Friday, November 23, 2012

Bargaining, How It Really Works

Unions bargain for their workers. One thing not really appreciated is the theory of how this is done. Normally the two sides sit down and reach a compromise. In today’s world it is a little different.

When a union sits down to the bargaining table, it is on this premise, “What’s mine is mine, and what’s yours, is up for negotiation. It’s a little like watching a foreigner haggle over the price for a basket of strawberries. Once they settle on price, the customer proceeds to cherry pick the strawberries that go in the basket they are buying—nothing but the biggest and the most colorful.

Many of the best union deals that could have been made are now coming apart. Retirement benefits seem to be a common denominator. In all of the bargaining in the past, the threat of a strike got concessions from management. Now, it looks like thing have changed somewhat. Hostess Brands decides to go into bankruptcy liquidation rather than deal with unions that had it all their way. It’s kind of humorous to watch unions balk at wage cuts. Their reasoning, “Why should the worker have to pay for the screw-ups of management?” Or, “We need a decent working wage.” The union got deal after deal and management was the frog in the pan of water on the stove, getting hotter and hotter. Management acquiesced too many times and all it took was a bad economy, to see how bad the deal was. Any way you look at it, the union leaders look like Ding Dongs and there will be no Ho Ho’s this Christmas. Of course, the Twinkie murder defense will be a thing of the past.

Illinois and California will be the poster children of the new state governments that claim, “We can have it all.” State governments haven’t figured out one simply principle. Raising tax rates does not in turn increase tax revenues. It only implies more revenue. It does however determine where and when people choose to spend their dollars. Can the consumer justify a new car every 5 years when the sales tax is 10 percent?-- Maybe now it will be every 8 years. A company car instead of a wage increase?-- The list goes on.

During the Great Depression many localities raised taxes and all they got were the taxpayer’s keys to their home. Increased taxes were the last straw. Of course it will be different this time. At times I wonder, are we smarter than those people back in the 1930’s or incredibly more stupid? The jury is still out on this one.

The real drain for the states will be retirement funds for state workers, and of course we aren’t even discussing the Federal programs of Social Security, and Medicare.

The California State retirement fund (CalPER's), among others, can only pay 65 cents on the dollar in benefits to everyone in the plan. The way the legislature looks at it is, everyone gets full benefits for the next 10 years and then we have a problem.

FDR even said that government employees should never be unionized, and they are now. Business profits determine if a pay raise is warranted. In a government job, the guiding hand of profits is not there to determine a realistic wage. What our state governments have contracted us to pay as benefits, border on the absurd in some cases. The unions took advantage of our political system, to get benefits that could never be realistically paid on a long term basis. Where does it go from here?

Hostess Brands had a slow death. They couldn’t make a profit and the company folded. In good times the unions asked for more and always got it. This time they asked for more, thinking it was a poker game they could bluff their way through. How many of those 18,000 employees will even find a job? Of those that do, what will be their starting wage?

It’s time for the taxpayers to realize that they have been ripped by these government unions on a more intense level than private industry. We need state employees that will be underpaid and with training, will find better jobs in the private sector. Government is inherently inefficient, let’s reward this inefficiency with lousy wages and low retirement plans.

Where I grew up as a kid, we had volunteer firemen with no 100k retirement plans at age 50. The argument isn’t over whether or not these firemen or police or teachers are worthy of these wages, the argument is over whether or not we can justifiably pay private sector rates for jobs that could be filled for one third of their present cost. There is no problem filling the jobs, it’s the turnover rate that has to be dealt with, that is the trade-off with higher wages. Government unions always want more, Ronald Regan once said no, and meant it.

Of course in California, who runs the government, the unions or the legislature? Do you get the feeling that the unions can run the state into the ground? Of course, maybe they already have, and are keeping quiet--no need to panic anyone.

Copyright 2012 by Jim Brubaker

Monday, November 12, 2012

The Fiscal Cliff or "Hey Buddy Can You Spare a Dime?"

Mentally picture 4 or 5 dogs all pulling on a towel in different directions, this is Congress in action. The towel represents our budget. So when you come down to it, it’s not a very big towel. The consensus is, Congress needs a bigger towel. How we get there, is more taxes or print more dollars. Both do the job, but when you raise taxes, you can point to who raised them. But when you print dollars, you can’t blame Congress, that’s how the economy is, we live with inflation.

The real problem is that the benefits and entitlements take up almost the entire budget, and we have to borrow to pay the rest of the bills. The President doesn’t have to worry about reelection, but the Congress does; so none of the entitlements and benefits will be cut without a long drawn out fight. Whatever the compromise, it won’t even be close to enough to fix the existing problems of funding.

Figure that total tax collections next year, even with a tax the rich provision, will probably be far below this year’s totals. Remember we are not taxing rich people, only high wage earners. So a doctor making 250k, what does he do to limit tax liability? He forms a Limited Liability Corporation and pays himself about 60K a year and slaps the rest into a retirement fund. If you’re an oil company, forget American investments; drill where you get tax breaks.

