Johnny on the Spot

Moving to Another Spot

2011-05-27T09:07:00.000-07:00

It's moving day! I've decided to move this blog to another site. You can now read all of these posts and more on johnnycox.com. Hope to see you there!

We Have to Raise the Debt Ceiling Because Bush Lowered Taxes?

2011-04-20T21:56:00.000-07:00

I constantly hear the president blaming the Bush tax cuts (and everything else besides his own actions) for our current deficits today. Is there any truth to that? The media will have you believe that the Bush tax cuts were mostly for the wealthy and that because of them, the rich aren’t paying their fair share. That sounds plausible, doesn’t it? Let’s examine a few facts first.

The Bush tax cuts were enacted in 2001 and 2003. Together they lowered the effective individual income tax rates for most taxpayers and were phased in over three years 2001, 2002 and 2003. Since 2003, the individual income taxes rates have remained the same, which consists of six tax brackets having rates of 10%, 15%, 25%, 28%, 33% and 35%. Before 2002, there were only 5 brackets, with the lowest being 15%.

So how did these tax cuts affect individuals? Well, if you had a summer job and earned $8,000 dollars in 2000, your tax rate was 15%. In 2009, it would have only been 10%. Your rate would have been reduced by 1/3.

Suppose you earn $30,000. In 2000 you paid 28% and in 2009 you only paid 15%. That’s almost cut in half (46%). For an $80,000/yr earner, the rate dropped from 31% to 25%. The table below shows some examples of how taxpayers at different income levels have benefited from the Bush tax cuts.

You should be able see from this table that the tax cuts weren’t just for the rich, they were for almost everyone. In fact, those making under $34,000 had the largest reductions percentage-wise.

What was the purpose of the tax cuts anyway? The idea was that in 2000, the government had overtaxed Americans. In that year, the IRS collected more taxes than the government actually spent. What? How did that happen with a democrat (Clinton) in the white house? Aren’t democrats supposed to be big spenders? Well, I’d argue that the reason we had a surplus was two-fold. First, the republicans took control of the US House of Representative for the first time since 1953, which, in my opinion, curtailed spending growth. Second, and more importantly, income tax revenues were at an all time high due largely to the internet bubble of the late 1990’s. The economic impact of the Internet was tremendous. It created thousands of new companies and jobs, provided new markets for others, and gave individuals easier access to investment (online stock brokers), which flooded capital into the markets causing stocks to soar.

Much debate was given over what to do with the tax surplus for 2000. Bush and most republicans decided that since the tax money came from taxpayers in the first place, then they would give it back to them by gradually lowering the tax rates such that future tax collections would be on par with spending.

It was a sound plan, despite the controversy. But then a few unexpected things happened, which were not related to the tax cuts at all. The dot-com bubble burst. The investment fury into new technology companies lead to overvalued stock prices which ultimately collapsed. Many companies and investors went broke. The Nasdaq fell from a record high of $5,132 in March 2000 to just $1,720 a year later. Even today, the Nasdaq still hasn’t recovered at only $2,800.

As if the dot com bubble bursting wasn’t enough, something else happened. American was attacked on September 11, 2001. This also had a devastating impact on our economy. Ten days after the attack, the Dow Jones Industrial Average hit a 12 year low at $8,235 on September 21, 2001.

Ok, so our income tax collections were hit by three major factors in the first few years of the Bush term: the lower tax rates, the internet bubble, and the 9/11 attacks. In fact, with the economy slumping, the Bush tax cuts were accelerated. Originally, they were supposed to the phased in over a longer period but were enacted in full in 2003 due to the downturn in the economy. Why? Well, the idea behind this strategy is highly debated. As I understand it, the philosophy was that a lower tax burden would encourage businesses to invest (instead of paying higher taxes) and individuals would have more money to spend, thus creating more economic activity. In short, the result was to be more people paying tax on higher incomes, thus offsetting the reduced rates. If this were true, then our government would receive more tax, not less.

Did it work? Despite the dot com collapse and 9/11, yes it did. Huh? By 2006, our income receipts were MORE than they were in 2000, before the tax cuts. America had record setting tax years in 2006 and 2007. In fact, 2006, 2007 and 2008 all had higher income tax revenues than in 2000. But I thought Obama said the tax cuts were bad?

Source: Table 2.1, Historical Tables, FY2012 Budget

http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/hist.pdf

Did the Bush tax cuts favor the rich? If that was true, then wouldn’t it be fair to say that the rich are paying less now than they did before the tax cuts?

In 2000, the US population was 281,421,906. According to the IRS, only 37.4% of those people actually paid any income taxes at all. That’s right, 62.6% of all Americans didn’t pay ANY income taxes...zero. Of course, this number includes children, but still. So what about the 105 million people who did pay? Let’s call the top 1% of earners the “super-rich” as Obama likes to say. There were about 1 million people in this category, which was only about 0.37% of the total population. That group paid a whopping 1/3 of the total income taxes reported that year.

If you expand that group to the top 5%, let’s just call them “rich”. Now we’re talking about 2% of the total population. This group paid about half of the total taxes reported. That’s leaves the other 95% of taxpayers to pay the rest.

Now let’s look at the lower earners, say the bottom 50% of taxpayers. This accounted for about 81% of the total US population. This huge group only paid less than 8% of the total tax bill.

Ok, so that was in 2000. What about 2008, after the Bush tax cuts were in full effect? If these were so skewed towards rich people, shouldn’t these numbers be drastically different?

Let’s see. In 2008, the US population had grown by about 20 million to 301,621,157. The IRS reports that only 35.8% of Americans paid any income tax that year. That’s a smaller percentage than in 2000. The top 1% of those taxpayers (about 0.36% of the population) again paid about 1/3 of the total tax bill. That’s right; the “super rich” paid the same share as they did in 2000. What about the top 5%? In 2008, they paid… wait for it… 51%. Huh? Under the Bush tax cuts the richest 5% had to pay MORE? The Top 5% paid 50% in 2000 and 51% in 2008.

