Dan’s Blog

An Illness Called MDD

Dan Calandro - Monday, May 27, 2013

I diagnosed U.S central government with an illness I call Management Deficit Disorder (MDD) in February of last year. Since then they have shown no inkling of getting better. Instead the disease is getting worse, as widespread abuse is being uncovered everyday in Washington DC. It is a place gone mad.

In the face of widely available remedies, U.S. government continues to scorn recovery and turn a blind’s eye to history, fact, and logical reason. To them, somehow, a rotten basket of apples can make a fabulous pie. This derangement is a symptom of MDD. Others can be seen far and wide. 

This week a bridge collapsed in Washington state that sent two cars plunging into the still chilly waters of the Skagit River. In this latest example of government failure and incompetence, it is appropriate to thank God – not government – that no one perished in the failure. 

Built in 1955 on Interstate 5, the bridge was constructed with what is known as "fracture-critical" design. Somehow this bridge wasn’t included on the list of "shovel ready" projects funded by untold trillions of government stimulus spending. Get this…

The malfunction was caused by one tractor trailer, which bumped into one girder, which caused a chain reaction that collapsed an entire section of the bridge. Crazy I know, but hold on… 

This sort of chain reaction failure is common with fracture-critical design. Perhaps that is why state and federal engineers determined the I-5 bridge to be "functionally obsolete," and gave it a failing grade for operational safety (47 out of a possible 100). 

It’s hard to believe that sort of assessment can’t find any stimulus respect – especially when considering the economic impact at risk. Some 70,000 cars and trucks pass daily on the I-5 bridge; and they contribute approximately $100 million of economic activity every week. 

Traffic delays and re-routes cause the economy to slow down because products move slower and more costlier to markets – and at one hundred million dollars per week, billions of lost dollars will add up quickly in this one Washington market. 

But no, not one penny of trillions of dollars spent by government to improve the economy could find its way to protect a "functionally obsolete" main trading artery between the United States and her valued partner to the north, Canada. 

That’s your government working hard for you.  

And that’s why the return on investment with government always stinks. Their activity is not about markets and market activity, or profit and ROI.  It’s about politics – which always gets in the way of good management.  

The failed bridge in Washington is a fine example of fiscal mismanagement that hurts economic growth and vitality – but it is just one example. There are many more, and sadly, they all come in different shapes and sizes. Healthcare is a big one.

In an article entitled: Employers Eye Bare-Bones Health Plans Under New Law, the Wall Street Journal reports how companies are looking to trim healthcare coverage to comply with the Affordable Care Act (ACA). Did you hear that?  They’re reducing benefits to comply with the law.* Only in government can people keep their jobs when they create a healthcare law advertised to increase coverage and benefit while reducing costs and deliver the complete opposite. You and I would lose our jobs without notice.  

But as Nancy Pelosi predicted, we learned after it passed that the ACA really had nothing to do with healthcare. It’s about taxes and mandates of coverage. And as time is proving, companies are looking to trim healthcare benefits because government gave them incentive to reduce them. That's the easiest way to a single-payer system, after all.

The ACA uses tax policy to enforce mandates and regulations by charging taxes (penalties) to uncovered people and people with generous insurance plans, a.k.a. "Cadillac plans." In theory, the law then redistributes tax credits and/or coverage to people who "can’t" pay for it.  

In other words, the ACA penalizes people and companies who work hard to afford good healthcare coverage; taxes young people who don’t want or need it; taxes people who behave against their wishes; and rewards people who do nothing to help themselves. 

This is a major market problem. The ACA raises taxes, reduces market activity (see * above) and limits coverage and opportunity. 

And it’s going to get worse.

The reason the ACA is a landmark case is because it taxes behavior instead of activity. For instance, tobacco users will begin to pay a tax for using tobacco under the ACA. In this case the government is not taxing tobacco, but rather the behavior of using tobacco, as the amount of the tax isn’t related to the amount of tobacco used. The ACA, therefore, taxes choice, not activity. 

It also taxes inactivity. In other words, the ACA also taxes people for not doing something. In this case the government taxes people for not paying for healthcare insurance. Under this precedent, the government can tax any inaction – a tax for not serving in the military, a tax for not going to a state funded school, or a tax for not working in a union.  

This sets such a dangerous precedent that the Affordable Care Act should be repealed solely upon it. But the fact that it is producing a completely opposite result from its intended objective makes repeal justifiable more so.

Until then, however, it is important for taxpayers to acknowledge that the ACA is a tax law first and foremost, and as such, the Internal Revenue Service is the agency responsible for enforcing it. 

Yes, the same IRS brought in front of Congress last week to testify whether they illegally targeted conservative or republican groups, which they certainly did, will be in charge of enforcing Obama’s healthcare law. 

Is there any question that politics will drive medical decisions in the future?—and that those politics will flow through the IRS?  

And when that happens, we should expect much in the same as Lois Lerner who ran the IRS division currently in violation. She pled the 5th to the infraction and refused to answer any further questions. She was put on paid leave one day after she indicted herself.

