Supreme Court Speaks, Investors Lose

OPINION ARTICLE

The Supreme Court published its opinion in the Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., et al. This case asked the court to determine whether, under rule 10(b)5 issued by the Securities Exchange Commission pursuant to the Securities Exchange Act of 1934, a company (a third party wrongdoer) that assists a publicly traded company in misleading the public about its financial results can be held liable to the investors in that public company for damages caused by the misleading actions.

In my humble opinion the case can be summarized as follows: It is better to let investors suffer at the hands of fraudulent business activities than to potentially raise the cost of doing business by holding businesses accountable for their fraudulent actions. The SEC can, in its discretion, take action against a third party wrongdoer but private investors cannot.

Here is my short version - the long version (with details) is below:

The Court noted two issues with allowing investors to sue third party wrongdoers other than its review and manipulation interpretation of prior law. The first is that it would raise the cost of doing business because every company would be exposed to potential liability and harassment by discovery proceedings for investors with weak claims. This could drive up the cost of doing business, and so businesses need to be protected from this harassment. The second is that this additional cost of doing business in the United States could deter foreign companies from issuing securities in our markets and doing business with domestic firms. Interestingly, the Court never addresses the cost to businesses or investors of meltdowns such as Enron and Charter and all of the other fraudulent market disasters experienced over the past decade. How can it conclude that the cost to business would increase when it does not even consider the other side of the ledger? What costs would go down if businesses acted more ethically? What about bad debt write-offs for one? Doesn’t this very decision reduce the cost of wrongdoing? These points are not addressed in the opinion. Nor does the opinion address the cost to the economy of a lower level of investor participation due to a lack of confidence in the market. This decision, in my opinion, was pre-determined and I wrote that back in October.

What businesses stand to gain disproportionately from this ruling? Think about the major financial institutions and all of those very complex transactions they helped structure for Enron. Think about those subprime securitizations and CDOs. You are now getting warm.

Here is the long version if you are interested in some specifics.

Two set-top box makers (Motorola and Scientific-Atlanta) knowingly entered into phony transactions with Charter Communications so Charter could fool its accountants and report higher income than it actually had. It was a classic fraud scheme wherein Charter swapped long-term depreciation expense for short-term reportable income. Charter then issued false financial statements, investors purchased the stock, the scheme was revealed, and the investors lost money. Now the investors want the set-top box makers who entered into these fake transactions with Charter to pay. Here are the facts from the Court:

Charter, a cable operator, engaged in a variety of fraudulent practices so its quarterly reports would meet Wall Street expectations for cable subscriber growth and operating cash flow. The fraud included misclassification of its customer base; delayed reporting of terminated customers; improper capitalization of costs that should have been shown as expenses; and manipulation of the company’s billing cutoff dates to inflate reported revenues. In late 2000, Charter executives realized that, despite these efforts, the company would miss projected operating cash flow numbers by $15 to $20 million. To help meet the shortfall, Charter decided to alter its existing arrangements with respondents, Scientific-Atlanta and Motorola…

Respondents supplied Charter with the digital cable converter (set top) boxes that Charter furnished to its customers. Charter arranged to overpay respondents $20 for each set top box it purchased until the end of the year, with the understanding that respondents would return the overpayment by purchasing advertising from Charter. The transactions, it is alleged, had no economic substance; but, because Charter would then record the advertising purchases as revenue and capitalize its purchase of the set top boxes, in violation of generally accepted accounting principles, the transactions would enable Charter to fool its auditor into approving a financial statement showing it met projected revenue and operating cash flow numbers. Respondents agreed to the arrangement.

So that Arthur Andersen would not discover the link between Charter’s increased payments for the boxes and the advertising purchases, the companies drafted documents to make it appear the transactions were unrelated and conducted in the ordinary course of business. Following a request from Charter, Scientific-Atlanta sent documents to Charter stating—falsely—that it had increased production costs. It raised the price for set top boxes for the rest of 2000 by $20 per box. As for Motorola, in a written contract Charter agreed to purchase from Motorola a specific number of set top boxes and pay liquidated damages of $20 for each unit it did not take. The contract was made with the expectation Charter would fail to purchase all the units and pay Motorola the liquidated damages.