This can’t be right. Surely, somebody got screwed. How about the bottom 50%? Remember, the bottom 50% of taxpayers, represented 82% of the total population in 2008. The group again paid just under 8% of the bill, slightly smaller than they did in 2000. (7.9% vs. 7.6%)

Source: IRS.gov Statistical Tables for 2000 and 2008

http://www.irs.gov/pub/irs-soi/00in02mt.xls

http://www.irs.gov/pub/irs-soi/08in02tr.xls

Ok, so if the tax cuts aren’t to blame for the current deficits, what is? Well, something rather significant happened in 2008 (besides electing Obama). The nation had been experiencing a housing boom. By 2006, the average price of a home was more than double (124%) the price it was just ten years earlier. The cause of this boom is also controversial. Interest rates being too low, banks lending to risky borrowers with little or no down payment, and increased foreign investments are just some of the common causes being thrown about today. However, the eventual bust of this housing bubble has a much clearer culprit - defaults.

As the Federal Reserve Bank raised interest rates, people with adjustable mortgages could no longer afford their mortgage payments (if they could even afford them in the first place). Home foreclosures began to increase. This led to fewer buyers and more homes on the market, which caused home prices to drop. As folks witnessed their home equity dry up, many even became “under water,” which means home owners owed more on their home than it was worth. This triggered an even greater number of defaults and foreclosures, perpetuating the problem. With all of the foreclosures going on, lenders were in a panic. The falling home prices meant that their collateral for the loans no longer covered their risk. Credit markets froze. Banks stopped lending. This affected not only the housing market but everything else. Business couldn’t borrow money to expand or make capital improvements. Individual couldn’t borrow to buy new cars or make home improvements. Credit card rates skyrocketed. It was an economic Armageddon.

Get the picture? The crisis led to TARP (government loans to bail out the banks), and provided an excuse for the incoming president to open up the spending gates. After spending $787 billion in a “stimulus” package the first month in office, Obama and the democrat-led house and senate felt that our only solution was to pump loads of money into the economy with more bailouts, government rebates for buying new cars and houses, more government jobs (i.e. bigger government) and health care. All the while, blaming Bush and the republicans for letting it happen.

I’ll save my analysis of why this happened and who’s to blame for another post. But as a result, the stock market crashed. The Dow hit bottom at $6,626 in March of 2009, losing half of its value in less than 10 months. Investments soured, retirement savings vanished, and jobs were lost. The unemployment rate went from 4.5% in April 2008 to a high of 10% by January 2010 and has remained above 9% ever since. This is why our tax revenue dropped after 2008. Fewer people were working.

Source: Table 1.1, Historical Tables, FY2012 Budget

http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/hist.pdf

The real reason that we have huge deficits every year is because of spending. We spend too much. This is not a partisan problem; it has happened under both parties. Some may like to take credit for deficit reduction initiatives, but the guilty ones have both D’s and R’s after their names.

Source: Tables 1.1 & 2.1, Historical Tables, FY2012 Budget

http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/hist.pdf

The chart above shows our total individual income tax receipts (the green bars) compared to how much MORE money we borrowed (deficit) that same year (the red bars). As you can see, we have been borrowing more than we collected in income tax since 2009. That means that if ALL of the individual income tax rates were doubled (for everybody) to 20%, 30%, 50%, 56%, 66% and 70%, it STILL wouldn’t be enough to cover the deficit! And that’s assuming that those exorbitant rates wouldn’t crimple the economy any further (which they certainly would). In fact, the 2009 income rates would have to have been astronomical to cover our deficit that year (27%, 40%, 67%, 89%, 94%). Would you like to pay those rates? Would you like for your children or grandchildren to pay those rates? Because today’s deficits are simply future taxes.

The chart below shows an even more alarming view. Each bar represents the total amount of money that our federal government actually spent each year. The different colors within each bar show from where the government got the money. A portion of each budget came from several different taxes. The remaining amount (deficit) was borrowed which is shown in red.

Source: Tables 1.1 & 2.1, Historical Tables, FY2012 Budget

http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/hist.pdf

What are we spending all of this money on? Well, spending levels have increased in almost every category. Have a look.

Source: Table 3.1, Historical Tables, FY2012 Budget

http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/hist.pdf

Where has all of this gotten us? Deep in debt. Our current debt around $14.3 trillion and is bumping against the current debt ceiling. The debt ceiling is the statutory limit authorized by Congress. This chart shows our growing national debt over the past 15 years and the red lines indicate the past times that the debt ceiling was raised. The debt is growing out of control.

Source: Table 7.1, Historical Tables, FY2012 Budget

http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/hist.pdf

http://en.wikipedia.org/wiki/United_States_public_debt#Debt_ceiling

Now the debate is whether or not we should raise the debt limit yet again. But why do we even have one at all? I mean, if everyone in Congress says that we absolutely MUST raise it this month – I ask, raise it to what? $15 trillion? 18 trillion? And when we borrow and spend our way to that limit, is the consensus going to be that we MUST raise it again to avoid a government default, world-wide financial chaos, and another depression? If the answer is always going to be that we MUST raise the debt limit whenever we reach it, then what in the World is the dang thing for? When does it stop?

Failing to raise the debt limit should not be viewed as an empty threat. That’s because world-wide collapse is not hinging on our default, but on our reckless fiscal policy. Once “tax and spend” liberals run out of our tax dollars, they become “borrow and spend” liberals. All of that borrowing is simply future taxes…taxes on our children. Where is the outrage on having trillion dollar deficits when all of the income tax paid in the U.S in a year is barely over a $1 trillion.

Raising the limit without meaningful fiscal reform only kicks the can down the road and digs the hole deeper for our children. Our generation allowed this to happen. It’s our generation that should face the consequences.

The World needs to know that we are serious about getting our fiscal house in order. We’ve gone a 10 year bender, and now we are surprised that we’re broke and have a hangover. If Obama feels the need to apologize for America, then he should apologize for that! Let’s just hope we didn’t “drunk call” anyone.

I Totally Agree With Obama

2011-04-12T16:50:00.000-07:00

“Mr. President, I rise today to talk about America's debt problem. The fact that we are here today to debate raising America's debt limit is a sign of leadership failure. It is a sign that the U.S. Government can't pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government's reckless fiscal policies. [..] If Washington were serious about honest tax relief in this country, we would see an effort to reduce our national debt by returning to responsible fiscal policies.[..] Increasing America's debt weakens us domestically and internationally. Leadership means that ``the buck stops here.'' Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.”
– Senator Barrack Obama (D-IL), March 16, 2006.

