Sunday, August 02, 2009

The comments of a well regarded financial analyst follow after my modest words, some of which some of you may have seen.

The American people have become OPM addicts. They have yet to realize that there is no such thing as Other People's Money. Originally OPM was distributed by the government during balanced budget days as permitted by the second part of the Income Tax Amendment to the U.S. Constitution. It took Congress little time to learn that distributing OPM was a great path to reelection and the prestige and benefits that ensued. It worked so well that another privileged class of citizens was established -- the mandarins, unelected, on the committee staffs and in their own offices. Just like the Mings and the rest of the Chinese dynasties those elected could then pay attention to lofty ideas which would assure their position by securing contributions from their large money supporters while delivering OPM in the form of bread and circuses to their Districts.

We had been formed as a nation based on the idea that the elected viewed their position was temporary and gave them an opportunity to serve. Foolish drafters. I measure the growth of government by the increasing number of concrete edifices constructed in the District of Columbia and environs. Supposedly to provide nesting places for our elected representatives, they are in fact homes to the permanent governing class -- the unelected mandarins -- who remain forever, serving as they did the dynasties of elected officials in ever increasing numbers.

This has been going on for decades. The Senior Executive is limited to two terms. Legislators can last forever, or as long as the Depends supply holds out.

But it costs tens of millions to be elected to Congress for a two or a six year term for a salary, benefits, and prerequisites which total probably no more than $500K per year.

Your first job as a legislator is to be re-slated and reelected. Congressional safe seats are reapportioned in the states after every census. The number of truly contested seats decreases every ten years. The redistricting would make Elbridge Gerry proud.

Nevertheless there is a hot pursuit of money for campaigning and a parallel hot pursuit of money for pork. Some smart mathematician should be able to figure out the relative value of campaign dollar versus pork dollar in terms of votes.

Reelection assuages egos, provides a comfortable life and an excellent formal and informal pension. The formal pension comes computed and paid by the Federal government. In most cases it is dwarfed by the informal pension paid by special interest groups from corporate to labor to goo-goos for the services rendered in the practice of lobbying.

The reason term limits failed was because it would have released too many ex-legislators into the pool of lobbying swag, to divide it up into smaller pieces.

The veneer separating the taxpayer from his elected representative gets thicker every year. The contribution letters become more frequent, the contact directly more distant, the size of the office staffs every greater, even as the congressional staffs -- the permanent mandarins -- grow larger

The evidence is clear -- the 1,000 page bill which no body can read and understand is the product of the mandarins on the various committees who communicate with the mandarins on the office staffs. The elected official does what his mandarin tells him. The 1,000 page bill makes reference to the million pages of statutes which reference each other. Would that Gilbert and Sullivan were alive today.

Which places the ideologues in control -- the missionaries for special political interests -- firmly in the drivers' seats.

With the elected interested solely in reelection and not the welfare of the country, with the purposeful complexity of the legislation designed to obfuscate its results, the citizen is at a loss.

He is less than a semi-colon in the legislator's existence -- unless he has enough money to get some attention or can promise a differential bloc of votes, or even better, both.

On a mailing list, he receives form letter. On the internet, he receives self-serving so-called surveys.

And the OPM distribution goes on. Even the Lord stopped distributing manna from the heavens after they passed through the desert. Our lords know no such bounds.

pete speer

Date: Sun, 2 Aug 2009 02:28:19 -0400
From: David.Kotok@CUMBER.COM
Subject: Cumberland Advisors Market Commentary

Cumberland Advisors
614 Landis Avenue Vineland NJ 08360-8007

August 2, 2009

Genesis 1:31 says “And God saw every thing that he had made, and, behold, it was very good. And the evening and the morning were the sixth day.“ A few millennia later, we find that the world’s most popular book can be applied metaphorically to the US House of Representatives, as it labors in the creation of clunker-nomics.

The first billion voted by the Congress for the $4500 clunker rebate program was exhausted in 6 days. Practicing for deity status, the House beheld and determined “it was very good.” They immediately passed a $2 billion addition. That bill now goes to the Senate, which will pass something similar, and then to a conference committee to resolve some differences about rules. We expect additional funding will be forthcoming quickly. Congress loves to spend and Americans love to receive.