To return the additional money from the set top box sales, Scientific-Atlanta and Motorola signed contracts with Charter to purchase advertising time for a price higher than fair value. The new set top box agreements were backdated to make it appear that they were negotiated a month before the advertising agreements. The backdating was important to convey the impression that the negotiations were unconnected, a point Arthur Andersen considered necessary for separate treatment of the transactions. Charter recorded the advertising payments to inflate revenue and operating cash flow by approximately $17 million. The inflated number was shown on financial statements filed with the Securities and Exchange Commission (SEC) and reported to the public.

So what did the court decide? Well, first it determined that the set-top box makers didn’t make any misleading statements, so they didn’t directly violate the statute in question. The next step, then, is to determine if they can be held liable under a theory of aiding and abetting Charter’s misstatements. The court then goes through a long history of cases explaining that the set-top box makers did not do anything “in connection with the sale of a security” so again they are not liable, and they had no affirmative duty to disclose this information to the public nor did they communicate these acts to the public so the public could not have relied on them. The dissenting opinion does a good job of debunking these arguments in my opinion.

The investors argued:

Liability is appropriate, petitioner [the investor] contends, because respondents [the set-top box makers] engaged in conduct with the purpose and effect of creating a false appearance of material fact to further a scheme to misrepresent Charter’s revenue. The argument is that the financial statement Charter released to the public was a natural and expected consequence of respondents’ deceptive acts; had respondents not assisted Charter, Charter’s auditor would not have been fooled, and the financial statement would have been a more accurate reflection of Charter’s financial condition.

Liability is appropriate, petitioner contends, because respondents engaged in conduct with the purpose and effect of creating a false appearance of material fact to further a scheme to misrepresent Charter’s revenue. The argument is that the financial statement Charter released to the public was a natural and expected consequence of respondents’ deceptive acts; had respondents not assisted Charter, Charter’s auditor would not have been fooled, and the financial statement would have been a more accurate reflection of Charter’s financial condition.

Sounds like perfectly sound logic to me, and it would place liability where it belongs, at the doorstep of the wrongdoers. So why does the Court reject this argument? Here we see the true agenda behind this ruling:

Were this concept of reliance to be adopted, the implied cause of action would reach the whole market-place in which the issuing company does business; and there is no authority for this rule…

In Blue Chip [a prior Court case], the Court noted that extensive discovery and the potential for uncertainty and disruption in a lawsuit allow plaintiffs with weak claims to extort settlements from innocent companies…

Adoption of petitioner’s approach would expose a new class of defendants to these risks. As noted in Central Bank [a prior Court case], contracting parties might find it necessary to protect against these threats, raising the costs of doing business… Overseas firms with no other exposure to our securities laws could be deterred from doing business here. See Brief for Organization for International Investment et al. as Amici Curiae 17–20. This, in turn, may raise the cost of being a publicly traded company under our law and shift securities offerings away from domestic capital markets.

So in the end, the Court does not want to protect individual investors from this type of bad activity because it could raise the cost of doing business for all companies. Inherent in that decision is the belief that it is better to let investors and other businesses suffer at the hands of fraudulent business activities than to potentially raise the cost of doing business by holding businesses accountable for their fraudulent actions. Absent from this reasoning is the cost to businesses of fraudulent practices (which has just gone down for the wrongdoers) and the cost to businesses and society due to lower investor participation in the financial markets. How many businesses entered into transactions with Charter based on its reported financial condition to later find out they could have a write-off on their hands? How many investors burned by these frauds have left the market and what is the cost of this loss of participation?

In making its ruling the Court goes beyond this case into what the law is, concluding that there is no private right of action in the Securities Exchange act (a private right means every day citizens can sue under it vs. only the government) for aiding and abetting in a securities law violation. The Court points to legislative action were the congress passed a new law that specifically provides for this liability but only mentions the SEC for enforcement. From this, the Court concludes Congress did not want to provide a private right of action in these cases. So, in the end, we the people as individuals cannot sue to recover damages from companies that aid and abet in these cases, only the SEC can. If it decides not to, nothing happens, and it may or may not recover damages for the investors.

