors, who believe that individual investment behavior largely depends on age-related patterns. Younger adults, those from 20 to 39, are generally consumers. Middle-aged people, 40 to 59, tend to invest in stocks. Retirees are likely to sell more stocks than they buy.

Market performance is strongly affected by the relative numbers of people in each of these three life stages, the professors say. When more people are entering middle age than retiring, for example, the market tends to rise because more people will be buying than selling. If the next generation of investors is smaller, the trend will reverse when the middle-aged investors retire.

The major influence of the next two decades will be the aging of the baby boomers, the approximately 79 million people born in the United States from 1945 to 1965. This generation has about 27 million more people than the one that preceded it, and about 10 million more than the one that followed.

The big difference in the sizes of these generations has already led to wide swings in the stock market, the study found. As the first baby boomers approached middle age in 1985 and began investing heavily, their buying more than offset the selling of the older generation then entering retirement. Stocks entered a multiyear bull market.

That trend is reversing, according to the model, which predicts that the market has entered a long decline caused by baby boomers selling stocks as they approach retirement. The sales will be only partially offset by the purchases of the smaller group entering middle age.

The model predicts that this long-term trend will not turn positive again until after 2018, when retirees' stock sales will be more than offset by the purchases of younger investors. This trend will strengthen as the larger baby boom "echo" generation, born between 1985 and 2005, enters middle age.

Since the professors began circulating their research as a working paper in August, critics have been skeptical that the model will apply to other periods or countries as it has to American history. Professor Magill is using it to study Japan, and so far it appears to hold up well. The model suggests that much of the long-running bear market there can be explained by the high ratio of retirees to middle-aged people.

To derive from the model a long-term forecast for the American market, it is necessary to estimate how fast corporate earnings will grow. Assuming that they grow at the same rate as they have over the last two decades, the model predicts that the market, after inflation, will lose more than half its value through 2018.

Still, the model holds out hope for truly long-term investors. After all, if the professors are right, a bull market lasting more than a decade will begin after 2018.

Yeah, I got a copy of their paper. I'm going to cite it in book#3 as an example of academic confirmation of my basic thesis.

Originally Posted by Mike Alexander '59

This is quite correct. It is a perfect example of how history doesn't repeat, but rhymes. To counteract deflation, Keynesian stimulus is required. The last time this wasn't done and there was a Depression. It took the massive stimulus of WW II to get out of the Depression. Should history repeat we should expect the GOP to go down and "tax-and-spend" Democrats come into power and spend a lot just like they did in WW II.
How long can it last? Valuation suggests another two maybe three years. By then, we should have reached the bottom of the Juglar cycle, and business investment will pick up the slack. Result: no recession in 2006.

My economic advice when the housing boom ends is to simulate demand in the Housing market, I have proposed a radical overhaul of public housing, namely to sell-off the public housing stock and give to low income people direct subsides to make it affordable to pay-off or rent a house (the emphasis is to spread home ownership to people would never dream of it, namely low wage workers). Also relaxing restrictions on applying for a home loan would be also part of the policy.

The Howard government in Australia, gave a several thousand dollar grant to first time home buyers last year to head off a fall in the housing market which would have triggered a deflationary spiral.

The economics of the 21st century as opposed to the 20th will be one of redistributing ownership (the means of production) in the economy, rather than the wealth (end-product of production in the economy). Karl Marx envisioned in Das Kapital that the workers one day would own the means of production in the economy; in a warped way I think this prediction might be coming true. This policy on public housing is part of the redistrubting the ownership in the economy, our whole welfare and social security systems will have to be radically overhauled along these lines to make this dream work.

Originally Posted by Mike Alexander '59

This is quite correct. It is a perfect example of how history doesn't repeat, but rhymes. To counteract deflation, Keynesian stimulus is required. The last time this wasn't done and there was a Depression. It took the massive stimulus of WW II to get out of the Depression. Should history repeat we should expect the GOP to go down and "tax-and-spend" Democrats come into power and spend a lot just like they did in WW II.
How long can it last? Valuation suggests another two maybe three years. By then, we should have reached the bottom of the Juglar cycle, and business investment will pick up the slack. Result: no recession in 2006.

My economic advice when the housing boom ends is to simulate demand in the Housing market, I have proposed a radical overhaul of public housing, namely to sell-off the public housing stock and give to low income people direct subsides to make it affordable to pay-off or rent a house (the emphasis is to spread home ownership to people would never dream of it, namely low wage workers). Also relaxing restrictions on applying for a home loan would be also part of the policy.