In the spirit of Genesis, Adam and Eve American, otherwise affectionately known as John and Jane Doe, recognize a good deal when they see one. They had an old clunker worth a few hundred. Suddenly they can exchange it for $4500 if they buy the new one now. The rest they can finance at very low interest rates, thanks to the Federal Reserve and the Treasury for extending TARP and other funds so that lenders can offer them liberal terms. They seized the moment – who can blame them?

This will boost short-term activity in the US. Neil Soss of Credit Suisse estimates, “Our math suggests that vehicle sales could spike in July, perhaps to a run rate near 12.5 million units (at a seasonally adjusted annual rate) from the 9.6mn average of Q2.” He adds that “in response to cash-for-clunkers … the personal savings rate will drop sharply in the next months, even as the longer run trend is still headed higher.” That will ramp up auto production in the 3rd quarter. Neil concludes, “As a consequence, we are revising up our Q3 real GDP forecast to 2.0% (from 1.3%) and our Q4 forecast to 2.5% (from 2.0%).

Okay. We know that older and fuel-inefficient cars are supposed to be scrapped. That is supposed to be an environmental improvement. And we know that the United Auto Workers like this stimulus, for obvious reasons. So do the government-owned or government-sponsored auto manufacturers. The last private firm, Ford, will benefit, too.

Does the clunker stimulus result in enough gain to offset the net present value of the perpetual cost to finance it? Fair question? We think so. Is there an answer? Maybe, but the proof is very difficult to establish. It you are interested in this discussion, invite a few friends over for a beer and talk about it. But make sure the beer is brewed in America by the United Beer Brewer Workers. And when you toast, toast Ford and be a patriot.

Did anyone ask how many of these car sales are being “borrowed from the future?” We didn’t see it in the Congressional commentary. If it was there, it did not influence the political decision.

Has anyone looked at what we have done in a macro sense? We will try.

The United States borrowed 1 billion dollars. It is unlikely to ever pay it back. The annual interest will add $50 million to the federal budget each and every year, forever. We are assuming it is financed today with 30-year Treasury bonds. The additional $2 billion of borrowed clunker money will add another $100 million in interest. So clunker-nomics has committed the nation to make this interest payment forever.

Practicing an industrial policy by inserting government into a mixed economy is the new America. No one measures the exchange of short-term gain being substituted for longer-term taxes or inflation or debt-burdened slower growth. Those economists who are full believers in expectations analysis argue that the market will immediately adjust prices to reflect this exchange. Maybe so in the mathematical models that they use to justify that argument.

We think this expectations analysis fails in the real world. Adam and Eve American are not economists. They make their decisions for their individual benefit and in terms they can understand and assess. They know what a $4500 free gift is. They understand it. They do not deal with trillions of dollars; they do not conduct ever-increasing auctions of Treasury notes and bonds; they do not deal in foreign exchange and reserve transfers. That is not their fault. The have daily lives to live and they are facing their own struggles.

So they delegate some of these borrowing and spending decisions to the Congress because they have no other choice. In the House the long term is limited to the two years until the next election cycle is faced. So the House will easily exchange $1 billion in spending for $50 million in added budget interest.

Thus we have an asymmetric exchange. We gratify now; we borrow to do it; we defer the day of reckoning; it grows bigger and bigger but seems to be perpetually deferred. Every once in a while a crisis unfolds and the system fails, as it did with Lehman Brothers last September. That triggers a new round of upward ratcheting of this asymmetric system.

When does it end? First question without an answer? Will the end be fire, or ice? Also, no answer. What should we do to protect ourselves? Much harder, but there are some answers. Diversify worldwide. Seek a mix of investing to protect wealth. Lastly, enjoy life and the weekend in the spirit of Genesis. Rest on the seventh day, if you can.

And remember that God gives you only so many days on the planet but doesn’t count the ones you spend fishing. We will wink at CNBC viewers on Friday, August 7 from Leen’s Lodge at the annual Shadow Fed fishing retreat, where 35 of us will debate and dissect asymmetric information and deficit finance. For now, we hope your seventh day is restful for you.