Who may benefit from this ruling? Think about the major financial institutions and all of those very complex transactions they helped structure for Enron. Think about those subprime securitizations and CDOs. You are now getting warm. Who makes fees from underwriting securities? Warm again. The Court, in its infinite wisdom, has determined that protecting these interests is more important than ensuring ethical business practices.

If you would like to read the opinion of the Court, you can find it here.

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Stubborn Poverty

This "article" is actually a response to a question in another blog here. It is a good thread and I encourage giving it a read and a vote. Here is the question I want to address here because a picture tells a thousand words and I don't think I can post a picture in a comment box:

The question for me is this: In a free society, where people are free to make bad choices, how much poverty can we eliminate without rewarding, and hence encouraging, bad choices?

And despite $6.6 Trillion spent on anti-poverty programs, the poverty rate has not budged much since 1968--regardless of the party in power or plan of attack.

I think this is a really good question, good enough to send me to the Census Bureau to dig up the chart above. What it shows is that poverty in this country was very bad in the 1950s and fell throughout the 1960s and 1970s. At first I thought the downward trend had a lot to do with the economy in general, but looking at the GDP growth rates doesn’t seem to indicate that was the reason. Labor unionization likely played a part as some jobs that did not provide a living wage became subject to collective bargaining (a trend that is now reversing).

I then looked at the minimum wage. I found this quote here.

The minimum wage was first enacted in 1938 as part of the Fair Labor Standards Act (FLSA). It is enforced by the U.S. Department of Labor's Employment Standards Administration. Initially just 25 cents per hour, the minimum wage has been raised several times in the decades since. In real (inflation-adjusted) terms, the minimum wage reached its peak in 1968, when it was worth $6.92 in 1998 dollars.

So minimum wage legislation could certainly explain some of the downward trend in poverty over this time period. Today, the minimum wage has finally been raised again to $6.55 beginning in July of 2008 and $7.25 in July 2009. At the current rate of $5.85, a full time minimum wage worker would make about $12,000 per year working 40 hours per week with no vacation. This is above the poverty line for a single person, but well below the $16,000 poverty line for a family of three. And getting “Mom” out to work does not pay because childcare costs more than the available earnings. At $7.25 per hour we get close to the line for a family of three, but by that time it will be further below the poverty line due to inflation. So what we see is that many very hard working people live in poverty.

(On minimum wage – if we make employees more expensive, we provide incentive to innovate. This results in fewer jobs in that particular field, but more jobs in the field of the innovations. So, the idea that raising the minimum wage translates directly into inflation is just wrong, and in fact raising it could be, in the long run, exactly the incentive we need to continue innovating to compete globally.)

Then there is The Great Society, and the war on poverty launched by the Johnson Administration. This war included all of the types of programs I here today’s conservatives speak about, such as community development, job training, education, and so on. You can get a pretty good summary of those here. Two of the most important programs implemented were Medicare and Medicaid, and this likely had a lot to do with the rapid decline in poverty among seniors. Note that the poverty rate among seniors in 1959 was in the 35% range, hardly justifiable based on laziness and clearly unacceptable by today’s standards.

So, certainly the programs of The Great Society launched during Johnson’s War on Poverty in the 1960s had a lot to do with declining poverty rates throughout the 1960s. Since those programs were fully implemented and integrated into our society, the poverty rate has remained somewhat stable although they have begun to track up again. I think this goes back to the minimum wage issue.

So, back to the original questions. First:

In a free society, where people are free to make bad choices, how much poverty can we eliminate without rewarding, and hence encouraging, bad choices?

I wish I had an answer to this question but the fact is I do not. This is a question that I believe is impossible to answer because the only way to do so is to know how many people being helped would actually not need it if it were not available to them. We did see, however, what happened in our society when it was not there – a quick look at the graph tells me that poverty rates were very high by today’s standards and would be unacceptable to us in this more modern era.

The second question:

And despite $6.6 Trillion spent on anti-poverty programs, the poverty rate has not budged much since 1968--regardless of the party in power or plan of attack.

