Many complain that jobs are being taken from U.S. citizens by cheap foreign illegal labor. It is a political hot potato and a new report adds fuel to the fire. Bruce Krasting says it’s Social Security Trust Fund’s Labor Day Bombshell.

SS has been collecting money from illegal aliens for years. They will keep the money they have collected and they will not pay out any benefits (except fraud) in the future. So this money is “free”. I have often wondered how big the numbers on this are. Now we know. The numbers are enormous. Without the Free Money coming in from illegal aliens SS would look much different than we “think” it does.

The illegal alien workforce may be contributing as much as 13.5% of the Social Security taxes. Most reporting about the status of Social Security have assumed that all who contribute will receive benefits. When there is such a large amount that will not, as of now, have to be paid to its contributors, it means that those reports have significantly overstated the liabilities versus the benefits.

In some respects this is nice because it is ‘free’ money for the government program. Krasting points out that this sort of thing is also political hay that appears to be used to support questionable positions.

The Administration will use the Goss revelation to prove to the American people that illegal workers have made a major contribution to the US economy via the taxes they paid to SS. This will be done to blunt the growing tide of ire among those who actually live here.

But what’s wrong with ‘free’ money? There is, of course, the dishonesty involved in taxing some folks with a false promise, even if they made false representation about who they were. Much more important though, is in how Social Security security is viewed and considered.

I will say that this is a sea change event for how we look at SS. All prior analysis and all future expectations must now be revisited. I assure you that the results after excluding the illegal taxes will be will prove to be a major blow to the solvency of the Fund.

Things just aren’t as simple as they seem, sometimes. This source of Social Security funds is also not the only questionable source. There is also the interest rates on the Treasury bonds behind the funds that is worth some consideration. When you get to mangling the books, all sorts of interesting things can happen.

The pressure to obtain income to match state government spending has legislatures demonstrating significant creativity. That money has to come from the masses but how it is collected needs to avoid notice if at all possible. Sometimes people do notice. Nevada recently passed a law to raise funds that has generated some notice. Fact Checker: Registration tax triples on 9-year-old vehicles describes a case.

The increase in sales tax and the tax on vehicle registration are both regressive taxes. Those who spend most of their money on supplies and have older vehicles are going to feel the taxes more than those who spend their money on services and have newer vehicles.

Incremental sales tax increases often fly under the radar as they will be hidden in the noise of nominal price fluctuations. The key for legislatures is the slow and sure approach. Once you get people used to paying the tax and get the infrastructure set up to collect it, you can make occasional small increases over the years that are sized to avoid notice. Since it such a broad tax, a small increase can generate significant revenue. The impact of that tax on economic activity is difficult to pin down so arguments against it are difficult.

The vehicle registration tax could also be incremental but the legislature may have overstepped on this one. As in the RGJ column, owners of older vehicles may have seen a threefold increase in their annual fee. That tends to cause one to sit up and take notice. “Officials hoped that it would bring in expected revenue of $94 million. … as of the end of May, the DMV had transferred about $46 million this fiscal year to the General Fund.”

These taxes plus another few taxes and fees, especially on small businesses, were “expected to raise $781 million in taxes to help fill the state’s $3 billion revenue shortfall.” That’s only a quarter of the needed money which means a significant squeeze. What is the legislature to do to close the gap? Their constituents demand services yet the money to provide those services is not there. And this is only for the state. Local and federal levels face a similar squeeze. The natural tendency is to just raise taxes. This is like a novice entrepreneur deciding to raise the price of his merchandise to increase income. That natural tendency has been shown to be questionable. Raise the price, or the tax rate, above a certain point and it will reduce sales to the point that overall income decreases. Make it too low and and the profit margin reduces to an inefficient level. The challenge both for the entrepreneur and for the state is to set their prices or tax rates to just the right place so as to maximize healthy activity and optimize revenue. That is not as easy a task as it sounds.

“Armed with knowledge about California’s three public-union heavyweights, one can start to understand how the state found itself in its nightmarish fiscal situation.” Certainly, employees desire better wages and benefits and that is a proper market pressure. The problem comes in when the distance between employer and employee becomes larger and more obtuse as then the responsibility for decisions becomes less clear. Create a situation where both only meet via representatives and you have a recipe for disaster. Unions and elected representatives make the case. Steven Malanga describes how public-sector unions broke California with a history lesson.