David R. Kotok, Chairman and Chief Investment Officer, email:


Copyright 2009, Cumberland Advisors. All rights reserved.

Thursday, May 29, 2008

Controlling Costs By Setting Efficient Prices in the Health Care Market

Paul D. Speer, Jr.

I. The Current Environment

Neither national health insurance nor current or proposed federal regulation can control health care costs. "We will pay you a set amount for treatment," they seem to say, "if it falls within cost guidelines." Implicit here is the idea that the government will pay for an unlimited number of treatments. Payment for an unconstrained number of treatments creates its own demand. Bills tendered for such treatments will naturally be clustered at or above the cost ceiling. The health care market is inefficient.

From present experience this is to be expected. The set amount has been determined by government research and been categorized as diagnostic related groups. Even if the research were timely and the range of fees followed a bell shaped curve, the availability of information concerning the level of reimbursement to be obtained from the program would cause the lower tail of the curve to be truncated as fees charged rose at least to the former mean. Like a snake coiling its tail and moving forward these charges would rise and be reflected in the next rate setting.

Further, providers would continue to price services generally above the approved reimbursement rate for all patients. By their so doing, the plan participant would remain liable for fees above the government set reimbursement. If the government reimbursed seventy five percent of allowable costs after an annual deductible, the patient would still be liable for the deductible, the remaining twenty five percent of allowables plus the difference between the total allowable cost and the billed fees. So-called gap policies are available to pay the twenty five percent. Unless the provider has agreed to accept assignment to the government program (and thus cap billings at the government allowed cost), the remainder is still a patient liability. Providers have invested considerable sums to collect the remaining liability.

Consider a simple initial appointment with a specialist, who bills at $200 per visit. The government set fee is $168. The government plan might reimburse seventy five percent of that amount, or $126. If assignment had been agreed upon by the provider, the maximum payment would be $168. In this case, gap insurance, after satisfaction of a deductible, would leave the patient with no additional obligation.

Should assignment not have been accepted by the specialist, the patient would still owe sixteen percent of the bill. If the deductible has been previously paid and gap insurance is not present, the patient pays thirty seven percent of the provider's original charge; if gap insurance is in force, sixteen percent. The additional liability of from sixteen to thirty seven percent of the provider's charge is a surcharge on all patients collected by the provider from those whom it believes can pay.

Most providers with access to middle and upper class patients refuse to participate in government assignment programs. The reason most heard is that reimbursement is too slow and the amounts captured insufficient to cover 'costs.' The true reason why participation is avoided is that it does not make economic sense to give up the opportunity to obtain the maximum level of fees. The provider is willing to assist in processing the claim through the government system; the patient liability remains. Only where there appears to be no chance of collecting the remainder of the unpaid charge will the provider accept assignment. It is not surprising that these providers are located in areas where the patient is unlikely to have assets against which collection can be undertaken.

In these areas, the average charge will be much closer to the charge permitted by the government and the supply of health services will be lower. If additional services are provided, they will have been subsidized by the provider's access to moneys obtained from self-pay and private insurance paid patients.

The good deed by the provider in delivering services to asset poor areas at the government assignment rate has four perverse effects. First, it retards the growth of government allowed costs. If the allowed costs remain below actual costs of delivering service, the supply of services will be affected. Fewer services will be available. Second, it requires the provider to increase his billings in other areas to make up for his costs. These patients in these areas are in effect being taxed to provide this subsidy.

Third, it encourages providers to increase their turnover and maximize the number of billings. Increased turnover results in reduced time for diagnosis and patient control. The relationship between the allowable charges and the assumed patient time necessary to complete the procedure is thrown out of kilter. In repairing automobiles, the mechanics use a flat rate manual to determine the labor charge. Mechanics, however, are usually expected to beat the flat rate time or find a new job.

Fourth, it encourages providers to invest in ancillary enterprises. This investment using captured business directed by the provider is another profit center to increase provider income. Originally limited to patient referral for testing and in patient care at the hospital with which the provider was associated, these profit centers now include the myriad of specialized outpatient facilities owned in part by referring providers and formed by a combination of advances in medical treatment and the spin off by the hospital of certain services which with the advent of the government DRG reimbursement methods were not profitable.