Wow, what a difference five years makes! The excerpt above was taken from then Senator Barrack Obama’s Senate speech when the question of raising America’s debt limit was being debated a few years ago. I couldn’t have said it better myself. Where’s your fiscal conscience now, Mr. President?

The entire speech is quoted below along with a link to the Congressional Record as published online.

The 2006 Congressional Record, Page S2237 (March 16,2006) (link)

Mr. President, I rise today to talk about America's debt problem.

The fact that we are here today to debate raising America's debt limit is a sign of leadership failure. It is a sign that the U.S. Government can't pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government's reckless fiscal policies.

Over the past 5 years, our federal debt has increased by $3.5 trillion to $8.6 trillion. That is ``trillion'' with a ``T.'' That is money that we have borrowed from the Social Security trust fund, borrowed from China and Japan, borrowed from American taxpayers. And over the next 5 years, between now and 2011, the President's budget will increase the debt by almost another $3.5 trillion.

Numbers that large are sometimes hard to understand. Some people may wonder why they matter. Here is why: This year, the Federal Government will spend $220 billion on interest. That is more money to pay interest on our national debt than we'll spend on Medicaid and the State Children's Health Insurance Program. That is more money to pay interest on our debt this year than we will spend on education, homeland security, transportation, and veterans benefits combined. It is more money in one year than we are likely to spend to rebuild the devastated gulf coast in a way that honors the best of America.

And the cost of our debt is one of the fastest growing expenses in the Federal budget. This rising debt is a hidden domestic enemy, robbing our cities and States of critical investments in infrastructure like bridges, ports, and levees; robbing our families and our children of critical investments in education and health care reform; robbing our seniors of the retirement and health security they have counted on.

Every dollar we pay in interest is a dollar that is not going to investment in America's priorities. Instead, interest payments are a significant tax on all Americans--a debt tax that Washington doesn't want to talk about. If Washington were serious about honest tax relief in this country, we would see an effort to reduce our national debt by returning to responsible fiscal policies.

But we are not doing that. Despite repeated efforts by Senators Conrad and Feingold, the Senate continues to reject a return to the commonsense Pay-go rules that used to apply. Previously, Pay-go rules applied both to increases in mandatory spending and to tax cuts. The Senate had to abide by the commonsense budgeting principle of balancing expenses and revenues. Unfortunately, the principle was abandoned, and now the demands of budget discipline apply only to spending.

As a result, tax breaks have not been paid for by reductions in Federal spending, and thus the only way to pay for them has been to increase our deficit to historically high levels and borrow more and more money. Now we have to pay for those tax breaks plus the cost of borrowing for them. Instead of reducing the deficit, as some people claimed, the fiscal policies of this administration and its allies in Congress will add more than $600 million in debt for each of the next 5 years. That is why I will once again cosponsor the Pay-go amendment and continue to hope that my colleagues will return to a smart rule that has worked in the past and can work again.

Our debt also matters internationally. My friend, the ranking member of the Senate Budget Committee, likes to remind us that it took 42 Presidents 224 years to run up only $1 trillion of foreign-held debt. This administration did more than that in just 5 years. Now, there is nothing wrong with borrowing from foreign countries. But we must remember that the more we depend on foreign nations to lend us money, the more our economic security is tied to the whims of foreign leaders whose interests might not be aligned with ours.

Increasing America's debt weakens us domestically and internationally. Leadership means that ``the buck stops here.'' Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.

I therefore intend to oppose the effort to increase America's debt limit.

- Senator Barrack Obama (D-IL)

The Hard Core of Freedom

2010-09-30T07:20:00.000-07:00

While doing some internet research (for a discussion on Facebook, no less), I stumbled across this article from the Daily Oklahoman published on December 9, 1951. I felt it was worth passing along. However, the citation of one quote in the article to Alexander Tytler (1747-1813) cannot be verified.

This is the Hard Core of Freedom
By ELMER T. PETERSON

A card without identification came along with a letter to this desk a few days ago. It read:

“There is no end to the good a man can do if he does not care who gets the credit."

This sentiment has a vital drive when applied to human relations, but if you will follow it to its logical conclusion in the field of government, you will find that it constitutes the inner essence of free democracy as well. A civic leader once said to the writer, about 25 years ago:

"If a man goes into civic work because he expects to get credit for it, or political profit, or anything else of material value, he should quit before it gets too late, because he is practically sure to be disappointed and disillusioned. If he doesn't get a real thrill out of doing good in the world, sufficient to pay him, he has missed the point of all civic activity."

Friendship and love of parents for children are the first and most primitive evidences of the Christian doctrine, "love thy neighbor," and the corollary is the Golden Rule. This corollary clearly points the two-way nature of the original doctrine and it helps human beings to understand why helpfulness can bring reciprocal benefit to the doer of good deeds, even though the doer does not demand or even expect such benefit.

Out of the mutual nature of neighborliness comes the pure meaning of free democracy. Cooperation, in its best sense, as suggested in this column a week ago, cannot be compulsory. The moment it is made into a compulsory mechanism, it loses its true meaning and becomes a form of despotism—a totalitarian socialism, in which public welfare is produced by force and not by operation of conscience.

The difference between free democracy and socialism is that free democracy carries over into the field of government the voluntary will do good by free choice, where as socialism leaves the citizen no choice. He helps his neighbor—or else!

The best member of free democracy is one who doesn't care who gets the credit for good deeds. He gets all the pay he needs out of his conscience—the inner satisfaction of knowing that "he has done what he could."

It is becoming more and more obvious every day that the mere form of democracy is not what brings blessed government. It is the substance that counts. That substance consists of the sum of individual consciences, working for the mutual good of all. A form of democracy can be just as corrupt as the worst kind of despotism if the members of that formal democracy are actuated only by selfishness and the determination to get all possible money out of the government" or Neighbor Taxpayer.

Two centuries ago a somewhat obscure Scotsman named Tytler made this profound observation:

"A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always voles for the candidate promising the most benefits with the result the democracy collapses because of the loose fiscal policy ensuing, always to be followed by a dictatorship, then a monarchy."

This ought to be a warning sign, of the times, for never before in this nation has there been such temptation to use the formal mechanism of democracy as a means for gratifying the selfish designs of the individual citizen. This applies not only to the corrupt high official who sells influence or conspires with crooks to steal money from the public. It applies, likewise, to the individual voter who seeks to profit personally by laying a heavier burden on his neighbor, through subsidies and other government gifts.