The rise of the white-collar CTA provides a good example of a fundamental political shift that took place everywhere in the labor movement. In the aftermath of World War II, at the height of its influence, organized labor was dominated by private workers; as a result, union members were often culturally conservative and economically pro-growth. But as government workers have come to dominate the movement, it has moved left. By the mid-nineties, the CTA was supporting causes well beyond its purview as a collective bargaining agent for teachers.

The lesson is one of feedback and checks and balances in governance. Diligence of the citizenry is one component that has been lacking else the unions would not have their political clout. The ‘running out of other people’s money’ is another but one that tells you all others have failed. The challenge for California and many other governments from municipal to national is to take heed of the need to make corrections before they repeat what has happened to the Soviet Union and other socialist oriented states.

Stankley takes a look at Personal Morality vs Business Morality wondering “Why don’t businesses have social responsibilities?” He “quickly learned that markets don’t respond primarily to morality, or goodwill. In fact, often times it’s quite the opposite.” He asserts that profit is to corporations as breathing is to individuals. That means that ideas about morality are not driven by ideology but rather practicality. A business survives because it caters to the morality that is expressed in its market and not by trying to force a morality on that market.

“Understand, when McDonald’s competes for your dollar, it is competing against hookers, drugs, and booze. Any morality it emanates has been engineered to extract more profit.”

That is why much of the green movement trying to force their views about energy create much friction. Rich Trzupek describes this when he takes on Obama’s Green Energy Myth.

Those two sentences [about wind and solar] summarize the green nirvana that the president is trying to foist upon America. It’s a goal that’s entirely unachievable, because of a number of technical and economic realties that lie just below the surface of simplistic analysis.

There is the ideology with components about ‘addiction to oil’ and human environmental impact that sounds really really good but fails miserably when it meets the basic needs and desires of humans to live comfortably. As business reflects a morality that drives down to the fundamental lifeblood of its market components, governments and societies must also cope with, and adjust to, that morality as a matter of survival. That means that idealistic morality is a luxury that can only be afforded by those who have obtained significant profits and can use some of those profits to ameliorate the fundamental morality of survival.

Professor Williams provides insight into basic economics in discussing Greed and the Greater Good. ‘Greed’ is one of those loaded terms tossed around as a means to impugn capitalism or the US as in CNBS’s show American Greed. As with many of these concepts, looking at the alternative or finding an honest reference can qualify the negativities.

How about the criticism that businesses are just in it for money and profits? That’s supposed to be an anti-business slam but upon simple examination, it reflects gross stupidity or misunderstanding. … Compare our level of satisfaction with the services of those “in it just for the money and profits” to those in it to serve the public as opposed to earning profits [like public education]. … You can bet the rent money that if Wal-Mart and other businesses had the power to take our money by force, they would be less interested and willing to please us….. In the market, when a firm fails to please its customers and fails to earn a profit, it goes bankrupt, making those resources available to another that might do better. That’s unless government steps in to bail it out. … The ruthlessness of the market discipline, which forces firms to please customers and thereby earn profits, goes a long way toward explaining hostility toward free market capitalism.

It would be something if government was run on the basis of an optional purchase. Scary thought. But that is the essence of the federalism originally envisioned in the formation of the United States.

The LA Times says the Feds charge 1,200 people in mortgage fraud crackdown. As Instapundit says, this is a start. A bit late, but at least a start.

Seeking to show victories against the kind of ground-level fraud that contributed to the housing crash, federal authorities said Thursday that they had filed criminal charges in recent months against 1,200 mortgage brokers and others accused of cheating banks and borrowers of $2.3 billion.

A few billion is only a start on the few trillion but it is a start. The effort gets to the roots of the matter where the marketing of mortgages went overboard and sold product to those who really couldn’t afford it.

At the Big Picture: James K. Galbraith: Why the ‘Experts’ Failed to See How Financial Fraud Collapsed the Economy, the text of a written statement to members of the Senate Judiciary Committee delivered this May.