Provider owned medical testing facilities are another profit center. Much of the multiple tests ordered by providers are done as the ultimate liability defense; some may be attributed to the profit motive. At the bottom end of the scale, the relationship between the provider and the pharmacy provides another profit center, especially where unlimited, unquestioned government reimbursement of prescription costs occurs.

This is the system as we know it today. The pricing of services is inefficient and is of little concern to either the patient or the provider. Cost control is solely a function of government fiat. Extraordinary costs are larded into the system to benefit both the legal and the medical profession.

Providers will set fees above the cost ceiling to obtain additional income from persons outside the government assignment system. Hospitals, treatment centers, skilled nursing facilities, specialists, etc., can, if efficient, obtain extraordinary returns. Inefficient providers are encouraged to make profits by stinting on their services to individual patients. Neither outcome is desired by the government, the taxpayer or the patient.

The proposals by this and prior administrations would do nothing to alleviate the inefficient pricing mechanism but merely transfer costs to another sector of the market -- businesses. Existing businesses which are labor intensive must raise their prices to cover increased costs. This is a one time inflationary effect. There will be some effect on the creation of new businesses and their ability to weather the crucial first two years. The cost of health care must be contained. But to do so, a change in perspective is needed. The Health Care marketplace can become more efficient in its pricing and as a result deliver more services at a lower cost. This can occur only if market discipline is placed on that pricing.

II. Using Financial Markets to Price Health Care Benefits

Consider the best example of efficient pricing of financial assets -- the Dutch Auction process the U.S. government uses to price its borrowings. The U.S. Treasury at the time of each issuance announces the size of its offering. Prospective purchasers can bid a price (or an interest rate) at which each bidder wishes to purchase a certain amount of securities. Alternatively, the bidder can put in a bid of the 'average rate.' The government tabulates the amounts bid from the highest price to the lowest. After the amount to be accepted at the 'average rate' is subtracted from the original size, the government accepts offers, starting with the highest price (lowest interest rate) until all bonds are purchased. Those who wish to profit the most and those bidders which serve an inefficient sector of the market are excluded.

Now consider how this might be applied to health care. For each specific service -- say, a skilled nursing facility bed/year -- the government would periodically determine a finite number of bed years which it would purchase; at the outset it would probably use the level of services subsidized in the prior period. It would indicate its willingness to 'purchase' that number of units and solicit proposals with an offering price from providers. In this example, a health care institution would offer so many bed/years for a price -- say, 150 bed/years at $50,000 each. When the offer was accepted, the government would provide a fixed percentage of the total cost to reserve the indicated capacity -- an option contract. The institution would provide the government with a contract. Each contract would be good for a fixed time period and would be for one or a multiple of bed/year(s) and might be further subdivided into bed/months, much as coupons used to be placed on bonds.

The government would sell these contracts to health care users in the usual ways. Intermediaries such as private insurance companies would buy the option from the government at a market clearing price. Medicare and state Medicaid systems would receive contracts based on demand in lieu of cash payments. Individuals might purchase contracts as well. Hopefully, that price would be equal to or greater than the price paid to the provider. The contract would be delivered by the purchaser to the provider in exchange for the indicated service. The government paid reservation fee would be deducted from the cost of service indicated in the contract. The contract could be transportable. That is, it could be delivered to and care given by any certified provider. Local and state health agencies would apply for and receive annually contracts based on anticipated demand by needy individuals and maintain an inventory for use or for sale. The provider might invest the proceeds from sale of the option in services to the uncovered.

The user and provider would jointly certify the services used. When the user left the institution, the unused portion of the contract would be returned and payment for the days used would be made, after deducting the pre-paid government reservation fee. The days remaining would be available on an amended contract.