The hard core of freedom is the unselfish spirit of the citizen. Democracy cannot live long without this agency of conscience. Unselfish motivation in politics is much more than a gesture of good morality. It is a practical factor without which democracy cannot exist. In the long run nothing else will work.

Looking Up in Marion County, SC

2010-09-19T11:55:00.000-07:00

In 2009, the average SAT score for students in Marion School District One in South Carolina increased by 150 points or 11.5%. But before we break into a round of high-fives, let’s have a closer look. This improvement managed to earn Marion County the rank of 36th in the state. South Carolina has 46 counties, and Marion is 36th. This stat lets a little bit of air out of the balloon, but at least we are improving. We don’t have that far to go, right? Well, first consider that nationwide, our state is almost DEAD LAST in SAT scores. That’s right – out of 50 states, South Carolina is number 49 - the bottom of the barrel. Our county is 36th in a state that is 49th. If Marion County were a NCAA Division 1A football team, we could be about on par with West Kentucky in the Sun Belt Conference. In other words, don’t expect many pro scouts to be hanging around.

On a unrelated (or related) note, there are six different ways that the Department of Labor calculates the unemployment rate. They are designated U-1 through U-6. In all six categories, South Carolina ranks no better than 46th in unemployment in the country. We aren’t exactly last in any category, but we are 48th in two and 49th in one. (Thank you, Michigan.) Can you guess where Marion County ranks in unemployment within the state? Drum roll… DEAD LAST! Marion County has the highest unemployment in a state that has the highest (almost) unemployment in the country. Of course, it’s been this way for 10 years –but what else is new?

These are just two facts about our state and county. I suppose that I could dig around to find some other interesting data on poverty, crime, government assistance, child support delinquencies and the like; but who likes to beat a man while he’s down?

The question is - are these two statistics somehow related? Could it be that businesses don’t want to come to Marion County because we are just a bunch of dummies? Well, that may be a larger part of their strategy than we’d like to believe. Despite our beautiful town, its many trees (at least the ones that Progress Energy hasn’t mutilated yet), rich historical heritage, abundant land, vacant real estate, decent infrastructure and apparently a large percentage of the population ready and willing to go to work – companies stay away from us like the plague. Why?

That's the question that we should be asking ourselves: “Why is this the case and how can we fix it?” On the other hand, the question that we should be asking our students (and our idle workforce) is, “If you went to the store and bought three candy bars that cost $1 each, how much change should you expect back from a $5 bill if the sales tax rate is 10%?” If you don’t get an answer to the second question without the help of some electronic device, then perhaps you already have the answer to the first question.

Is Our Generation Relevant?

2010-09-12T19:04:00.001-07:00

Is our generation relevant? Looking back over my life so far, I struggle to find any significant contributions or events that occurred during my lifetime that have truly shaped our country. It seems like all of the important stuff happened before I even got here. The Civil Rights Movement, World War II, the Great Depression, the American Civil War, and the American Revolution – all of these profoundly impacted this great nation that we call home. But what have we done lately?

One could argue that since I was born, in 1965, America has fought in Vietnam, Kuwait, Afghanistan and Iraq – and that these are certainly significant events. Actually, I was just a baby during the Vietnam War and have only vague memories of it – mostly towards the end of US involvement in the mid 70s. Not to diminish the huge sacrifices made and the service of our armed forces, these wars somehow paled in comparison to earlier wars in terms of how they impacted our nation's development or American life in general.

I'll admit that we have seen the fall of the Soviet Union, bringing an end to the Cold War - oh yeah, and men on the moon! What else, the Internet? I'm sorry, but I can't help but feel that my generation has lived on the spoils of those that came before us, all the while, doing little to earn or even preserve it. Or perhaps, our turn has yet to come.

Let me be totally honest with you. I started writing this article almost 8 months ago but set it aside because I didn't know where I was going with it. It was only today that I realized that I already know the answer. Until recently, our generation hasn't really been relevant all that much - but finally, the relevance of our generation is at hand. I believe that we are once again at a perilous juncture in our nation's history. Our system of government, and thus our cherished freedoms of which it was designed to protect, is under attack. But this time it's not England or Germany - it's a far more formidable enemy. And what's more shocking is that many of us are completely oblivious to this threat. That's because this enemy doesn't wear red coats or swastikas - they look just like you and me. They live right next door, go to your schools, work in your workplace, some you even call friends. Some don't even know themselves that they are soldiers in an army that is set on a path to destroy America.

The enemy is the Progressive. The Progressives think that government knows best and that more and more government is the solution to all problems. In all that you hear in this election year and certainly in 2012, there is one fundamental question that is the basis for most of the controversy between the parties. It is the question of Big Government vs. Limited Government. The Progressives want a big government, which is the complete antithesis of the founding principles of our country. A limited central government is the basic premise of the U.S. Constitution and is absolutely necessary to guarantee the protection of our liberties and freedoms.

When was the last time that you read the US Constitution? For most people the answer would be somewhere around the 10^th grade. I can remember having to memorize the Bill of Rights, a handful of dates, and the names of some people who had something to do with the whole thing. But, unfortunately, I can't say that I remembered much of it. I guess we all had different priorities back then. Now that I'm much older, I think that I would really appreciate most of those things now, if only they were not taught, memorized, and then soon forgotten. Maybe there should be some sort of a condensed high school refresher that everyone should take around age 30.

If you haven't read the Constitution as an adult, please read it here. In a nutshell, the document grants the federal government exactly 17 specific powers (called the enumerated powers) - no more, no less. All other powers are reserved for the states, except those expressly prohibited by the Constitution. This is by careful design to prevent the government from becoming too powerful, which is why we fought for our independence in the first place. Progressives fail to see the logic in this.

The Progressives sit on both sides of the fence (Democrat and Republican). In their defense, most Progressives honestly feel that there is a just and moral rationale to their cause. However, their policies and short-sighted "solutions" have steadily been growing our government and gradually eroding the basic underpinning that is uniquely American.

The challenge facing our generation is the restoration of this nation back to its founding principles and to renew our faith in God. This is our Iwo Jima, it's our Bunker Hill. For ours is no longer the lost generation, but the last generation. We are the re-founders!