Ask yourselves: is it possible for mortgage originators, ratings agencies, underwriters, insurers and supervising agencies NOT to have known that the system of housing finance had become infested with fraud? Every statistical indicator of fraudulent practice – growth and profitability – suggests otherwise. Every examination of the record so far suggests otherwise. The very language in use: “liars’ loans,” “ninja loans,” “neutron loans,” and “toxic waste,” tells you that people knew. I have also heard the expression, “IBG,YBG;” the meaning of that bit of code was: “I’ll be gone, you’ll be gone.”
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The financiers must be made to feel, in their bones, the power of the law. And the public, which lives by the law, must see very clearly and unambiguously that this is the case.

There is a pool of money whose owners are desperately seeking some return in an investment. There is a political push to make money available for certain needs. There are managers willing to connect the two. Some of those managers, perhaps even as a consequence of a chain of managers, cloud over aspects of one end of the transaction to the other as they take their cut on the money flow. Some may even intentionally cloud the transaction so those with the money to invest can’t really see the nature of their investment. When the realities of the money use end hit reality, the cloud clears and the owners of the investments find out where their money went. The only profit is the IBG, YBG crowd. Galbraith describes the presumptions and conditions that allowed this to happen. That must be learned to find the proper way to minimize future pains.

Up until about 2000, a family house cost about three times annual earnings. Since then it has gone up to near five times. There were two pillars behind this. One was the massive money pool looking for a return on value and the other was a social imperative for home ownership. The combination was ugly. E. James Welsh describes how the result in It’s not rocket science, his investment letter for April 20.

The decline in lending standards however exposed a fatal flaw in the securitization of mortgages. If there are no negative financial consequences when a prospective home buyer can purchase a home with no money down, a mortgage broker can help a prospective homebuyer directly or indirectly falsify data, and a lending institution doesn’t have to maintain lending standards if they know they’re going to bundle the ‘bad’ loans and sell them to be securitized, an open season for fraud and abuse is created. Everyone involved got to make a lot of money, as they shoveled the bad loans to unsuspecting buyers of mortgage backed securities. This type of fraud was allowed to develop over a period of years, while the Federal Reserve, Federal Deposit Insurance Corporation, and Office of Thrift Supervision did nothing.

Another recent report described how thousands of houses in Las Vegas were vacant and more undergoing foreclosure while builders were busy trying to meet the demand from folks who could not compete in the market to buy the vacant houses. This sounds odd but it is an illustration of the money pool desperately seeking something better than the extremely low cash instrument rates of return or the highly volatile stock market. That money pool is the retirement fund for both private investors and public pension plans and they want both security and a high rate of growth. Those goals are at odds with the idea of using capital for business growth. That puts it in competition with the basic needs of families as illustrated in the Las Vegas housing market. It will take a while to figure out how that is going to work, especially if the failed paradigms of socialist efforts from the past are to be taken to heart.

Ronald J Colombo provides a simple explanation of what is going on with “the Securities and Exchange Commission’s securities-fraud civil suit against Goldman Sachs.” The essence is that a house of cards was built so one client could gamble it would fail and other clients could gamble it would not. The moral dilemma is about whether those who gambled the house of cards would not fail were properly informed about the reasons for its construction.

Goldman’s behavior might be permissible under U.S. securities law, it most certainly is impermissible under traditional notions of right and wrong. All the disclosure in the world does not absolve someone of the basic moral precept to do unto others as you would have others do unto you. It’s simply morally wrong to sell someone – especially one’s own clients – junk specifically designed to fail, regardless of how many warning labels are attached. A degree in moral philosophy is not needed to see that.

Today, however, a degree in modern moral philosophy might actually get in the way of seeing that. For we live in an age marked by an unprecedented lack of consensus over what “morally wrong” means. Indeed, one of the few vices recognized nowadays is that of being “judgmental,” and perhaps it was this vice that Goldman sought to avoid when it refused to characterize Paulson & Co.’s plans as morally wrongful. Instead, Goldman probably rationalized the proposed course of conduct as a legitimate business strategy within the confines of the law.

The principle is caveat emptor (wikipedia). What this has become is a political argument about just how far government should go to protect buyers.

The fact is that both sets of Goldman Sachs clients were playing games looking for unrealistic financial gain through market manipulation gambits. The issue is whether Goldman Sachs was right in playing neutral referee or whether the company should have been a coach for each side using its knowledge of the other side’s goals to help construct its advice.

