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Saturday, August 28, 2004

Outsourcing Jobs

We are hearing lately about job loss due to "greedy" U.S. corporations contracting for IT services with workers in India at low wage rates. John Kerry has stated "… I want to repeal every tax break and loophole that rewards any Benedict Arnold CEO .. for shipping American jobs overseas". However, Bush chief economist Gregory Mankiw calls outsourcing "… probably a plus for the economy."

California joint legislative hearings in early 2004 reviewed possible options for dealing with this latest perceived crisis. One action considered was to deny state contracts to those companies which outsource jobs to foreign lands. It is clear that the California Legislature holds the interests of California taxpayers in very low priority.

The two questions I first would ask are, - Is this a real problem? If so, what did government do to cause the problem? My answer to both questions is - it is only a problem to the extent that government is causing the problem.

In my view, market trends based on freedom of choice and self interest are never a problem. Cheap foreign labor boosts American prosperity, whether the labor comes here (immigration), or whether the jobs go there (outsourcing). Free trade benefits both us and our foreign partners, whether the trade is in goods, services, labor, or capital.

Expect the outcry about outsourcing to evaporate once job creation recovers. Meanwhile, state government could (but won't) help, by ending some of the policies that reduce the competitive advantage of our California workforce; policies such as - minimum wage laws, payroll taxes, worker's comp, mandated unemployment insurance, work practice regulations, environmental regulations, and healthcare coverage mandates.

Technology and capital spending have made U.S. workers among the most productive, and therefore the best paid, workers in the world; misguided government attempts to forcibly "help" workers serves only to create unemployment and to drive jobs abroad.

Monday, August 16, 2004


Public school costs per student are now about twice that of private schools. Charter schools help supply needed competition, but true reform will begin when students pay some tuition directly to the public school of their choice. I do not support vouchers, tax credits, or expanded school funding. I do support charter schools, and I also advocate significant reforms to introduce competition and other market forces, as the only way to make the system responsive to customer needs. Specific steps in that path are:

(1) Repeal compulsory education laws; children are not the property of the state.

(2) Allow students to choose any public school.

(3) Allow schools to reject or expel any student for any reason;

(4) Allow schools to charge student tuition, in amount to be determined by each school in accordance with entrance demand, with the resulting funds to go directly to that school.

I also advocate reforms that require breaking the grip of the teacher unions. They are:

(5) Eliminate teacher tenure regulations and credential requirements, but simply require schools to publish teacher qualifications.

(6) Empower principals to hire and fire teachers at will, and to determine teacher pay based on such things as merit, workload, and supply/demand considerations.

With regard to the tendency toward legislative micromanagement, I would

(7) eliminate all legislative control of curriculum and methodology.

In summary, I would give educators the freedom to educate, and I would give them market-based incentives to be rewarded for success, punished for failure.

Social Security has Always been Bankrupt – Morally!

Consider the problem: some people retire in poverty, either because they don’t save enough for their retirement, or because their private pension plan fails. FDR’s 1935 New Deal solution was to force everyone into an Old-Age Survivor Disability Insurance (OASDI) plan, commonly called Social Security. Thank goodness we have a Constitution to limit such arbitrary authority of government - or so we thought. While much of the early New Deal legislation was declared unconstitutional, by 1937 the Supreme Court was so corrupted by progressive socialist ideology that it allowed Social Security to stand.

Even though people were being forced to pay for this “insurance”, many people loved the new system. Why? For two reasons. 1) Payout was based on your pay history, not your contributions, so older workers got something for nothing. 2 ) Half the contributions were taken from a person’s employer, so younger workers thought they were getting something for nothing too. Of course, employers would respond by paying people that much less, but few people were (and are) that economically aware.

Politicians love Social Security most of all, because it allows them to conceal deficit spending. Here is how it works. OASDI taxes generate more tax revenue each year than the system pays out, and Congress mandates that the extra money be used to purchase government bonds at a special low interest rate. Congress then spends the money, but the money is called tax revenue, not borrowing, for purposes of computing the deficit. (OASDI is a tax – get it?) This funny accounting means that our national debt is actually about $12 trillion larger than claimed (according to Forbes, October 1995). Alas, this party will be over starting in about 2016, when annual Social Security payout will first exceed annual OASDI tax revenues, at current tax rates.

Even assuming Congress can repay all of its borrowings, the system still becomes insolvent in about 2042, because of the ever-growing liabilities of an aging population. To solve this problem, politicians would love to keep raising the combined OASDI tax rate, which started at 2% of pay in 1935, and is now over 14%. That is the way the socialist countries of Europe do it too, but because they started ahead of us, their combined payroll tax rate is now approaching 50% (in France and Italy), with no end in sight. Such a high tax on employment is a real job killer, and it partially explains why socialist countries have such chronic high unemployment rates.

If Social Security is so great, why must workers be forced to participate? Furthermore, how can the government claim greater wisdom than the individual for deciding when and how much to save for retirement? Many young households carry debt on their house, car, and credit cards, ranging in interest rate from 6% to 15%. Does it make sense for these households to be investing money for retirement at 2%? Clearly, they would be better off paying down their debt first, and saving for retirement later. So much for the wisdom of government.

It has been proposed to allow workers to put part of their OASDI tax in a private account, protected from political whim, to possibly grow by investment. This would alleviate the problem of stealth deficit spending, and it might improve the rate of return for some workers. But it still does not address the basic moral problem - that Social Security is a socialist program founded on force and plunder. Instead of being fixed, the program should be ended.

Because two-thirds of people polled now say they expect nothing from Social Security, it may be politically feasible to end the program. This can be done as follows. 1) No new participants added to the system. 2) Pre-retirement participants allowed to opt out. 3) Means testing for all current and future retirees. 4) Funding shortfall paid from the general fund. The time to do this is now, before the baby boom generation retires.

Healthcare Welfare

Regarding the Medicare Modernization and Prescription Drug Act of 2002 passed by our Republican congress and signed by President Bush; I do not support expansion of the welfare state into the area of prescription drug insurance. Consider these points.
1. Seniors are the second most affluent segment of society, but even if they were not, it is not right to single out any one group to receive special favors at the expense of others.
2. The plan separates payer from recipient, which will cause an increase in the cost of drugs for everyone, by adding demand that is insulated from cost.
3. The plan adds another $50 billion a year in entitlement costs, at a time when our profligate congress is running half-trillion dollar annual budget deficits.
4. It is unconstitutional (but dare I even mention this, since all of Medicare and most of what the federal government spends money on these days is not included in it's enumerated powers).