Each specific service in a Dutch Auction would specify the standards required under that service. The provider would be certified as meeting the facility standard and the personnel standard. For example, the bidding for units of open heart surgery from a professional corporation would include the identification of the facility to be used, facilities costs including acute care hospital days, all medical professionals to be used, the pre-treatment examinations and tests, the post-operative care, drugs, terminating with discharge into a lesser facility or to home. The professional corporation would be responsible for bidding the complete package as a single unit price and would bear all costs above that price. As above, the government would pay a reservation fee for that service.

The health care industry would be free to make individual or collective arrangements with users in the traditional way. Individuals capable of supplementing the value of the contract with other sources of revenue would be able to retain freedom of choice in purchasing health care services.

We indicated that the government would be the initial market maker. There is no reason why, over time, a private agency could not assume this task. Nearly all of the mechanisms to implement this system are in place. Facilities and medical personnel are already certified. Within the hospital care area, diagnosis related groups have been identified. Medical-surgical teams have long been organized, although without apparent competition.

As an incentive to participation in the auction, the government should require the health care voucher users to forego the right to sue the provider for other than actual damages. Punitive, pain and suffering, loss of conjugal services, etc., would be foregone. Insurance costs and testing costs would surely be lowered. Finally, the use of inefficiently bundled profit center services would be minimized.

Costs cannot be controlled in an inefficient market without additional inefficient regulation and rationing. What we propose above is to make the market more efficient and in so doing minimize both regulation and rationing and deliver services to all persons at the lowest possible cost.

(The author is president of Municipal Finance Consulting Services, Inc., Indian Creek, Illinois. The firm provides services to state and local entities, including hospitals.)

Sunday, May 11, 2008

Tenure for K-12 Teachers is Bad Policy

Tenure in educational institutions below the college level is an obscene concept.

A college can be described as a colloquy of fiefdoms. In universities professors are expected to conduct research free from biased criticism to advance the state of knowledge in their field.

Tenure is or should be granted based on the demonstrated advancement and the capacity for future advancement of knowledge.

Classroom teaching is an adjunct to all this and demonstrates the professor's ability to communicate the ideas which make up the body of knowledge. The college professor works from a base salary augmented by research grants.

In the K-12 field, tenure is based nearly exclusively on the time in position. Even before that time has been reached, discharge of the teacher based on classroom performance is nearly impossible for a school board to conclude.

K-12 teachers receive monetary increases usually based on a matrix with term of service along one axis and additional educational attainment along the other. For the most part the additional courses taken are in the education field and not in the subject matter taught. Methodological courses are taken in the evening and during the summer. Some high school teachers do work towards graduate degees to obtain and extend subject matter mastery.

It is subject matter mastery as well as a love of both the material being taught and the ability to communicate that affection and respect for the pupils that define effective instruction.

Independent research such as is accomplished by professors at the college level is not part of teacher duties at the levels below college. Tenure is neither a necessary nor a sufficient condition for effective teaching.

It is an element of the closed shop of Public Education, which along with the lack of periodic testing of teacher Subject Matter knowledge (recertification), the dumbing down of standardized tests by the state agencies and the norming up of scores, has helped to create the sub prime results we see.

These outcomes are hindering the nation's performance in the 21st Century world economy. Tenure may provide security in teacher employment. It affects job performance in the rest of the economy


Tuesday, April 29, 2008

Curing The Recession, Part I: The Sub Prime Mess

The Executive and Congress have used the Fed as the "Miracle Worker" and gone their own foolish ways concentrating not on sound fiscal policies but on re-election (a personal fiscal and power policy.)

The fed has no more solutions and will not until the household sector can be induced to further liquify financial institution balance sheets.

The Japanese Central Bank could get away with lowering the its rate to as close to zero as accountants would permit because of the high savings rate of the Japanese household. That we do not have.

What we do have is a consumption/gratification society, with the political system riding the backs of increased consumer installment and home equity debt. The sector is tapped out; and housing debt is so large, given market values, that many home owners have zero equity and increasing interest rates. Thus, foreclosures, jingle mail and the lot.

Financial institutions have been playing the turnover game not holding but sending mortgages for securitization by the whiz kids -- even dumping their servicing businesses to an out of town firm. They are out of touch with the real world of their retail customers.

