Tuesday, August 19, 2008

Financial Triage

The U.S. is like a household which has been spending $90,000 a year--$60,000 earned and $30,000 borrowed--which is now facing getting by on $30,000 a year. Such massive cuts in expenditures require what I call "financial triage" and making the difficult assessments about what has to be be allowed to pass away will be a major theme here at OTM for years to come.

To refresh our understanding, here is Wikipedia's entry on triage:

S.T.A.R.T. (Simple Triage and Rapid Treatment) is a simple triage system that can be performed by lightly-trained lay and emergency personnel in emergencies. It is not intended to supersede or instruct medical personnel or techniques.

In advanced triage, doctors may decide that some seriously injured people should not receive advanced care because they are unlikely to survive. Advanced care will be used on patients with less severe injuries. Because treatment is intentionally withheld from patients with certain injuries, advanced triage has ethical implications. It is used to divert scarce resources away from patients with little chance of survival in order to increase the chances of survival of others who are more likely to survive. It would be nice if the U.S.'s financial triage was only of the simple sort, but the scale of deficits and the dependence on borrowed money is so great that cutting off the borrowing will push the nation into the financial equivalent of advanced triage: painful and consequential ethical decisions will have to be made.

Since the public has some say in this process, we might as well face up to it fully now rather than continue sticking our heads as deep into the sand of denial as possible.

On a household level, simple triage is relatively obvious and painless. Eating out is, well, out. The closure of 600 Starbucks, the closure of entire restaurant chains, the closure of various fast-food and restaurant outlets--these are already in the news every week.

Having your nails done weekly, after-school tutoring and classes for the kids, seasons tickets to sporting events--all are easy decisions: gone. Ditto overseas vacations, spa treatments, or vacations which require large amounts of gasoline or costly stays in resorts or hotels. Remodeling, new furniture, lavish back-to-school shopping, having the dog shampooed, music lessons, hiring house cleaners, car washes, texting, unlimited Netflix, the big office space--the list of easy triage items is nearly endless in the consumer-mad, service-economy U.S.

But that's the easy stuff. That's the financial equivialent of getting the lightly injured away from the scene. Once the household loses one income, or the sole income is slashed (bonus disappears, hours cut, benefits slashed, etc.) then the easy cuts won't be enough.

At the other end of the spectrum, the financially mortally wounded are also easy to spot and deal with. If a household's mortgage re-sets to $3,000/month and their income is $2,000/month, then they have to walk away from their house. Painful but obvious: the old "living large on borrowed money" spending $90K/year lifestyle has passed from this life. Mourn it and move on to a more positive and financially healthy way of life.

Unfortunately, at the Congressional level, this sort of obvious financial triage is political suicide. So we as a nation are wasting hundreds of billions trying to save the already-dead. This includes Lehman Brothers and hundreds of insolvent banks, and millions of under-water insolvent households.

It's political suicide because we voters continue to reward the biggest panderers with re-election. Denial is much more fun than reality, and if we elect panderers then they will gladly spend borrowed money to win our "please don't make me leave Fantasyland" vote.

Pundits such as Bill Gross are gamely suggesting the Federal deficit will have to run from a "mere" $500 billion a year up to $1 trillion. That's borrowed money, folks, which will require interest payments for the rest of our lives and our grandchildren's lives, too. How cavalierly Mr. Gross suggests funding a third of our Federal government's insanely wasteful expenditures by borrowing another trillion dollars from the Chinese and Gulf Oil exporters.

If we have to borrow $1 trillion to avoid even simple triage in 2009, what will it be in 2010? 2011? 2012? $2 trillion? Let's be clear: pundits like Gross and the vast majority of politicians of all stripes will gladly borrow a trillion dollars a year, insuring budgets from now til doomsday are burdened with higher interest payments, just to avoid any financial triage at all.

Households aren't that "fortunate." They have to deal with reality. The really stressful, difficult triage decisions are in the middle of the spectrum: the "patient" is still alive, but will committing scarce resources save them or just end up costing some less-injured person their life?

We as a nation have avoided triage by just borrowing larger and larger sums. Once our trading partners run low on dollars and will, then that option goes away.