The Howard government in Australia, gave a several thousand dollar grant to first time home buyers last year to head off a fall in the housing market which would have triggered a deflationary spiral.

The economics of the 21st century as opposed to the 20th will be one of redistributing ownership (the means of production) in the economy, rather than the wealth (end-product of production in the economy). Karl Marx envisioned in Das Kapital that the workers one day would own the means of production in the economy; in a warped way I think this prediction might be coming true. This policy on public housing is part of the redistrubting the ownership in the economy, our whole welfare and social security systems will have to be radically overhauled along these lines to make this dream work.

The figures are in for the Third Quarter of 2002 over at the Federal Reserve Website. Total Aggregate Debt is now about 30.5 Trillion Dollars up about 2 Trillion Dollars at annual rate over 2001. This sounds like a lot of money but it's not nearly enough. 2 Trillion only represents about a 7.6 percent increase in Total Aggregate Debt. Of course this is the REAL rate of inflation, not the phony CPI figures the Government publishes as the Inflation Rate. The long term average is 9.4 percent, anything much below that indicates recession (obviously).
Bad news in the Stock Market: the value of all stocks is now 10.9 Trillion down almost 10 Trillion from the 2000 peak of 20.3 Trillion. So the current Bear Market has resulted in a loss of almost 50 percent. This Bear now matches the 1974 Bear Market which lost 50 percent as well. Anybody's guess whether it will be more. 10 Trillion is a lot of moola. Last year's Gross Domestic Product was 10 Trillion.
But never fear! Help is on the way! The Wonder Boys at the Federal Reserve have promised (some of us would say "threatened") to fight deflation with, yes, you guessed it, MORE MONEY! Big Al gave us a knowing wink and a nod and said he is prepared to buy any securities necessary to inject more funny money into the economy and prevent deflation. Of course gold immediately rallied.

It's Time To Do The Math

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By E.J. Dionne Jr.
Tuesday, December 31, 2002; Page A17


At this time of year, families regularly take stock of their financial situations, and this should be the time for such a reckoning in Washington.

The federal government is in a fiscal mess that will only get worse if political plans now on the table come to fruition. The federal mess is compounded by disasters at the state and local level.

The question for 2003 is who will blow the whistle. Herewith a brief guide to the mess, and the choices.

Taxing, Spending and Guts. President Bush will come up with measures supposedly designed to stimulate the economy. In fact, the stimulus argument is an excuse for furthering his campaign to reduce the share of taxes paid by the most well-off Americans. He's expected to propose making his tax cut permanent and cutting taxes on dividends.

In 2001 a dozen Senate Democrats dug a deep hole for their country and their party by supporting Bush's tax plan on the flimsy argument that the president had "compromised" with them. If Democrats had hung together and hung tougher, they could have pressed for a more affordable tax cut that spread more of its benefits to the middle class and the poor.

Will 2003 be a "here they go again" year? Will Democrats again back a fictional "compromise" that will further deplete the Treasury? You can already see its outlines. Bush may agree to add the Democrats' idea of a payroll tax holiday to his other proposals and pronounce the package "balanced."

If Democrats do this, they will be complicit in creating a fiscal crisis that will explode after Bush leaves office -- at just the time when the baby boomers are retiring and placing heavy demands on government.

The alternative: A bloc of at least 41 senators -- Democrats plus fiscally responsible Republicans such as John McCain, Lincoln Chafee and perhaps George Voinovich, Susan Collins and Olympia Snowe, among others -- pledges to block further irresponsibility. In the face of charges that they are being "obstructionist," these senators could insist that they are being constructive by demanding a grand fiscal bargain. It would include some short-term stimulus and a freeze on the parts of the Bush tax cut that have not yet taken effect. The freeze would last as long as we considered ourselves on a wartime footing. Will Democrats and moderate Republicans find their voices, or will they fritter away what little power they have?

This is war -- but not really. Politicians might find the courage to get serious about the nation's fiscal condition if they simply noted that the president is willing to do all he can to fight the war on terror -- except for anything that might inconvenience the high-end taxpayers who form his political base.

Here he is, after all, calling for large increases in military spending, preparing for an expensive war in Iraq and saying he will do all he can to defend the homeland -- while also proposing to reduce government revenue.

Politicians such as Sens. John Edwards and Bob Graham and Rep. David Obey are beginning to argue that this doesn't add up, and that the fiscal mess in Washington is impairing the federal government's efforts to protect the homeland. At some point, words and deeds need to come into alignment -- don't they? How can a president who says he loves state and local government insist that states and cities pay the bills for Washington's promises?