There are two huge, parallel problems. The first is in the housing market, which is really a domino business with people selling their entry level houses to first time buyers and fleeting up to the next level, using equity from that sale to provide the downstroke for the next level, and so on up the line.

There are entry level buyers, but at a reduced price. At the same time, the home equity loans have to be paid on sale, putting these step-up buyers in a position where they are unable to make the step up, because if they sell, they have little cash to move up with.

This problem can be solved by not moving up, of course. It is complicated by the under qualifica
tion of home buyers, the teaser rates offered, etc. If the mortgage could be desecuritized a solution presents itself.

Provided that the objective is to keep home owners solvent, participating in the economy and not incidentally depositing money on a regular basis in demand and savings accounts, a jointly beneficial solution presents itself. It demands that we take a new look at the home owner's balance sheet.

Traditionally it has had one Asset -- the property; one Liability -- the mortgagee provided loan; one Equity entry -- Owner's position, the remainder after subtracting the principal amount of the Liability from the value of the Asset. Prudent lending in accordance with GNMA criteria held the Liability to be no more than 80% of the appraised market value at closing of the Asset purchase. Owner's verified Income Statement showed that the mortgage payment would be no more than 25% of his income and that the combined mortgage and installment debt would be no more than 33% of his income.

That is the hallmark, forever stained by a combination of sub prime loans based on no documentation and faulty appraisals. These were complicated by teaser rates folded into a higher rate after the initial one, two or three year period and the present fall in home values.

Without the expected increase in home values the conversion of teaser into permanent rate caused mortgagors at the margin to fall outside of the GNMA criteria. Home equity loans caused further deterioration of the mortgagor's credit position

Problems were compounded by the fact that the original lender had no permanent customer relationship; everything was on a transaction basis. Some fault lay there.

Ideally, we would hope to rescue the balance sheet in being by restoring GNMA standards for balance sheet and income statement, while keeping the mortgagor in good standing, occupying the property and making a positive contribution to the economy.

We can do this by adjusting the balance sheet and income statement relationships and requiring future annual adjustments based on the hopefully improving financial position of the mortgagor. All that is required is that we open a new Equity category, a Preferred position in the Asset, nominally held by the Mortgagee -- the Lender.

It will be determined by reducing the First Mortgage amount to that level at which, given the market interest rate on the one hand and the Mortgagor's income stream on the other, the GNMA criteria are met, The difference between the principal amount of the First Mortgage and the the qualifying amount is the par amount of the Preferred Equity. We then set an interest rate which will accrue to the holder of the preferred position. Annually, the Preferred Equity will be paid down by the Mortgagor, given an improvement in his income position.

Upon sale, the Preferred position will receive the first money. the Mortgagor, after paying of his mortgage will receive the remainder. In the interim, no Home Equity financing will be permitted without the permission of the Preferred holder. The Mortgagor will be required to maintain his personal and business accounts with his Lender.


Wednesday, April 23, 2008

Obtaining an Efficient System for Educational Development in Ilinois

I. The Goal

Section 1 of Article X of the Illinois Constitution succinctly summarizes the Goal of Public Education. Unfortunately, attention is usually drawn only to the last sentence which deals with State finance.

The State does have the primary responsibility for financing Illinois schools, but that is clearly subject to interpretation. That authority does not extend to a requirement that the State provide the majority of funding direct to all schools. First, 'primary' does not equal 'majority'. No Illinois Court has ever, nor will they ever rule that the two are the same. That would be equivalent to ruling that no local plus Federal funding can ever exceed what the State provides or that the State must provide at least the same amount of funds that are provided from Federal and local resources.

Each is a tautology. Finances are only a means to an End. The End is clearly stated at the beginning of the Section. It is in realizing and reaching for the Goal that we are failing.