At the household level, we're already seeing the choices being made: people with some medical insurance are going to emergency rooms. This is partly due to the increasing difficulty in finding doctors and clinics who will see them--financial triage at the institutional level is also kicking in--but it's also a result of putting off going to the doctor/clinic until the problem is acute. Why put it off? Because you can't afford to see a doctor, that's why.

We are still seeing the accumulation of debt as the preferred "solution": household credit card debt is rising rapidly as people charge gasoline, groceries, etc. and don't pay off the balance.
Unfortunately, many U.S. households and governments are not healthy--they are already weakened by incompetent budgeting, high cost structures and zero financial reserves.

Knowledgeable reader Bob Z. recently filed this report on workers' lack of savings:

I believe you have made a seriously flawed assumption in the section of the diagram captioned "The global liquidity glut dries up...millions who lost their jobs draw down savings." ( The Vicious Circle of Shrinking Capital August 15, 2008)

We are in the early stages of an economic depression, and I suspect that most of the millions who will lose their jobs have no savings. They are exactly one paycheck away from economic disaster. Very few understand that Republican economic policies have replaced the human slavery of the 18th and 19th centuries with the debt slavery of the 21st century. (By the way, just for the record, I am still a registered Republican, although that will soon change.)

Very few in positions of power in this country realize that most working people have borrowed to the hilt on their homes, their credit cards and their 401k plans just to keep afloat during this "fundamentally strong" Bush economy. Those who own their homes outright are much more likely to be the rich and those middle-class Americans who were fortunate enough to retire before the housing bubble blew up last year. For these people, unemployment will not be a big problem. For everyone else, unemployment will be disaster.

I ran the payroll department for a Fortune 500 company before I retired in 2007, and had 20 people reporting to me. Of the 13 who would be considered "hourly" workers, they averaged close to $40K a year in wages, but only 4 or 5 could afford to even contribute to the company 401K plan. Of those 4 or 5 contributing to the 401K plan, at least 2 borrowed all they could from their 401K plan. Of the 7 "professional and managerial" people, at least 5 of them were no more than 2 paychecks away from disaster.

While working payroll, I also tracked severance payments to separated workers, including many highly-paid executives. You might not believe it, but my guess is that about 1/4 of America's highly-paid corporate executives would be looking at a relatively quick economic disaster if they lost their own jobs.

As bank lending continues to contract and housing prices continue to plummet, this vicious cycle will play out and it won't be pretty. Most of the optimists who think that they are seeing light at the end of the tunnel are going to be flattened before they figure out that the light they see is a runaway freight train headed straight for them."

The hard choices are coming. We cannot "print more money" to extricate ourselves, nor can we borrow our way out of debt and rising interest costs. We have to make the painful decisions of triage.

I know nothing will change until the bond market and our international "pushers" (China, Japan, Gulf oil exporters, et al.) are finally unable or unwilling to lend the "debt junkie" U.S. trillions of their own accumulated capital. That day is coming, although the precise date cannot be known.
When that day arrives, then we as a nation--and you as a voter--have to be prepared to deal with difficult triage decisions.





Here is my short list of obvious triage sorting/prioritizing:

1. get rid of Homeland Security. Everyone knows it's a boondoggle and that it hasn't raised our collective security. Let the agencies which already exist do their anti-terrorism work and secure the borders: CIA, NSA, FBI, Border Patrol. Like all boondoggles, HS already has a potent cast of gluttonous pigs who have hired an army of lobbyists to protect and expand their empire of phony contracts.

2. Social Security and Medicare can only pay out what they take in. No more set benefits. Whatever Social Security collects in payroll taxes is all that can be spent. That sum will be pro-rated to all recipients. As a result, if payroll taxes fall, then all recipients get less. It's called "pay as you go." It was the guiding principle behind Social Security, and we've avoided any pain by borrowing trillions. We've also robbed the Social Security surplus (you know, the "trust fund"--ouch, it hurts to laugh that hard) to fund boondoggles like Medicare and Homeland Security. Obvious triage: spend Social Security payroll taxes only on Social Security. The rest of the Federal government will have to get by on the other tax revenues.

As the interest payments on the National Debt skyrocket ($250 billion a year in external interest, over $400 billion if you count what's been raided/borrowed from Social Security), like a growing cancer they suck up more and more tax money, taking money away from programs we all want (entitlements! Pork! Can't get enough of those, heh.)