We see that the basic premise of this question is correct because the poverty rates have not improved all that much since 1968 when most of the major Great Society programs were enacted. However, this may be in part an answer to the first question. Perhaps in this great society where people have the opportunity to amass great wealth and live with luxuries unimagined by most people in this world through all of its history, the cost is a 12-13% of the population living in poverty (I would hope not, but our track record seems to support it). The losers, if you will, in the great game we call our “free market” economy. So the question then becomes this: In our Great Society, do we want to see the accumulation of wealth never before seen in the hands of the few while we fail to honor our promises to provide benefits for those who are in need of them? Do we want to trade massive wealth for the few for massive suffering for the many? That is the question at hand, and I come down very clearly on the side that says share the wealth a little more. Has the $6.6 trillion been well spent keeping millions of our seniors and children out of poverty for the past 40 years? That’s a judgment call for each of us to make. The “free market” conservatives apparently think not, while the “bleeding heart” liberals think so. These programs have been under attack since 1980 and we are approaching, in my fear, a point of no return as this debate goes on and the wealth moves up.

One final note - the wealth distribution is not fully justified by "free markets" and all one need do to observe this is to follow the money in politics. If you want to eliminate waste, that would be the best place to start, in my humble opinion.

For more statistics on poverty go here.

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Federal Budget for 2006

Here are the rest of the federal budget numbers re-classified in a way that I think makes them understandable. They are approximate because the government figures use varying classifications depending upon where you get the numbers from. These amounts also ignore unemployment insurance, but the net impact of doing so is relatively small. The inflows are without including any payroll taxes as that is dealt with in the Social Security and Health Care pieces referred to below. Outflows are without Social Security and the portion of Medicare paid for by payroll deductions. My hope was to isolate those programs from the other government programs that we fund through general revenues rather than payroll taxes that fund Social Security and a portion of Medicare. By doing it this way, if you want to know how much you are paying toward any particular item you can get a very rough estimate by multiplying the amount you paid in federal income tax times the percentage to the right of the outflow category (plus your share of the additional national debt used to fund the shortfall, so add another 30% or so).

Interest expense is not "net interest" because the portion that the government considers a wash (about $169 billion) is "paid" to trust funds like Social Security but then immediately re-borrowed. Because of this the government accounting figures a net interest amount as though it really wasn't paid. In any event, about $100 billion of the interest expense is paying the interest on the money borrowed from Social Security, so if you like you can add that to your retirement costs.

Non-SS Mandatory Income Security includes all of the means tested entitlements.

The difference between the inflow and outflow explains the additional half trillion or so of national debt from end of year 2005 to end of year 2006 (approximately $574 billion).

A final note - to really understand who benefits and who pays in our system it is necessary to go beyond a simple inflow/outflow analysis. It requires a real analysis of the tax code to understand who is getting a better deal and who is not. One example of this is the capital gains treatment of carried interest for hedge fund and private equity managers that allows them to pay 15% on large portions of their (often seven figure) incomes. I hope, however, that this analysis provides some insight.

For health care go here.
For Social Security go here.
For welfare go here.

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Federal Health Care Expenses

2006, Dollars in millions.
Here are the numbers for Federal health care expenditures. By way of background, Medicare Part A, hospitalization, is paid from payroll deductions while Parts B and D are paid from premiums and general revenues. Part A is currently self funding, but projected to fall into major deficit in the short and long run. In addition, Parts B and D are drawing from the general funds at a level that requires the President to propose modifications by 2009. What all of that means is the costs of health care are expected to increase dramatically and there has been no trust fund established for the bulk of the costs.

All of the numbers come from Tables 2.4, 3.2, and 8.5 of The Office of Management and Budget (OMB) 2008 Budget Of The United States Government Fiscal Year 2008 Historical Tables except for Premiums, Taxes on Benefits and Interest which came from Status of Social Security and Medicare Programs, A Summary Of The 2007 Annual Report.

To sum this up, the Federal Government spends 22.7 cents of every dollar it collects (over and above payroll deductions) on health care. If you are an "average" taxpayer making $50,000 per year and paying 12.45% of your income in federal taxes, then you are contributing $1,414 to health care from income taxes and $725 from payroll deductions (1.45%) for a grand total of $2,139.00. This is in addition to any non-governmental health care you may be paying for.