"I hope to see our happy country restored to its former peace and happiness, and once more redeemed from tyranny and despotism, which, I fear, we are on the very brink of. We see the whole country in commotion: and for what? Because, gentlemen, the true friends of liberty see the laws and constitution blotted out from the heads and hearts of the people's leaders: and their requests for relief are treated with scorn and contempt. It has been decided by a majority of Congress that [the president] shall be the Government, and that his will shall be the law of the land. He takes the responsibility, and vetoes any bill that does not meet his approbation. He takes the responsibility and seizes the treasury, and removes it from where the laws had placed it; and now, holding purse and sword, has bid defiance to the Congress and to the nation."

- Congressman David (Davy) Crockett, 1834

Below are a few links to some rather enlightening videos of Judge Andrew Napolitano discussing the role of the federal government. Please take the time to watch some of these.

Constitution For Dummies Part 1
Constitution For Dummies Part 2
Constitution For Dummies Part 3
Constitution For Dummies Part 4
The Patriot Act Part 1
The Patriot Act Part 2
The Patriot Act Part 3
The Patriot Act Q&A Part 1
The Patriot Act Q&A Part 2
Texas Secession

The Real Spill

2010-07-27T21:34:00.000-07:00

(Click to Enlarge)

My Response to “Anonymous” on National Debt

2010-03-31T08:58:00.001-07:00

I received a comment to my blog post entitled "National Debt" from an anonymous reader. Call me long-winded, but I felt that it deserved a slightly longer response than was allowed for comments.

First, here is the poster's original comment:

5/31/2010 5:31 am - Anonymous said...
Money does not exist in nature. It has been created by government and is based on (in this case) other governments faith in our government. If other governments have so much faith in our government they want to give us goods for "free" because they trust we will pay them back at some point, why should'nt we take the goods? You relate the governments debt to an individuals debt, which is in fact a fallacy. When the music stops, we will be ahead still. Why is this bad that we are getting free goods from other governments again?

My response:

"Free?" What are we getting for free? Last year, the federal government paid $383 billion in interest on our outstanding debt. How is that free?

When you were young, did you ever get a savings bond for your birthday from some aunt or uncle you hardly ever saw? If so, what really happened was that old Uncle Charley loaned the government some of his hard-earned cash, let's say $25, with the expectation that his gift to you would be worth somewhat more than $25 when it (and you) matured. In fact, that $25 actually contributed to the national debt total. Also, every month that you've held onto that savings bond, the interest on the $25 (~1.2%) was been added to the national debt. Later in life, when you decide to cash in that savings bond, Uncle Sam will have to pay you the invested value of the bond in cash, let's say it's now $50, and the national debt will be reduced by that $50 (unless, of course, they have to go borrow that $50 from somebody else, which they will).

Our national debt is held by people (including many Americans), businesses, banks, retirement accounts, and other governments. All of those people have "invested" in the United States because they have faith that we will pay them back all of their money PLUS interest.

Try this. Loan me $1000 this week. Next week, loan me another $1000, and another $1000 the week after that, and so on. At some point, I'm willing to bet that you will become weary of our little arrangement and want to know exactly how I'm ever going to pay you back. How risky of an investment am I? Let's suppose that you knew me very well, and that I was loaded (which I'm not) and had a history of always paying back all of my debts on time with interest (which I haven't). You might feel comfortable loaning me all that money for a reasonably small interest rate. Or, perhaps you knew that I was broke and hardly ever paid people back on time. In that case, you might want a pretty large interest rate to offset the increased risk of you losing your money. On the other hand, what if you didn't know me at all?

Just like a bank can judge your ability to pay back loans by your credit rating given my credit bureaus (e.g. Equifax), bond issuers are rated by bond rating companies, like S&P (Standard and Poor's) or Moody's. Those companies set our governments' (federal, state and local) credit ratings. The lower the score the riskier the investment and thus a higher interest rate is warranted. The U.S government has always enjoyed a AAA rating (prime), the highest possible rating. However, one rating agency, Moody's, just released a warning that the US's AAA rating is in jeopardy due to our skyrocketing debt and fiscal policies. This means that it's going to become harder for us to borrow money and we will be paying higher interest rates when we do.

Drawing an analogy between government and personal finance is not a "fallacy" at all. I use the comparison to help people understand the problem. But it's more than just an analogy; because a government's financial state eventually impacts its citizens. Until 1971, our currency was backed by gold. For every dollar in circulation, the US Treasury had a dollar's worth of gold in Fort Knox or some other vault. We no longer have that security. The US dollar is now a fiat currency, and history, even very recent history, is littered with country after country with failed fiat currencies because of unsound fiscal policies and the printing of more and more money leading to hyper inflation. Take Zimbabwe for instance. In 1980, the Zimbabwean dollar was worth $1.59 USD. In just 10 years, it was worth only 38 cents. About a year ago, the Zimbabwean government issued a $100 trillion bill, which was worth only about 30 bucks at the time. Folks in Zimbabwe experienced prices of goods doubling every few hours. The monthly inflation figures are unbelievable in 2008, with values of 66,213% to 1,063,572% to over 10,000,000%. In fact, the 2008 annual inflation rate in Zimbabwe was 231,000,000%.

So if you think that we will be better off "when the music stops" and that somehow you will be unaffected, then my anonymous friend, you have your head stuck profoundly in the sand.

Show Me the Money

2010-03-21T23:48:00.000-07:00

There are about 4,000 companies listed on America’s stock market exchanges, NYSE, AMEX and NASDAQ. Together their total market value is $13.3 trillion. That’s every publicly traded company in this country. That means for a cool $13.3 trillion you could own them all, every one of them, lock stock and barrel. http://www.wilshire.com/Indexes/Broad/Wilshire5000/Characteristics.html

You couldn't exactly pay cash for them because the U.S. Federal Reserve estimates there is only about 1.7 trillion dollars in U.S. currency and coins in the world. That’s every dollar bill that exists in the World! Most of that cash ($1.3 trillion) resides in U.S commercial bank vaults. That leaves about $400 billion in people’s pockets and mattresses. But that is just cash, how about checking, savings and money market account balances? Well, if you took all of the assets of all of the commercial banks in the U.S., including all deposit account balances, all of the cash in the vaults, and the current value of all residential and commercial real estate mortgages and consumer credit loans (e.g. auto loans, credit cards), you'd have $11.7 trillion. Of course, the banks have liabilities to their depositors and other bank, but I’m just counting assets. http://www.federalreserve.gov/releases/h8/current/default.htm#fn1

So, we have about $11.7 trillion in bank assets and about $13.3 trillion in stock value. That’s $25 trillion, altogeher. Remember that number for a minute.