Can you imagine pleading the 5th when the IRS shows up at your door?—let alone getting paid leave from work when they left?

It’s time to gut that pig. 

More chaos came to the tax cause when Congress hauled Apple CEO, Tim Cook, into Washington DC to testify about their tax practices. As you may recall, Apple recently raised $17 billion in a bond offering that paid approximately 3% interest to private sector investors. This pissed Congress off, as they wanted Apple to bring some of the $100 billion in cash they have in foreign bank accounts back to America. If they did so, Apple would have paid a 35% corporate income tax. 

Nothing to be confused about here: Why would anyone rather pay a 35% tax over a 3% interest rate?—And who walks among us trying to pay the most taxes they could possibly pay? 

Not even Obama poster child Warren Buffet does that – and in fact, he openly complains about not paying enough in taxes. But heck, not only could Buffet afford to pay more taxes but he is damn well free to do so. My advice to him: shut up and put your money where your mouth is, or go away.  

The main objective for every CEO is to maximize profit and shareholder value. Apple did that, and broke no laws in the process. And par for the political course, everyone on the Senate panel agreed to that. But this doesn’t change their motive: Congress badly wants idle corporate cash so they’re using cash rich Apple as a logo for their campaign to increase corporate taxes.  

That’s another symptom to the MDD illness. Spending four trillion dollars per year isn’t enough; Congress needs higher taxes to feed their insatiable addiction to spending. So they throw caution into the wind, ignore facts and logic, and do so knowing history will prove their policies incompetent. But they do it anyway.  

Those, too, are symptoms of MDD – which can easily be treated.  

For instance, someone once correctly stated, "If you want more of anything, tax it less." Want more growth, tax it less. Want more employment, tax it less. Want more prosperity, tax it less. 

It works because fewer taxes add incentive to profit.  

Here’s the problem again with taxes. Money is received through a central authority and then divvied out according to political agenda. Disbursements have nothing to do with profitability, return on investment, bettering markets, or protecting important trade routes like the I-5 bridge. Government spending is about politics, making things look nice and feel good, with other people’s money. 

Because modern day politicians throw around so much money, hundreds of billions are wasted or misappropriated every year. But instead of fixing their own operation, Congress clamors for more money and higher taxes while they neglect the real problems.

Take the repatriation tax issue that Apple faced this week. It could easily be remedied if Congress passed a new tax called the repatriation tax. The new tax would only apply to profits generated by American corporations overseas, and it would be taxed on capital returned to the U.S. The new tax rate could be 1% above the prime rate of interest, which is controlled by government. Government policy, therefore, would control the repatriation tax rate. 

That tax rate, today, would essentially be the effective interest rate of Apple’s new bonds.  

In such a case, central government would have received additional tax revenue based on the interest rates it creates, which is far less than the absurd corporate income tax rate. The move would encourage a stronger dollar and provide incentive for American companies to bring foreign earnings home. 

The market benefit is exponential.  

Figuring just the one company, the $100 billion Apple has in overseas accounts would now reside in American banks. This earned but new capital would increase bank reserves in America, make them stronger, and make it easier for them to provide more loans to other U.S. companies. This would make the American Market stronger, and best of all, it would drastically lessen the need for QE.

It’s a win, win, win.  

But no, instead our government wishes to penalize Apple’s success in order to fund more political shenanigans like "stimulus" and failed programs that continue to drain worth from the American monetary system. 

Misnomers like these are part of the MDD condition.  

And with the fiscal house is such disarray, persistent pressure on the monetary side is starting to wear on Federal Reserve chairman Ben Bernanke. He testified in front of Congress again this week and is looking increasingly more confused about the market dynamic he helped create. A few weeks ago he said QE efforts could either rise or fall; then a few weeks later he said he wanted to begin unwinding the program in June; and now he looks to be unwilling to move at all – but still open to dipping his toe in the water in the "next few meetings." 

He’s acting scared and unsure.

Of course, Bernanke knows what is all too plain to see: the moment he stops feeding the beast it will turn on him. In a matter of seconds Wall Street will begin acting like a bunch of spoiled brats looking for more candy. 

"The market" will undoubtedly sell off in dramatic fashion once Bernanke turns the printing presses off. Pressure will build immediately and a new focus will be placed on the deteriorating global condition. Democrats will blame Republicans, Republicans will look lost, and Bernanke will be under his desk until he is forced to face the music. And when that time comes, he will blame Congress, the President, and party politics for the disaster in front of him. 

Indeed, Bernanke will be right on that accord. But he was part of the team – a management team with an illness called MDD - that will have caused the next great correction.  

It’s time for the tough medicine. The monetary shell games must stop and stop right away. It’s the only way fiscal governance will find the courage to enter a corrective program and take the first step to recovery: acknowledgement of the affliction. 

A problem identified is 90% solved.  

But government isn't there yet. Investors should expect a rocky road from here.  

5-24-13

Stay tuned…

ShieldThe road to financial independence.™

Special Note: Hearts and prayers to our American brethren in Oklahoma who suffered a direct hit from another monstrous tornado. Stay Strong, Rebuild, and Be Safe. Godspeed!

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