Let states and cities eat cake. Governors and mayors, Republicans and Democrats alike, are in deep fiscal holes of their own. Unlike their friends in Washington, the people who run states, counties and localities can't keep piling up deficits.

As Washington sits by, lower levels of government are forced to do all the things the president says he's against: raising taxes, cutting spending on schools, reducing outlays for security, including police and fire departments. States, like individuals and families, are also being clobbered by rising health care costs.

Governors and mayors are beginning to speak up. Watch for incoming governors Ed Rendell of Pennsylvania and Jennifer Granholm of Michigan and Mayor Martin O'Malley of Baltimore to demand fiscal relief under the slogan: "Enough!" Washington could help cover expenses related to the war on terror, institute emergency revenue sharing, or pick up of more of the costs of Medicaid and thereby help more Americans to keep their health insurance.

In 2003 we'll either put the country on a saner fiscal footing, or we'll dig the hole deeper. Guess which one is more likely.


? 2002 The Washington Post Company

The Long and Short Of the 'Stimulus Package'

By George F. Will
Wednesday, January 8, 2003

Ten years ago, the last time this non-economic city -- it makes laws and news and not much else -- was speaking solemnly about the need for a "stimulus package," Sen. Bob Kerrey, the rarely solemn Nebraska Democrat who was then dating actress Debra Winger, said she was his stimulus package. The economic sort of stimulus package is almost always a mistake unless it is misnamed.

Unless, that is, its primary purpose is, as with the proposal the president made yesterday, long-term structural change, not changes in short-term conditions. This is because there is almost always a long lag between Congress's doing what it can do -- change fiscal policy -- and the effects of its doing so. And the effects often are not those intended, circumstances having changed by the time the new structure of incentives begins influencing consumer and corporate decisions.

Monetary policy, which fortunately is beyond the reach of the political branches, can have short-term effects. But not today, because Alan Greenspan's bandoleer is running out of bullets: After 11 interest-rate cuts in 2001 and one last year, rates are at a 40-year low.

However, low rates are a mighty stimulus that has been working for months. They are one reason the housing market remains strong. And three-quarters of new mortgages are refinancings, which mean, on average, an increase of $200 a month in the refinancer's disposable income.

Low rates are one reason why consumption, the economy's engine (about two-thirds of GDP), has not been paralyzed by consumer debt that, relative to disposable income, has been trending upward for many years. Because of low rates, consumer debt payments are no higher, relative to income, than they were 20 years ago.

When critics say the plan the president proposed yesterday will have negligible short-term stimulative effects, the right responses are: Of course. And: Good. Good because government is too blunt an instrument for fine-tuning an industrial economy.

The original idea of a $300 billion stimulus dribbled out over 10 years -- to spur a $10.5 trillion economy with $30 billion increments -- was even more derisory than 10-year economic projections generally are. Even the proposed 10-year, $674 billion stimulus is modest relative to the economy.

The president's proposed tax cuts have provoked the usual jejune rhetoric about favoring "the rich." However, any significant cut, meaning any cut large enough to prod this enormous economy, must be largely a cut for the rich, because only they pay significant taxes. In 2000 the highest income among America's second-richest quintile of households was $81,960. This quintile paid 19.9 percent of federal taxes -- more than the bottom three quintiles combined (0.7, 3.9 and 10.2 percent, respectively). The top quintile (mean income, $141,620) paid 65.1 percent.

Of course the double taxation of money disbursed as dividends -- first as corporate earnings, then as individuals' income -- does influence capital flows. The current system in effect subsidizes corporate financing by debt rather than equity, because interest is deductible and dividends are not.

But the stimulative effect of the president's proposal to eliminate taxation of individuals' dividend income is limited, because half of all dividends go to 401(k)s, pension funds and other untaxed accounts. It would be better to cure double taxation by allowing corporations to expense dividends against income.

It is true that four companies -- Microsoft, Cisco Systems, Dell and Intel -- have among them $80 billion in cash (half of which is Microsoft's). But it is not necessarily true that a change in the taxation of dividends would cause anything like that sum to be distributed to shareholders.

Those four jewels of the information-technology sector must live in wary anticipation of the Next Big Thing, the identity of which is unknown. They must have resources to respond quickly to some technological change that alters the economic landscape as rapidly and radically as one New Thing, the telephone, did in devaluing one of the 19th century's most highly skilled cohorts of professionals -- telegraphers.