I’ve written many times about our exploding national debt, so by now you should know that the debt is currently $12.5 trillion. Yes, our country owes more than all of the money that is in all of the banks in the country. By the end of this year, the debt is going to be 13.8 trillion dollars. Wow, that’s enough to buy every one of the publicly traded companies in the stock market. But, those alarming fact are not really the point of this post.

Last night, the U.S. House of Representatives passed the Senate’s Healthcare bill which will enact the greatest entitlement program this country has ever seen. Now, our record is not so good when it comes to entitlement programs. Our two biggest programs, Social Security and Medicare, are broke or will be broke in a few years. What most people don’t realize is, that the future payments that we are obligated to pay Social Security and Medicare recipients are not reflected in the national debt figure. In fact, over my children’s lifetimes (say the next 75 years), these programs will add $108 trillion to the national debt, that is assuming some fools ar still lending us money. What that means is we would need to put $108 trillion into a savings account today, earning interest, so that we would have enough to cover the shortages. Economists refer to this as an “unfunded liability.” In other words, we don’t know where we are going to get the money to pay for it. http://www.usdebtclock.org/

The truth is we can’t pay for it. Remember the 25 trillion dollars in our banks and stocks? That’s not going to cover it. It's not even close. We can't pay for the programs that we have now. Those will have to stop, soon. More importantly, we can't pay for any new ones, either. Now do you see why I am concerned for my children?

The Saturday Morning Toast

2010-03-20T14:08:00.000-07:00

I took my 4 year old son to eat breakfast this morning. Having three sisters, he appreciates the father-son time more than most. We went to eat at one of Marion’s iconic eateries, Richard’s Restaurant. It’s your typical greasy spoon that you can find in just about every small town in America. Richard Godbold has been a short order cook in Marion for over 50 years. He has been serving up good food for good folks at his present location since 1982. My father’s morning ritual always included breakfast at Richard’s nearly every day up until shortly before he died. I always enjoyed the times that he let me tag along.

We sat at the counter, looking up at the walls clad with old license plates and Route 66 signs from all over the country. Distinctive 1950’s music provided a faded backdrop to the sizzling griddle and folks going about their morning. Noah pointed to a colored-pencil sketch, reminiscent of Norman Rockwell, of a red 1955 Chevy hanging over the door. There’s just something about nostalgia that makes me proud to have been raised in a small town in America.

As we sat there eating our breakfast, Noah explored the limits of the swivel bar stools. He was grinning ear to ear and ever confident that his Daddy had the answers to all of his questions. “Why do these stools spin around?... Do they make baked potatoes here?... Does apple juice have seeds?”

It’s my hope that one day Noah will have fond memories of spending time like this with his father, as I do of mine. And, if he is lucky, he will be able to share similar experiences with his sons and grandsons and the tradition will perpetuate.

Staring into my plate of grits and eggs, I worried about the future that lies ahead for my son. One day, I may not have all of the answers for him. I’m concerned for our little town and our country. I feel that each generation is obligated to leave the country in better shape for the next.

When I was born in 1965, the national debt was only $322 billion. Today, it’s 38 times that amount - $12.5 trillion, and that number is expected to double in the next ten years. To some, the whole national debt issue is irrelevant. They feel that it doesn’t affect them and never will – It’s just something they ignore.

When I try to pay attention to national issues and things that are affecting our government, I hear, “You’re way too involved in that stuff. Why? There’s nothing you can do to change it.” But if not me or you, then who? Isn’t that one of the founding principles of this country - a government of the people and for the people? “The right to petition the government for a redress of grievances” and rest of the Constitution says it all. In America, the ability to affect change is not reserved for just noblemen or monarchs. The power lies within its people.

I had a fun, but spirited conversation with a good friend the night before about the healthcare bill and politics in general. He’s a moderate democrat who has had some experience in politics. I was amazed at how little he was concerned about our country’s financial situation. “We will never pay it back. So what?” he said. “(In Marion) we are on the receiving end.” To him, government spending is just a way that we can get a bigger piece of the pie. I do not agree. Nor do I agree with his misinformed rhetoric that it’s all Bush’s fault, and that Clinton left us a surplus. You see, this is a common misconception among democrats. It’s the deception that politicians portray when they use the terms “deficit” and “debt” interchangeably. My good friend is under the impression that the Clinton surplus was somehow over and above our total debt. You know, “We were paid in full, until Bush ran up the deficit.” LOL.

What really happened in the Clinton years (1993-2000)? Well, according to the Office of Management and Budget (OMB), Bill Clinton increased the national debt EVERY year he was in office, starting from $4 trillion in 1992 to $5.6 trillion at the end of 2000.

The so-called surplus years were actually annual budgets where our federal revenues turned out to be more that what we spent in that year. That’s a good thing. However, some of those revenues were from “off-budget” items, like Medicare and Social Security. Until recently, both Medicare and Social Security have taken in more in taxes than they have had to pay out in entitlements each year. This “extra” money gets immediately borrowed by the government, which adds to our national debt. That’s a bad thing. Right now, $2.5 trillion of our $12.5 trillion debt is owed to the trust funds of the Medicare and Social Security programs. The trouble with this is that the “off-budget” surpluses have been masking the “on-budget” deficits that have been occurring over and over and over. Folks, this will catch up with us. Our current track is unsustainable.

If we are to leave this country to our children in sound shape, we must act now. So for now, my part is to help educate people on the real situation. I will engage folks in conversation. I will write this blog. Do your part. Come November, go vote. Vote in the primaries. Support candidates around the country that will demonstrate fiscal responsibility. It’s time to put people in office that “get it.”

Noah and I finished off our breakfast and headed out of Richard’s Restaurant this morning. An Elvis song was just coming on as we walked out of the door. Noah grabbed my hand; his other hand was occupied, nibbling on his toast. It was my turn to grin.