Behind all of this were two factors. One is the massive amount of money looking for investment return and the other is the pool of financial instruments fostered by the government’s policies to encourage home ownership. The two made for a deadly mix.

Parks and Rec are often a political football in budget wars. Warren Meyer describes how private management of public resources can turn parks from a sink to a source. It is an example of a private and public partnership that can benefit both. See his Public Testimony on Private Parks Management.

One of the problems Meyers encounters is the modern paradigm of evil business. This is despite many years of example to the contrary. If your business is the outdoor camping experience, you will not make a profit by paving over the wilderness.

Check out Meyer’s presentation notes and see what can be done. Contrast that to the difficulty in trying to sell the benefits of the private sector over the proven problems with governmental bureaucracy.

It may be that teacher’s unions were among the first to gain significant clout. They have also been among the first under the gun with such events as the firing that hit the news in Rhode Island lately. They have also been under the gun in regards to charter schools, ‘No child left behind’ accountability measures and the growth of home schooling.

But now, other public sector unions are coming under scrutiny because they have made their members Civil Servants no more. The Washington Times book review by Jeremy Lott takes note of one example.

Mr. Greenhut does a good job of showing how California’s public employee unions have done so much to cause the state’s budget troubles by negotiating large salaries, benefits and retirement packages far out of line with state revenues. He does an even better job of showing how the unions respond when their privilege is threatened.

For instance, they managed to shoot down all of the referendums Gov. Arnold Schwarzenegger put on the state ballot in 2005 to get a grip on state spending.

This, in essence, is the expression of a warning that goes back to the founding fathers. The public sector has surpassed the private in terms of salaries and the benefits have never been comparable. Public sector employees have had better job security than private in recent times. A result has been that many communities are facing financial pressures. Trying to find revenue sources to pay for their employees is a big problem but even that problem looks small in comparison to the bill that is coming due in regards to pensions and retirement benefits.

Restoring the balance is likely to be a rough process.

It seems the pessimist gets all the publicity.

For much of the past decade, “declinism” – the notion that America is heading toward a deadly denouement – has largely been a philosophy of the left. But more recently, particularly in the wake of Barack Obama’s election, conservatives have begun joining the chorus, albeit singing a somewhat different variation on the same tune.

Joel Kotkin thinks the pessimism might be misreading history and that the reality is America on the Rise. In part it’s demographics and in part it’s resources, attitudes, and governance.

As we enter the next few decades of the new millennium, I would bet on a more youthful, still resource-rich and democratic America to maintain its preeminence even in a world where economic power continues to shift from its historic home in Europe to Asia.

It is very easy to focus on the problems as they tend to bite you in sensitive anatomy. Things going right and running smoothly tend to disappear unless you go out and find them. Kotkin provides a reminder that those focused on the decline of the US might want to exercise a bit more diligence in how they measure the referent.

One of those persistent myths that keeps coming up is the diminishment of US capabilities such as in manufacturing. For instance, the idea that everything is made in China. The reality is somewhat different as Mark Perry notes in his blog: U.S. Remains Largest Manufacturer in the World

As much as we hear about the “demise of U.S. manufacturing,” and how we are a country that “doesn’t produce anything anymore,” and how we have “outsourced our production to China,” the U.S. manufacturing sector is alive and well, and the U.S. is still the largest manufacturer in the world.

Manufacturing is only one sector of an economy. There is the service sector that is often noted as growing rapidly in recent years as another, for instance. What Perry notes is that, according to government numbers, US manufacturing output is larger than all but two other nation’s entire output or GDP. As for those two others, Japan and China, US manufacturing output rates better than half those countries entire production in all sectors.

It is this reality that makes it possible for the US to suffer trillion dollar deficits without immediate financial catastrophe. How long is another matter, especially when there is such strong political bias towards the destruction of the US manufacturing through taxes and regulations for reasons not well founded in fact such as climate change.

Many moan about decay and loosing ground and doom and gloom. Housing tells a different story. Carpe Diem reports New Homes Built Today Compared to the 1970s: More Square Footage, Baths, Garages, Central A/C .

A generation ago it was fairly common for new homes to be built with a single garage, single bathroom and no air conditioning, and today those types of new homes have become extinct. What are most common today are new homes with two or more bathrooms, two-car garages or bigger, central airconditiong, and 50% more square footage than new homes in the early 1970s.