SECTION 1. GOAL - FREE SCHOOLS A fundamental goal of the People of the State is the educational development of all persons to the limits of their capacities. The State shall provide for an efficient system of high quality public educational institutions and services. Education in public schools through the secondary level shall be free. There may be such other free education as the General Assembly provides by law. The State has the primary responsibility for financing the system of public education. (Source: Illinois Constitution.) (Emphasis Supplied)

That goal can be achieved only by a private-public effort. It is like a three legged school, with Knowledge being the seat, and the legs being the parent in the home, the teacher in the classroom and government providing the environment. When the parent is not or can not be part of the process of education, the stool is uneven, the child's capacities do not reach their upper limits. Similarly, when the teaching is inadequate, the system is not high quality that result is also uneven and the student sitting on the seat of knowledge is unable to reach the capacities nurtured by the family unit.

II. The Multiple Failures

We see today failure in the system, in the classroom, and in the home supporting the system.

At the bottom of the income spectrum too many parents having had the system fail them in the past face the real world inadequately prepared. This failure holds them back in society and makes them less able to reinforce at home the lessons taught at school. At the worst, they no longer believe that Education is an Economic or a Social Good and this example is passed down to the child. At the opposite end of the income spectrum, affluent parents, perhaps gulled into inactivity by the Education establishment are distracted by work or play and pay scant attention to the educational achievement of the child and rely on grades on paper instead of demonstrated excellence. At both ends, parents fail to instill loyalty to the family in its members and a sense of sacrifice for the future good of the unit. The parents fail as role models and the children take as models what they see on television instead. Education is best achieved with a sense of urgency. The opportunity for learning passes the child by. In much the same fashion the family elders fail to provide the moral discipline necessary for adults to function in a civil society.

The State for its part has failed its Constitutional Duty above. Both the Executive (primarily through the State Board of Education) and the Legislative branches have failed to demand that local Districts provide a quality education to their students. Curriculum oversight is miniscule, It is based solely on periodic statewide testing controlled by the very agency whose members and staff are not truly independent and whose objective appears to be the validation of the present system of instruction in the several schools, rather than the knowledge base of the students.

Test results are seen to be a function of funding rather than the quality of instruction. Criticism of the latter is out of bounds. As a result, while a problem may be discerned, the solution proposed is and will always be more money. Firms like Augenblick and Myers get employed by an ISBE foil to conduct regression analyses whose solution is always 'increased funding'. The quality of instruction is not considered as a variable in the analysis.

ISBE does its best to hide matters. Its staff is composed of education school graduates -- contemporaries of the teachers in the schools. ISBE admits to both dumbing down the tests and norming up the results. This effectively hides the systemic failure. Compounding this failure is the effective (and expensive) lobbying done by the teachers, administrators and the local school boards

The system also fails to exercise responsible financial oversight until individual Districts are drowning.

Two legs of the Seat of Knowledge are effectively lowered.

What of the third -- the classroom teachers? Effective classroom teaching requires a mastery of techniques learned in training, a mastery and love of the subject matter, and an affection and respect for the students. Each is necessary.

Training in techniques is provided routinely in schools of education prior to employment and validated by unpaid practice teaching before entering full time employment. Affection for and respect for the students is an essential part of the teaching personality. No individual without it will ever be truly effective. These are the qualities which are reciprocated by the students and create a classroom discipline conducive to learning.

It is in the area of Subject Matter Mastery that teachers, and thus students and schools stand or fail. There are quantitative measures for this. Does the instructor have a degree in the subject matter being taught? While most instructors return to education schools for evening and summer courses to pick up classes in education technique (and thus step increases in pay for completed coursework and advanced degrees), do District teachers similarly upgrade their Subject matter degree, obtaining Masters and perhaps Doctorates? .

This should be easily discernable in the curriculum vitae of a District's instructional staff, Freedom of Information blockades notwithstanding. Lesser qualified teachers means that the Seat of Knowledge has been shortened all around.

This failure is especially harmful in the hard sciences and mathematics. Science proficiency exams show our classes in elementary through high school with very low proficiency percentages

Look not at the statewide rankings of schools but at International rankings. United States secondary school quality is abysmal, even unto the so-called Advanced Placement classes. When compared to Western Europe and the Asian littoral from Japan and China around to India, our classes rank at or near the bottom in Mathematics and in Physics -- the very subjects which require the highest subject matter qualification from our teachers. The ACT people have acknowledged this by announcing a review of the Advanced Placement Class designations.