For Social Security go here.
For welfare go here.
For the balance of the budget go here.

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Social Security Figures

2006, Dollars in million

Here is my estimate of the 2006 Social Security budget. These are estimates as they come from different sources (which is necessary to obtain the full picture). The data represent 2006 Old Age & Survivors Insurance (SSI) and Disability Insurance (DI) which are both funded through payroll deductions.

For the revenue side, I used both The Office of Management and Budget (OMB) 2008 Budget Of The United States Government Fiscal Year 2008 Historical Tables Tables 2.4 (page 43) & 8.5 (page 142), and Status of Social Security and Medicare Programs, A Summary Of The 2007 Annual Report. On the outflow side I used the OMB report.

Net savings to the fund is the amount of the increase in the Old Age & Survivors Insurance (SSI) and Disability Insurance (DI) trust funds for the period. Note that a significant contribution to Social Security revenue comes from interest on funds borrowed by the Federal Government from the trust funds and taxes on benefits. These get ignored when looking only at the OMB Budget figures but are certainly relevant here. The interest represents interest paid (and, of course, re-borrowed) by the Federal Government to the trust fund. Although I am calling these estimates, the net increase to the fund based on the SSA figures is within $1.5 billion looking at their figures vs. my estimates. This is pretty good, especially considering the fact that the OMB Budget report has Social Security outlays of $548,549 million in table 3.2 and $543,900 million in table 8.1. But hey, what's $4.5 billion among friends? (It was explained to me by an intern at OMB that this is due to classification differences.)

For "Welfare" costs go here.
For health care go here.
For the balance of the budget go here.

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How Much Does Welfare Cost?

Based on information I received from the Office of Management and Budget I have revised this post. The numbers changed by enough that I though it worth revising.

I have been involved in some discussion of late regarding fairness of our tax system, income distribution, and income redistribution. It seemed to me that there was a lot missing in these discussions. In particular, the facts! So I set out to plow through some government reports to get a handle on were the money comes from and where it goes. This has turned out to be quite a challenge, especially since I am not an accountant (although I think even some accountants would be baffled by some of this stuff).

As I progressed it became obvious to me that this is a project that will need to be broken down into pieces. I decided the first piece would be welfare related expenditures because that has been a popular topic in my conversations and political debates. With that introduction, here are some of the welfare figures. I hope to have more analysis soon, depending upon when one very nice young intern named Karl at the Office of Management and Budget gets back to me with some information. (Karl has since gotten back to me which is why this has been revised. Thank you Karl!)

According to The Budget for Fiscal Year 2008, Historical Tables, total outlays for Means Tested Entitlements in 2006 were $354.3 billion. This was 2.7% of GDP and

Includes Medicaid, food stamps, family support assistance (AFDC), supplemental security income (SSI), child nutrition programs, refundable portions of earned income tax credits (EITC and HITC) and child tax credit, welfare contingency fund, child care entitlement to States, temporary assistance to needy families, foster care and adoption assistance, State children’s health insurance and veterans pensions.

(from Table 8.1, page 133)

The cost of these programs has increased from 0.8% of GDP in 1962 (before Medicaid) to 2.7% of GDP in 2006, or by 1.9% of GDP. If we exclude Medicaid, health care for children and veterans pensions it is 0.89 % of GDP, or $117 billion. (The numbers for the excluded items are found in Table 8.5, page 142). This represents approximately 7.5% of total non-Social Security receipts to the Federal Government. So, for every one of your tax dollars to the Federal Government, about 7.5 cents goes to these programs. I hate to use averages, but the average taxpayer had a tax rate of 12.45% in 2005 (the latest data available here), so if we multiply things out we see that about 0.93% of the average taxpayer’s income went to non-medical “welfare”. So, if you made $50,000 and paid $6,225.00 in Federal income tax, approximately $465.00 went to all of these programs x-health care and veterans pensions.

Next up I hope to isolate some of the health care numbers. I believe this is truly where our fiscal crisis lies and I hope to see whether I am correct. It will require working through historical budget numbers together with Social Security numbers - my head hurts already!

For Social Security go here.
For health care go here.
For the balance of the budget go here.