Obama Wants to "Double Down" on Your Future

2010-03-06T08:24:00.000-08:00

There was an article posted on Yahoo Finance today from Andrew Taylor of the associated press. I've pasted the article below just in case this link to it becomes unusable. In it, Taylor discusses a new report by the Congressional Budget Office (CBO), America's non-partisan financial watch dog. In a nutshell, it ain't good.

According to the Taylor article, it seems the White House has understated the impact of Obama's spending over the coming decade by about 14%. Over the next 10 years, the CBO expects another $9.8 trillion to be added to the national debt.

So I decided to have a look at this report for myself. The report contains a table that shows the revised annual budget deficit projections for the years 2010-2020. Are they crazy?!?

George Bush, not the most thrifty person in the World, left the nation in debt to the tune of just under $10 trillion at the end of 2008. If the CBO is correct, the Obama administration will have nearly doubled this debt by the end of his 2nd term (assuming he gets relected). The true doubling point comes just 18 months after he leaves office. By the end of 2020, the national debt is expected to be 23.14 trillion dollars. We will be paying almost a $1 trillion a year on the interest alone by then. (CBO estimate of interest in 2020 is $916 billion.)

Folks, this is no longer a partisan debate. It's not about Democrats or Republicans. It about our children's future.

The article below is by Andrew Taylor, Associated Press Writer.

WASHINGTON (AP) -- A new congressional report released Friday says the United States' long-term fiscal woes are even worse than predicted by President Barack Obama's grim budget submission last month.

The nonpartisan Congressional Budget Office predicts that Obama's budget plans would generate deficits over the upcoming decade that would total $9.8 trillion. That's $1.2 trillion more than predicted by the administration.

The agency says its future-year predictions of tax revenues are more pessimistic than the administration's. That's because CBO projects slightly slower economic growth than the White House.

The deficit picture has turned alarmingly worse since the recession that started at the end of 2007, never dipping below 4 percent of the size of the economy over the next decade. Economists say that deficits of that size are unsustainable and could put upward pressure on interest rates, crowd out private investment in the economy and ultimately erode the nation's standard of living.

Still, the Feb. 1 White House budget plan was a largely stand-pat document that avoided difficult decisions on curbing the unsustainable growth of federal benefit programs like the Medicare health care program for the elderly and Medicaid, which provides health care to the poor and disabled.

Instead, Obama has created an 18-member fiscal reform commission that's charged with coming up with a plan to shrink the deficit to 3 percent of the economy within five years. But the Republicans to be named to the panel by congressional GOP leaders are unlikely to go along with any tax increases that might be proposed, which could ensure election-year gridlock.

"While the president is intent on ramming through Congress a new trillion-dollar health-care entitlement, he appears far less concerned with addressing the looming crisis of entitlement spending already on the books," said Rep. Paul Ryan of Wisconsin, the top Republican on the Budget Committee. "Instead, he delegates this task to a 'Fiscal Commission' -- which would not even report until after the next election."

The report says that extending tax cuts enacted in 2001 and 2003 under GOP President George W. Bush and continuing to update the alternative minimum tax so that it won't hit millions of middle-class taxpayers would cost $3 trillion over 2011-2020. The tax cuts expire at the end of this year and Obama wants to extend them -- except for individuals making more than $200,000 a year and couples making $250,000.

For the ongoing budget year, CBO predicts a record $1.5 trillion deficit. That's actually a little better than predicted by the White House, but at 10 percent of gross domestic product, it's bigger than any deficit in history other than those experienced during World War II.

The new report predicts that debt held by investors, including China, would spike from $7.5 trillion at the end of last year to $20.3 trillion in 2020. That means interest payments would more than quadruple -- from $209 billion this year, to $916 billion by the end of the decade.

Sources
http://finance.yahoo.com/news/Congressional-estimates-show-apf-2216760019.html?x=0
http://www.cbo.gov/ftpdocs/112xx/doc11231/03-05-apb.pdf

The National Debt

2010-03-01T09:37:00.000-08:00

Santa left a very special present for us this past Christmas Eve. Our line of credit, as a country, was increased by $290 billion to a total of $12.4 trillion. If that wasn’t enough (and it wasn’t) the Ground Hog added another $1.9 trillion increase just six weeks later. Our new credit limit is now a whopping $14.3 trillion. Should we be concerned? At what point should we be? What happens if we can’t pay it back? Can I get one, too?

This reminds me of my first credit card that I received while in college. For some reason, that I never asked myself at the time, there were credit card applications left lying around in one of my classrooms. They had tale of some sort of free trip – to the Bahamas, I think. I applied for one and, to my amazement and delight, received a shiny new Visa with a $350 credit limit. Well, long story short (one new VCR and a couple of nights out with my fraternity brothers), it was maxed out. The first (minimum) payment that I made was for some absurdly small amount, like $19 or $29 – I can’t remember exactly, but it was one of the few that I actually made on time. What really surprised me was that after having the card for only just a couple of months, I asked for and received a credit limit increase to $500. Now, short story long, I had asked someone else a much different question the day earlier and she had said “yes.” Surprised at that answer as well, I found myself absolutely broke and unable to take her out. Not wanting to risk the embarrassment of having my credit card declined on our first date, I called the bank to determine my available balance… $4. After some quick math, I knew things didn’t look good. With nothing else to lose, I decided to “press ‘4’ to speak with a customer representative.” It only took a few minutes and an excellent presentation of the “facts” by me, I might add, and it was done. I had another $154 to blow. Eventually, that card (and that girl) got me in a bit of trouble and I learned a valuable lesson or two.

When will we as a nation learn our lesson? How much can we safely borrow?

Let’s get a few things straight. I am not against borrowing money. Obviously, circumstances will require you, your town, or your country to spend more money than it takes in over a given period of time. That’s how life is. Most people earn their money at a steady pace but are faced with outlays that are varied or even unpredictable – car repairs, buying a new home or new furniture, college tuition, illness, etc. Governments, like people, have the same financial woes in the terms of sometimes having to spend more than they take in. The key word in that last sentence is “sometimes.” Obviously, we can’t spend more than we take in all of the time, right? That would be crazy, wouldn’t it? I think the nice lady at the bank card company would catch on after a while.