In Reno, a realty blog says housing prices are holding at $103 per square foot (November median sold price, units, DOM, and $/sq.ft.). At median numbers, that’s a 1700 sq foot house for $175k. That means a generation ago the median house was close to 1000 sq feet. That’s a just a bit bigger than a single wide mobile home.

The features listed in the report are only the major items. New houses will often have better insulation, more efficient appliances and many other features and capabilities compared to houses from a generation ago. They represent a form of wealth that is often overlooked and just accepted and taken for granted.

The Coyote Blog wonders Was I Wrong, Or Did Something Change?. Last year he was predicting unemployment to top out at 9% or so. That was overly optimistic in terms of the current state of affairs. What happened and why was the prediction off?

Businesses are reluctant to invest when the returns on their investment are wildly unpredictable, particularly when future income changes are more driven by changing acts of Congress rather than fluctuations in the market.

He then lists a number of governmental actions that would inhibit or hinder business planning. There is a great uncertainty about how costs for labor and energy, especially, will be influenced by such issues as health care and climate taxes.

The climate of concern is not AGW but rather a hostility towards business and the wealth it can create. That is a worry about survival.

Scott at Powerline describes a book by Peter Schweizer: Secrets of the financial crisis titled Architects of Ruin. It addresses what happens when a big money pool seeking investment and good intentions intersect.

The idea sounds appealing enough: encourage homeownership in order to reduce crime, unemployment, and broken families. But activities pushed their agenda by demanding that lending institutions loosen their lending standards and look the other way when lending to people with bad credit. Activist groups such as ACORN, the Congressional Black Caucus, and the Service Employees International Union pushed banks to use “less traditional income sources such as food stamps, unemployment, part-time jobs, non-court ordered child support and foster care payments” while considering a mortgage application.

Liberal activists also pushed banks to agree “to lower down payment and closing costs” for lenders. What this meant is that the borrower would have little or no money in the game–no incentive to hang on if times got tough. The activists also pushed banks to allow people to take out larger loans on lower incomes, upending the traditional notion that people should only be allowed to have a mortgage payment account for, say, 28% of their income. Activists argued that this was all necessary in the name of social justice.
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The real culprits here are the social activists and their allies in Washington who pushed an activist agenda. They helped to propel us into the mortgage crisis we face today.

The key upon which this thesis rests is the finding common to several studies that the major impact of the financial crisis has been in poor and minority neighborhoods where this ‘good intentions’ activism has been most at play. It is another topic as to why there has been much publicity about “all the talk of unsold condos in South Florida and McMansions sitting empty in California” and house flipping for investment returns.

The topic is Never Cleaner but the analogy works for many hot political issues besides environment protection.

“The problem,” I tell the students, “is similar to the experience when watching the Steelers play on Sunday with your wife or girlfriend, while eating potato chips and French onion dip. At first, each chip is generously covered with dip, a good return on each effort of chip dipping, you can even do it with peripheral vision and focus on the game. As the dip volume decreases, some adjustments have to be made; additional efforts, focus and attention are expended. Initially, the extra effort is simply turning the dip tub to a more favorable angle for your chip dipping success, after all, it is in your girlfriend’s or wife’s best health interest, almost an altruistic act on your behalf.

“Then additional effort is expended to actually retrieve the dip tub and closely focus on ferreting out sufficient dip for each chip way down in the bottom crease or under the lip of the lid. This is ultimately followed by the effort of the finger swipe and mouth chip/dip mixing. It is at this point that some reasonable person needs to stop the process. There is no longer a sufficient benefit to continuing efforts to try to ingest the last dip residue … don’t lick that dip tub … is the admonishment from your better half.”

This is the analogy to the history and current story of our environmental regulations. Where once contamination was emitted almost freely into the environment, now, it is not so extreme. We continue to expend more and more efforts to seek those last molecules of contamination to satisfy our environmental appetite for cleaner.