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Updates - SIVs, Citi, Social Security, Subprime, and Taxes

First thing to update is the status of this blog. I started it on October 2, not quite two months ago. Since then I have written 26 pieces for publication, but nothing substantial in the past week. The reason is that maintaining the level of publication I started out with has proved difficult as evidenced by the late payment notices I have been receiving (I have forgotten to pay the bills!). So I took some time off to catch up on the other pieces of life not reflected in the blog (bills, family, work, exercise, etc.). I will continue to post so long as I continue to have visitors, although there will be periods of quiet.

There have been some very interesting developments in the interim, and I am writing today to update the issues I have been writing about in November. If you have been following my blog (thank you) then these should be of interest to you. You can click on any of the topics below to go directly to that topic, or just read from the top.

Citigroup Subprime SIVs Social Security and Taxes Short Rant on policy and responsibility

On Citigroup:
It has been interesting watching this unfold. Citi announced today that it will receive a $7.5 billion capital investment from the Abu Dhabi Investment Authority. According to the press release

Each Equity Unit is mandatorily convertible into Citi shares at prices ranging from $31.83 to $37.24 per share. The Equity Units convert to Citi common shares on dates ranging from March 15, 2010, to September 15, 2011, subject to adjustment. Each Equity Unit will pay a fixed annual payment rate of 11%, payable quarterly.

11% seems high to me, about the same as Ford Motor Credit and GMAC high yield bonds give or take a point, and these are convertibles. Abu Dhabi ends up with a 4.9% interest in Citi post conversion.

Now the layoffs are coming in force, and there is a lot of speculation in the media about how many jobs. I heard today on MSNBC anywhere from 15,000 to 45,000. That could be a lot of layoffs and of course it comes just before the holidays.

The investment by Abu Dhabi reinforces the fact that America is currently on sale, as I wrote about in my first piece in November. Interestingly, this purchase is with dollars so the exchange rate is not the issue. Rather it is the price of oil.

Since I wrote that piece, the Fed chairman testified before Congress and released its (now quarterly) report on the economy. The report was pretty much as expected, as was the testimony. Of course some of the dialog during the testimony was simply amazing in that it will likely lead to a proposal by Congress to federally guarantee jumbo mortgages (just what we need – more obfuscation of the “market”). I believe I heard warnings of stagflation in the testimony as well. If you would like more detail on this you can find it here.

While on the subject of the overall economy, I have some anecdotal evidence of a slowdown. Each year my family drives 230 miles to visit relatives for Thanksgiving. Last year the trip took about 6 hours with traffic, each way being a very long drive. This year it took just over four hours each way with almost no traffic. I believe gas prices are beginning to have an impact.

On Subprime:
What is happening there? Well, for one thing the Federal Home Loan Banks have vastly increased their exposure over the past quarter to provide liquidity to the mortgage market. Freddie and Fannie did their part as well, although they have since disclosed problems of their own relating to poorly underwritten mortgages. I wrote abut these increased exposures here. In a pleasant surprise, Senator Schumer is onto this scheme and posted a letter to the Federal Home Loan Bank today. Details here. Other than that there have been increased calls for taxpayer help to bail out homeowners so as to avoid a real economic problem. I don't believe there should be any bailout, and you can read about my reasons for this here and here and here.

On SIVS:
We now know that Citi has taken substantial assets onto its balance sheet relating to the SIVs, and HSBC announced that it is moving approximately $45 billion in SIV assets onto its balance sheet. I believe this is a blow to Citi and the whole MLEC plan because HSBC has taken the matter into its own hands and consolidated the problem. We should ask why Citi does not do the same, but the answer is likely to be one we don’t want to hear. Perhaps Citi does not have the equity to absorb such a move at this point. Whether Citi must consolidate these off-balance sheet entities is the subject of ongoing debate. According to a WSJ Online Edition article there MAY be a requirement to consolidate since Citi has taken over $32 billion in assets onto its balance sheet as of September 30 (as I discussed here). Sounds to me like a lot of intellectual wrangling over a pretty simple issue – if ultimately Citi will be forced to bail out these entities, whether for “reputational” or any other reasons, then they should be on the balance sheet. Of course that’s just my opinion.