The only solution is to stop borrowing more.

Medicare and The Pentagon are running neck and neck in the race to build the most pernicious and wasteful "choice architecture." Restructuring that choice architecture will be exceedingly painful and ideologues of both left and right will have to learn practicality trumps their most cherished sacred cows.

For instance: the market doesn't solve everything. The current credit crisis was created by a nearly unfettered free market. That's what you get with "free markets unbound by horrible government regulations."

The Veterans Administration provides care to millions on a very reasonable budget: and yes, it is a government-run program. By all accounts its service has improved greatly and its centralized computer system is light-years ahead of our private for-profit healthcare providers. Many of the problems which have been highlighted in the media involved active-duty personnel who were not yet discharged to the VA's care. (Note you can't get VA care until you're a veteran, i.e. discharged from active duty.)

Yes, there are problems and improvements to be made, but if you really know something about the VA's decade-long improvements in care, and you're honest about the stupendous failings in our "private care" system, which is superior is no contest: the VA provides superior care for a mere sliver of the trillions wasted in the for-profit sick-care system.

Free market zealots: get real, get over it. Markets don't work in all cases. Global fishing is another example. The seas are being stripped for profit. The "invisible hand" will take the last wild tuna without any qualms because somebody in Tokyo will pay a very handsome sum for it. The entire planet is the loser--including free market zealots. A fish farm does not replace a living ecosystem like a coral reef any more than a tree farm replaces a complex forest.

Borrow and spend politicos of both parties: get real. You can only spend what the government collects in tax revenue.

The "blame government" crowd: tear up all your entitlements checks, then get back to us. Tear up all those "giveaways"--disability checks, Social Security checks (none of us paid in anywhere close to what we're taking out or hoping to extract), and all the government checks being issued to your family members, too. Think the entire government is a rip-off? Hey, don't we all--but it's amazing how many people who rail about "government is the problem" have no problem whatsoever cashing their disability or Social Security check or soaking up thousands in Medicare and other government programs for which they paid only a tiny sliver via their own taxes. (I'm only 54, and you can bet I'm praying the debt machine holds together long enough to get my share of the spoils.)

Hypocrisy is out, reality is in. We have met the enemy and he is us.

Entitlement-mad Democrats and corporate-welfare Republicans: the giveaway pander party is over. The frenzy over the shrinking pool of tax revenues--recall taxes decline in recession/depression--will be ugly, and so we should all agree on a simple guiding principle:
Spend no more than you take in, and serve the greater good of the greatest number for the lowest cost.

The government can and should provide vaccines for its citizenry and protect the public health via plans to combat epidemics and pandemics. But maybe it shouldn't be in the business of spending $100,000 a week on every elderly person who then dies or leaves the profit-system basically uncured.

Those of you who are young will not recall that the U.S. somehow managed to function in 1965 without any Medicare system at all. Yes, life expectancy was lower but it wasn't like a Third World country. The U.S. had a functioning medical care system which did not cost the Federal government $500 billion a year.

All that happened was the cost structure of our nation expanded beyond the bounds of affordability. It's amazing how an unlimited credit card will change one's thinking, one's billings and one's "needs."

Maybe the government should be focused by its citizenry and taxpayers on providing the FEW resources (food, energy and water) to its citizenry rather than cutting millions of checks to individuals, paid for with money borrowed from future generations.

I know all this is shocking and horrifying--an end to Medicare as we know it, a scaling-back of Social Security and Pentagon largesse, the outright cancellation of "Homeland Security" and the anti-drug boondoggle prison-complex Gulag--so many sacred cows will have to be led off and slaughtered.

But why? comes the anguished cry. Because there's no longer enough money for them all. It's called financial triage, and though the choices won't be easy, we can have a rational, compassionate simple principle/guideline to aid the difficult decisions:

Spend no more than you take in, and serve the greater good of the greatest number of citizens for the lowest cost. We should focus our collective attention on the FEW resources, which are really the only essentials: food, energy and water--and on the public safety necessary for the pursuit of happiness. Everything beyond that is gravy.

New Book Notes: My new "little book of big ideas," Weblogs & New Media: Marketing in Crisis is now available on amazon.com. The price is currently listed at a default of $15, but I am working on getting it lowered to $10.99. Check back later in the week to order a copy at the lower price.

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