This gets into the False Dilemma logical fallacy. Pollution isn’t something that is or is not. It is a matter of degree. Peak oil and other resource limitation scare stories are of a similar nature. These things don’t just reach a perfect state. There is a cost involved and it rises as the limits approach. Whether it is an effort to reduce pollution or to find new sources for a resource, there is a point where the cost starts to exceed the benefit. Some matters, like pollution, do seem to need governmental involvement to address as they are often highly dispersed in impact and in sourcing. The problem is in developing mechanism to govern the governance because the cost to meet governmental regulation is also often highly dispersed. That diffuse connection between actual cost and actual benefit tends to fly past any cost to benefit considerations. That is what Robert Smith was describing in his American Thinker column.

Scott describes The Dems’ poisonous cocktail and refers to a Peter Schweizer column in Forbes, “Expanding the CRA,”. The crux of the issue is a huge money pool finding legislation intended to rebuild communities.

The White House and Congress want to expand a 30-year-old law–the Community Reinvestment Act–that helped to fuel the mortgage meltdown. What the CRA does, in effect, is compel banks to seek the permission of community activists to get regulatory approval for bank expansions and mergers. Often this means striking a deal with activist groups such as ACORN or unions like the Service Employees International Union (SEIU) and agreeing to allocate credit to poor and minority areas that are underserved.
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The CRA is not about community development; it is, essentially, affirmative action in lending. Trillions in loans are now to be made not on the basis of whether they can be paid back but to meet CRA goals. This is precisely what we need to get away from. Drinking this potent cocktail would be dangerous to our financial health.

Obviously the money had to exist before it could be borrowed. One source of that money was created by ‘boomers saving for retirement. This was a created wealth of the labor force that created a pressure to find a ‘reasonable’ rate of return for investment. The Community Reinvestment Act was on the other end in creating a market for money. In between were creative people finding ways to connect the money pool to the market for funds. That brought in credit management schemes, leveraging, and bundling of assets.

What happened was that the accountability of the market was superseded by political desire. The accountability of the market will not go away and it will eventually catch up to the political desire. When that happens, something breaks.

One of the big problems in management or in legislation is that of creating proper incentives. Coyote Blog illustrates this in Follow the Incentives.

I often tell people that in failing organizations like the government or GM, most of the folks who are “part of the problem” aren’t bad people, they just have bad incentives.

The case at hand is a health bill that penalizes doctors if they show up in the wrong place in the cost distribution curve. Yes, it sounds good to trim those who end up on the high cost end of the curve. The problem is that you don’t know why they ended up there. The assumption is that a doctor who is responsible for too much billing is over-charging and not that he is more involved in difficult cases or working in an expensive environment.

The key in this case is to properly define the desired outcome. Inexpensive health care has two desired outcomes that conflict with each other. It is easy to go after one or the other and that is the source of such ideas as in the Coyote’s example. What is difficult is to find incentives that work towards both outcomes. The only effective way to do that found to date is the open market of competing ideas. It is a capitalistic economic philosophy that has worked best, to date, in encouraging many people to create new ideas and try them in the market to see how they work and how they compare to other ideas in meeting the desired goals. One of the keys in this open market approach is that the desired outcomes do not all need to be explicit nor do their relative merits need to be defined beforehand. The success of what works and how it changes over time takes care of that.

Peter, The Bayou Renaissance Man, discusses Feral kids and the problems they pose. The post refers to “a series of articles on feral kids in Britain and the problems they pose in terms of crime, anti-social behavior, etc.” The focus is on the incentives from the welfare state that result in disassociated fathers, single parent children, and girls in their formative years using children as a source of income.

Feral kids are only one result. The young men who are being used to father a child and are then discarded also tend to go ‘feral.’ The role of father is transferred to the government which is more reliable and pays more and doesn’t burden the mother with excess close and personal relationships (babies and children are easier to ignore). The ties that bind civilization are cut asunder by well meaning governmental programs.

I know from bitter personal experience the consequences of such a culture. I used to meet them every day in my work as a prison chaplain. A very significant proportion of those kids, of any and all races, will end up as convicted criminals. They’re feral, anti-social, wrapped up in a ‘me first’ culture that justifies doing anything and everything to get what they want, blaming their problems on ‘Whitey’ or ‘the system’ or ‘racism’ but never accepting any personal responsibility. And, really, who can blame them? They imbibed those attitudes with their mothers’ milk!

Should this change? Can it be changed? Should it be changed? How can the original motivation of the governmental programs be addresses without this side effect?