Browsing the blog archives for July, 2011.

Obama & the Happy Meal

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McDonald’s is changing the Happy Meal. Instead of including french fries or apples, kids will get a small portion of both, without the caramel dipping sauce. McDonald’s says it’s responding to consumer preferences and wants to make its meals healthier. If true, this is how capitalism is supposed to work. Of course, I don’t really buy McDonald’s explanation.

In April, regulators developed voluntary standards for marketing food to kids aged 2 to 17, including limitations on sodium, sugar, fat, and calories. But there’s a problem here. Regulators cannot develop voluntary standards. To be voluntary—by definition—such standards should be developed by the companies, not Washington.  McDonald’s execs understand the implication here. If they don’t “voluntarily” comply, they might be forced to do so. In essence, regulators are telling McDonald’s and other food markers how to run their businesses.

I’m for healthy kids as much as anyone else and I don’t mind Michelle Obama encouraging our youngsters to eat smart and exercise. But it’s not her role to raise my kids or dictate how private firms manage their affairs. Individuals and private companies should be able to live their lives and allocate their resources any way they see fit as long as they don’t infringe on the rights of others to do the same.

Interestingly, liberals claim to agree with this statement but argue that childhood obesity raises healthcare costs for society. Regulation, therefore, is a rational approach aimed at balancing individual rights and societal costs. However, their argument for more government control is built on a socialist premise. Society’s healthcare costs only exist to the extent that some individuals are not responsible for their own expenses in the first place.

This type of liberal argument is not uncommon; intrusion on individual liberty is deemed necessary to keep a lid on society’s obligations. While it contains a kernel of truth, it also ignores the larger picture. Unfortunately, many Americans accept such arguments without questioning their basis.

As for Happy Meals, McDonald’s should sell what consumers are willing to buy. We should also realize that government intrusion into business activity is never free. Any product decisions based on government mandates or “voluntary standards” that are not supported at the cash register will hurt company profits. Ultimately, this means lower returns in our 401(k)s, fewer jobs, and higher prices for Big Macs to cover the loss.

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The Debt Ceiling…Again

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I am frequently asked if there will be any adverse financial impact if the debt ceiling is not raised. The inference here is that the ceiling should be raised to avoid any negative repercussions (higher interest rates, lowered credit rating, etc.).

I expect there to be some negatives if the ceiling is not raised, but nothing catastrophic. Prudent choices pertaining to the allocation of the limited government funds could address such problems. Besides, even if no “deal” is reached in time, there’s nothing to keep Congress from addressing the issue shortly after the August 2 “deadline.” But this is not the point.

Washington is addicted to spending and debt, and this addiction must be controlled. The fallout over the intermediate and long terms from not addressing it now would be much greater than what we would experience if we refuse to address the problem head-on.

Drug addicts experience harsh withdrawal when they stop injecting the substance. This is no reason to continue with the abuse. The federal government’s addiction to liberal spending and fiscal irresponsibility is no different. Now is the time to act. I must admit that I expect the Republicans to cave on this issue. I hope I’m pleasantly surprised.

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“Fixing” Social Security

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The Social Security tax was enacted in 1935 with only a 1% deduction on the first $3000 of wages. Today, the tax rate has climbed to 12.4% of the first $106,800 of income, resulting in a 44-fold increase in the total allowable confiscation. So how did we manage to expand the taxes exponentially but also end up with a system destined for bankruptcy?

There are two main reasons for this debacle. First, thanks to advances in medical care, the life expectancy for Americans has risen from less than 65 years in the 1930s to more than 80 today. The statistics are a bit complicated, but this simply means that the average worker today is more likely to make it to retirement, and likely to draw social security much longer when he does.

Second—like most government programs—the system was underfunded from the beginning. Forecasters should have been aware of likely changes in life expectancy at the time, but working these assumptions into their models would have resulted in a higher tax rate from the beginning, thereby threatening passage of the bill. Once enacted, the momentum builds and the left can simply “tax the rich” to make up the difference.

Social Security confiscates 12.4% of one’s wages that could have been placed in a private retirement savings account. Meanwhile, millions of Americans who “played by the rules” now expect what they’ve been promised. Current retirees should receive benefits and those close to retirement should be covered as well, although it’s certainly necessary to increase the retirement age and correct flaws in the way cost-of-living adjustments are calculated. However, the real question is how to reform or scale back the program for those who have a ways to go.

Opting out must be part of the solution. I believe Social Security should be optional for those who prefer to save for retirement through private plans. However, I usually get 3 thoughtful questions when I offer this proposal. First, what happens if I invest my retirement funds in commodities and the stock market crashes? This question assumes that the federal government will always be able to meet its obligations, a notion I don’t buy in the first place. Besides, individuals could be required to invest a portion—perhaps one-third—of their funds in “safe” investments such as government securities just in case, and accept the risk associated with their other investments.

Second, if those with middle and upper incomes opt out, then who will pay the benefits for the poor? This question acknowledges the fact that social security is really about wealth redistribution anyway. My response? Everyone pays 1%—the original tax—whether they opt out or not. For those who don’t participate, these funds can be used to help cover the shortfall at retirement time.

Third, doesn’t my proposal violate personal freedom by requiring individuals to save for retirement and contribute 1% to a plan they reject? Perhaps it does, to some extent. But I’m a pragmatist. “Social Security” is as much security for society as it is for the recipient. Without it, some Americans would choose not to save for retirement and would end up on the streets as seniors. Taxpayers would step in at that point anyway. It’s part of personal responsibility to save for times when you cannot work, so I don’t have a problem requiring that people do so, but in their own accounts.

Given the choices I propose, most Americans would opt out and Social Security would diminish to a fraction of its current size in the coming decades. Whether or not you like my proposal, we must face reality. The plan guarantees more than it can deliver, and a big part of the solution rests with individuals relying more on personal savings than on Washington. If we only tweak the system, the train will still wreck. When it does, the left will call for massive “means testing” as the solution, turning the system into a full fledge wealth redistribution scheme. Every year that passes without a serious solution is another step in that direction.

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