Today's "stimulus package" is psychotherapy for a nation that very recently has become too fixated on the stock market, which has declined three consecutive years for the first time since 1939-1941. But the stock market and the economy are not identical, and indeed they have diverged -- the market slump has been more severe than the recent recession, the mildest since 1945.

President Clinton's 1993 push for a stimulus package flowed from candidate Clinton's 1992 claim that the economy was in crisis. Actually, the supposed crisis -- at that point, the mildest recession since 1945 -- had ended before the election: The economy grew at a 3.1 percent annual rate in the third quarter of 1992. Kerrey's stimulus package was more stimulating.



Posted for discussion purposes only.

The President's tax cut plan is nothing more than a ploy to inject more funny money into the economy. Nothing is mentioned about CUTTING Federal spending which a real tax cut would involve. Basically what will happen is the Bureau of Engraving and Printing will print up a pretty Treasury Bond (backed by NOTHING of course). The Federal Government will give the bond to the Federal Reserve in return for a large chunk of credit (funny money backed by NOTHING once again) and will give it as tax cuts to the taxpayers. Notice this is all PAPERHANGING (go see the movie Catch Me If You Can to find out what a paperhanger is). No real wealth is invoved just MORE PAPER. The Japanese have already tried this trick and Japan languishes in its 13th year of recession if not depression. You can't get SOMETHING out of NOTHING.

By the way Marc Lamb is quite wrong about the Stock Market and the economy being two separate things. For the last 10 years and more like 20 it was foriegn buying of dollar denominated securities which kept the dollar and the American economy propped up. The greatest desire is to reignite the Stock Market Bubble and reflate the sagging economy. This is where all the talk about not taxing dividends is coming from.

The President's tax cut plan is nothing more than a ploy to inject more funny money into the economy. Nothing is mentioned about CUTTING Federal spending which a real tax cut would involve. Basically what will happen is the Bureau of Engraving and Printing will print up a pretty Treasury Bond (backed by NOTHING of course). The Federal Government will give the bond to the Federal Reserve in return for a large chunk of credit (funny money backed by NOTHING once again) and will give it as tax cuts to the taxpayers. Notice this is all PAPERHANGING (go see the movie Catch Me If You Can to find out what a paperhanger is). No real wealth is invoved just MORE PAPER. The Japanese have already tried this trick and Japan languishes in its 13th year of recession if not depression. You can't get SOMETHING out of NOTHING.

By the way Marc Lamb is quite wrong about the Stock Market and the economy being two separate things. For the last 10 years and more like 20 it was foriegn buying of dollar denominated securities which kept the dollar and the American economy propped up. The greatest desire is to reignite the Stock Market Bubble and reflate the sagging economy. This is where all the talk about not taxing dividends is coming from.

Robert,

I agree with you totally. You can't get something out of nothing.
The level of international and consumer debt will finally prove to
be the albatross around the neck of the U.S. economy and sink it to
levels uinthinkable right now. We may even began to see the Dow hit 4,000 to 5,000 within the next two years. BTW - I just finished your book
"Conquer the Crash" and would recommend that everyone read it now. Deflation appears to be on the horizon when our over-inflated housing market finally starts to deflate.

Dave Stafford

Robert,

I agree with you totally. You can't get something out of nothing.
The level of international and consumer debt will finally prove to
be the albatross around the neck of the U.S. economy and sink it to
levels uinthinkable right now. We may even began to see the Dow hit 4,000 to 5,000 within the next two years. BTW - I just finished your book
"Conquer the Crash" and would recommend that everyone read it now. Deflation appears to be on the horizon when our over-inflated housing market finally starts to deflate.

Dave Stafford

Originally Posted by Robert

You can't get SOMETHING out of NOTHING.

Originally Posted by Dave Stafford

Robert,
I agree with you totally. You can't get something out of nothing.

Pardon me? :wink:

Originally Posted by Robert

You can't get SOMETHING out of NOTHING.

Originally Posted by Dave Stafford

Robert,
I agree with you totally. You can't get something out of nothing.

Pardon me? :wink:

The Pet Rock. Now that should keep our great nation depression proof .
A fine product with which to base our economy on.

The Pet Rock. Now that should keep our great nation depression proof .
A fine product with which to base our economy on.

A Tip o' the Hat to Marc Lamb for giving us a PERFECT example of an exchange of NOTHING for NOTHING. Back in the 70's people exchanged dollar bills, which are INTRINSICALLY WORTHLESS for Pet Rocks which were also WORTHLESS!