State governments’ layoffs will start in the coming week (the election is over), government employees have to be given 90 days’ notice now. If you’re not part of the Police or Fire department, count on layoffs. The teachers will be thrown under the bus. The voting’s over; education is where the first cuts come.

Congress wants to raise taxes on the rich and lower them on the middle class. It sounds great if you’re pandering for votes trying to get reelected. Do we dare assume that rich people are incredibly stupid and will pay more? It’s probably the middle class that is incredibly stupid. They believe Congress has done something constructive by extending the same tax cut another 4 years that will expire time and time again. And of course it will forever be called the Bush tax cut. Realistically, Congress has to drastically reduce entitlements by 50% and/or most probably double everyone’s taxes. That wouldn’t be a bad thing in a robust economy, but in this economy, neither is an option. A legislative solution to our fiscal problems doesn’t exist with the current thinking in place. Entitlements will not be addressed.

As if things couldn’t get worse, Obamacare, will start cutting into many wage earner’s paychecks . The national work week has now been (unofficially) reduced to 32 hours (part time workers don’t qualify for health benefits). And those that paid some federal taxes working 40 hours will now pay none (working less hours). Of course where you once had 4 employees working 40 hours you will pick up one new worker when we go to 32 hours. Your hourly wage stays the same, your paycheck is smaller, your standard of living drops, and more people will be employed--oh goodie!

The real problem just becoming apparent, we are in a depression, greater than the Great Depression. We can’t tax our way out of it, and since we have already borrowed almost every dollar in the banks, it will be impossible to print more money without inflation. Bernie Madoff's problem wasn’t with the money he had in the bank; it was the money he needed to withdraw for redemptions (consumption). As long as everyone keeps their savings in this “FDIC insured piggy bank” there is no problem. The Governments problem starts when everyone wants to spend their saving at the same time. The reward of consumption (instant gratification) is presently a far better value than the saving rates offered by a bank of one percent interest, considering the current 6 percent inflation rate.

The fiscal cliff out there that everyone is referring to is the fact that we are broke. Our government is running out of people to borrow from. A sign from the great depression in a grocery store read, “In God We Trust, all others pay cash.” In 1933 you bought a box of apples and sold them on a street corner to make a living. Now, the government is proposing to buy the box of apples and . . . .—“it’s going to be ‘different’ this time around. “ The trouble is, nobody is sure what that means.

Copyright 2012 by Jim Brubaker

Wednesday, November 07, 2012

Real Estate is Coming Back??

If you read the papers, it looks like real estate is coming back, prices are rising. The inventory is “drying up.” But look a little deeper. According to Zillow 31 percent of homeowners are underwater. And CNN Money reports, half of mortgage borrowers under 40 are under water. That kind of makes some of this “inventory shortage” a tad bit soggy.

I don’t see anyone lining up for a “Liar Loan,” anymore. The rush to buy before you are priced out of the market is gone. The median housing price is rising for a very simple reason. There are no low priced homes in the statistics to bring the average down. Do you want the 300k 1500 sq ft starter home? Or for 75k more you can buy a McMansion with 2400 sq ft?

Sources are reporting that a large portions of sales 30% are cash only. Kind of boggles the mind unless you figure when a bank wins the bid on a home in foreclosure (by bidding the amount owed by the borrower), that’s considered a cash sale. As a real estate transaction, you have a new owner, the bank, and it is a cash sale. Of course, throw in the words “foreign buyer” and everyone nods, they must be doing the cash sales. That many foreign sales ought to set of sirens at the office of immigration.

Out here in California, earthquake insurance isn’t really affordable, so you let the bank own most of the house and you make payments --- if a quake wrecks the house, give the bank the keys. Paying off a home in this economy isn’t too smart, especially if you lose your job. Banks won’t do a home loan if you’re unemployed.

The economy is just peachy keen, and no one is worried about losing their job, and real estate is doing just great. “Now is the time to buy a home, ” interest rates will never be this low again. I hear that shouted in my ears all of the time. Do you get the feeling that there is inventory out there that they need someone to sign for on the dotted line? If you buy a 300k home in California, you can’t flip it. It isn’t appreciating and the 18K in Realtor commissions is staring you in the face.

There is the normal crowd of people buying homes as there has always been. But the speculative zip is gone. The demand is only about 1/2 of what it was in bubble times. And getting financing is a real chore. When I read these headlines that the housing market is coming back, I have to wonder, coming back to what? 6 cars in front of every home, doesn’t suggest to me that housing is booming.

The one thing that really bothers me, I can’t see any bank in the country writing 30 year loans at 3 percent -- 5 years maybe. Can we believe what we read in the newspapers? Is real estate back like it was in 2006 with a full punch bowl? Did the recession really end in 2010? The election is over, maybe it’s time to take off the rose colored glasses.

Copyright 2012 by Jim Brubaker