It is perhaps ironic that teachers complain about the amount of time they must spend preparing for the standardized tests. Should not therefore the inability to raise test scores be accounted in evaluating teacher quality?

Look beyond the high schools and one will see dumbed down ACT tests as well, billions of dollars in remedial instruction required in our Community Colleges and our four year colleges. Our Graduate programs are unable to find sufficient numbers of qualified American students.

And worst, we are not producing the knowledge levels which will enable is to compete in a 21st Century world economy.

Meanwhile, back on the ranch, more money into an existing system is not the answer. It will not increase parental involvement, nor will it aid better government oversight.

The argument is made that additional money will improve results. To date, it has not. More money will lower class size and not incidentally require more teachers. The question is clear: if the poor results we are now seeing come from the best qualified teachers we have, with what quality of instructor do we staff the additional classrooms? A wry answer will do.

We see charter schools delivering better instruction at lower cost. We see 'choice' schools getting along with less money using vouchers and producing equal to better results. Charter and choice invest the parents and energize them. Management is more efficient, the hiring of teachers comes from a larger pool, which seems to be better motivated.

Two cries come from the existing bureaucracy. Their carefully construed research purports to show no better results in charter and choice schools. On a cost benefit basis, even if it were true, equal results at lower costs provides savings to the Education system which can be used in each local District.

Similarly comes the skimming idea which implies that only parents with better performing children want to have Choice. This is clearly not correct and a canard upon the universe of parents wishing better for the child. Even if there were a scintilla of truth, the savings would be placed back into the public school system to better its instruction and enable it to retain better students while it allocated additional resources to the problem ones.

A+ Illinois, Martire and company are not for a better educational system, it is clear. They are for the retention of the status quo in which a closed shop union can maintain a monopoly with full job security for all its members.

This is not unlike the closed shop industrial Auto Workers union whose lack of craftsmanship made it possible for foreign manufacturers to come to this country, employ American workers and thrive.

Let us remember that Public Education is not about a System, it is about the education of children and young adults in a way in which the next and subsequent generations can achieve the interclass mobility which is an essential part of the American dream and continued prosperity. The alternative – a class bound statist society -- is not an option for the Republic.

Monday, April 14, 2008

What is missing, as it is from all Labor Department Statistics -- and from what I can ascertain from all Academic Economic Studies -- is a reliable estimate of the Gray Market -- the cash and barter economy into which people move regularly and without reporting.

It exists for many reasons, two of which are as follows.

First, cash wages escape detection by agencies which manage welfare payments, thuis creating dual sources of income for families that qualify for welfare.

Second, the most regressive tax on income at the bottom of the wage scale is that of withholding, FICA and medicare taxes. Bargains are struck with employers to receive cash wages instead. The employer then need not pay his share of the above and FUTA. To do this economically, the employer than under reports sales, pays cash to his wholesaler, etc.

The net effect is to lower reported GDP to a point well below Real GDP. Only gross estimates can be made by economists as to the total effect, but it is likely to be in the double digits.

The legal minimum wage serves as a benchmark for the true minimum wage -- the one actually being paid to the lowest wage earners, which is set in the cash market by the supply of and demand for labor. Is it above or below the legal minimum wage? I would suggest that it is probably a close approximation, perhaps lower in cases where welfare augmentation (see above) occurs, higher where the employee is an independent actor.

Assaying the Gray Market based on changes in the minimum wage might be possible. We surmise that as the legal minimum wage rises, so do the number of jobs which are paid by cash wages. This might be detectable from Labor market statistics.

But the real problem for policy makers is determining what the Real as opposed to the Reported GDP is. That can only be done by minimizing the size of the Gray Market.

One approach (and it would be sound anti recessionary policy on its own) would be to eliminate for employees all offsetting FICA and Medicare deductions, leaving the employer on the hook to pay his share. Raise also the income tax payment threshold to ensure that minimum wage employes have no such liability.

This would incentivize workers to stay in the open market and observe the proper payment of FICA, etc by the employer. In spite of all the uncertainty regarding the future of social security, the employee would be able to see that he was being provided for.