The impact of all of this on the money markets is still uncertain. According to this WSJ article:

Efforts by HSBC to protect its SIVs are being watched closely by analysts and managers of money-market mutual funds, some of which have invested in debt issued by the two SIVs, called Cullinan Finance Ltd. and Asscher Finance Ltd. Janus Capital Group Inc. is estimated to have held about $606 million, or 2.7% of its money-market assets, in Cullinan and Asscher through the end of October, which has since been reduced. Federated Investors Inc. holds about $350 million in Asscher in its five largest money funds.

In other words, the mutual funds are still waiting to see whether they will be taking a hit on these. So far it appears they are winding down their exposure, but still have substantial assets tied to SIV structures.

On Social Security and Taxes:
I have been debating with people all week about my stance on Social Security, including the latest proposal by Fred Thompson to address the “crisis” we have. This Fox News Article reports his tax and Social Security plan as follows:

Thompson's proposal, announced on "Fox News Sunday," would allow filers to remain under the current, complex tax code or use the flat tax rates.
Asked whether the plan would cut too deeply into federal revenues, the former Tennessee senator and actor said experts "always overestimate the losses to the government" when taxes are cut.

"We've known for years any time we have lowered taxes and any time we've lowered tax rates, we've seen growth in the economy," Thompson said.

Thompson added that money would be saved by his Social Security reform plan. He proposed that workers younger than 58 receive smaller monthly Social Security checks than they are now promised. Individuals could contribute 2 percent of their paycheck to a personal retirement account, an amount that would be matched by the Social Security trust fund.

The retirement plan "faces up to the fact that Social Security is going bankrupt and we're going to have to do something about it," he said.

Well, first of all Social Security is only going bankrupt if the Federal Government decides not to honor its promise to repay what it borrowed from the Trust Fund (see my article on this topic here). If it does not, then it may be time to sell any treasury securities you have because they would no longer be “risk free”. (The Trust Fund does not own treasury securities, rather special IOUs from the federal government that are backed by the full faith and credit of The United States of America).

Next problem with this statement is the same old crap about the Laffer curve and taxes – if we can decrease taxes to grow the economy it will raise tax revenue. If this is true then why worry about Social Security? We can just cut taxes to pay for it! Ridiculous indeed. Now, to be fair, the article does not actually say that he believes a tax cut will result in higher tax revenue, but this is the argument we consistently hear from Republicans on this issue. I have yet to see any actual proof that the Bush tax cuts CAUSED tax revenues to increase. I have seen plenty of evidence that tax revenues have increased, but never any cause and effect proof. In other words, we do not know if it is the Bush tax cuts, fiscal stimulus from excessive borrowing, or normal economic growth from population growth and global growth that has caused tax revenues to increase. What we do know is that since the Bush tax cuts we are in a lot more debt and that is becoming a problem, especially when no one wants a tax increase to pay it down.

Finally, a flat tax has the potential to be regressive and could be another gift to the high-income population. In any event, a reduction in tax revenue is a problem at a time when we are at war (two wars, actually), and facing the need to begin repaying what has been borrowed from Social Security (not to mention the health care issues). At the end of the day, this boils down to paying for the Bush tax cuts and maybe even more tax cuts by reducing promised Social Security benefits relied on and paid for by lower- and middle-income retirees. It is a transfer of wealth from those with less to those with more. It is a sham. Again, that is just my (somewhat informed) opinion.

A short rant on policy and responsibility.
I think it’s about time we begin taxing to pay for our wars. Until now, we have fought this war in Iraq by borrowing the money and paying civilian warriors so as to avoid a draft and any tax increase. I wonder how long we would be in Iraq if we instituted a draft to get the soldiers we need and raised taxes to pay for it. I see uprisings on college campuses. I hear the cries of the high-income earners writing checks to the Treasury. My guess is we would already be gone. Isn’t this irresponsible? What happened to the party of personal responsibility? Isn’t keeping promises to taxpayers such as Social Security an act of personal responsibility? Isn’t managing the country in a fiscally sound manner an act of personal responsibility? How is it we get lectured on the values of personal responsibility by those who seem to ignore theirs? I shall continue to object.

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