But this is exactly what our country is doing. With the exception of a small few, the USA is spending more money that it takes in practically EVERY year. We are making the minimum payment (the interest) and then piling on more, year after year after year. By the way, this “piling on” is the called the national debt. Now just so people won’t get confused – and believe me, some people want you to be confused – let’s explain a few basic things. Each year, the government receives a certain amount of revenue from taxes and other sources. And every year, the government spends money on programs and services for its citizens, like a good little government should. Now whenever the government spends more money that it receives in a given year, it is called a budget “deficit.” Likewise, if for some reason we don’t spend all of it in that year, then it is called a budget “surplus”. The terms deficit and surplus only apply to a single year. The balance of all past years is called the national debt. So, back to my credit card analogy - if I charged $100 on the card this month, and only made a $75 payment, then I ran a monthly deficit of $25 (plus interest). My credit card balance grew larger, which is also called my credit card debt.

Anytime I hear people talking about reducing the deficit, I laugh. It’s like saying we're still falling off of this cliff, but the good news is that we are falling slower. That’s the logic that my wife uses when she buys a new dress, albeit “on sale.” - “I ‘saved’ you $200!”

Come to find out, there’s a document available from the White House and the Budget Office (and probably about a dozen other government sites) that has some cold hard facts about our nation’s financial position. I downloaded a copy of the “Budget of the US Government” for fiscal year 2011, which contains a supplement entitled “Historical Tables.” In it, you can find the annual revenues and expenses for our nation, dating back to 1789. Section 7 contains an alarming table, which lists the national debt balances for each year. It is alarming in the sense that somewhere in the list you would expect to see the balance declining, but those instances are very rare. In fact, looking back 70 years, there have only been 6 years when the federal debt has gone down since 1940. The last time that happened was in 1969. In 1969, we actually lowered the national debt by $2.9 billion. But to keep this in perspective, in the year before, we had added $28 billion and another $12 billion the year before that. All said, in the two years before and the two years after 1969, we added a total of $82 billion – so it was hardly a significant offset.

You would have to go back to 1947 and 1948 to see what I’d consider meaningful reductions. Looking at this table, $436 billion in 1972 looks good compared to the current $12.4 trillion or estimated $13.8 trillion by the end of this year (2010).

Can one even fathom how much money $13.8 trillion is? It is about $126,000 per taxpaying citizen. Please add that amount to line 75 of Form 1040 the next time you file your taxes. $13.8 trillion is enough money to carpet the entire state of New York with $1 bills. If you were to stack them up (flat on top of each other, not end to end or side to side), they would be 935,644 miles high - almost enough to reach the moon and back, TWICE! If you were standing beside this stack of $1 bills and were to shine a flashlight on it, it would take the light over 5 seconds to reach the top. Even if we used $100 bills, the stack would still be taller than the Earth itself.

Okay, Okay. I know what you are saying. It’s a lot of cash, but we are a big country. Are we really that big? Let’s see, our Gross Domestic Product (GDP) last year was $14.3 trillion. At the end of 2009, our debt was 83.4% of our annual GDP. This year it will be 94% of GDP, and almost 100% by 2011.

Still not concerned? Our government basically uses “cash” accounting. Our deficit, and therefore debt, is calculated on an actual basis, in other words, actual expenses paid out less actual revenues collected. It doesn’t consider our future obligations or revenues. It’s the same way that you use to balance your checkbook. So, if you were to look at your checking account balance of, say $40,000, you might think that you’re doing pretty well. But, if you factor in that you have to pay your twin daughters’ college tuitions next month, things aren’t so hunky-dory. The U.S. has future obligations in terms of benefits for programs such as social security and Medicare. Until now, these programs have been taking in more money than their expenditures. Of course, all of the surpluses from past years (about $2.5 trillion in total) was immediately borrowed by the federal government and is included in the national debt figures above. This year, both Social Security and Medicare will have to pay out more than they take in, which means those programs will be calling in their markers. Most of these programs are going to burn through that $2.5 trillion nest-egg (which we scrambled and ate long ago) very quickly. First, we are going to have to borrow another $2.5 trillion from somebody else just to repay these programs. But after that, these programs will be completely broke (just like the rest of us) and the federal government will be expected to pick up the slack, so to speak. We refer to these as “unfunded liabilities” and their outlook is really scary to the tune of $100 trillion.

Why am I saying all of this? It’s simple. This country needs to hit the reset button. We cannot continue on this reckless course. We have got to get on some sort of “payment plan” that gets us out from under this huge debt. Changes, unpopular changes, will have to be made to Social Security and to Medicare. Congress will have to pass (and abide by) a “surplus budget act”, where we can begin to pay down this albatross that we have securely shackled around our children’s necks.

Sources
http://www.whitehouse.gov/omb/budget/fy2011/assets/hist.pdf

Energy Independence (Part Two): Is Ethanol the Answer?

2008-07-26T19:29:00.000-07:00

In 2007, the US consumed 3.4 billon barrels of gasoline. That’s 143 billion gallons. For the U.S. to ever become energy independent, we have to figure out where we are going to get all of that gas? Could ethanol be the answer? Here is the Good and the Not-So-Good on ethanol.

THE GOOD

First, let’s be clear on a few things. Ethanol is simply alcohol, ethyl alcohol to be exact. It has other names, like grain alcohol, but it’s the kind of alcohol you drink. It’s not the stuff in your medicine cabinet, I hope.

It’s interesting to note that Henry Ford first designed the Model T to run on ethanol. He thought the ability for most people to make their own fuel instead of having to rely on industry was a good one. If it wasn’t for Prohibition, ethanol may have emerged as the predominant fuel in the 20th century and most of us would have never heard of places like Iran, Iraq and Saudi Arabia.

Most cars will run just fine on ethanol blended with regular gasoline, without any modifications. In fact, the gas that you bought this morning was likely already 10% ethanol or E10. Many states have mandatory ethanol laws. The actual blend percentage is changed according to the season for some climates. Some claim that most cars on the road today could burn a much higher ethanol blend, 20%-50%, without harm.

Car makers now offer “flex fuel” vehicles (in some limited markets). A flex fuel vehicle (FFV) is designed to run on any ethanol blend up to 85%, E85. There is a push to mandate “flex fuel” cars for all new cars sold in the US. The estimated cost to the automaker is minimal, about $5. (Reference needed.) Existing cars can be converted to use E85 (or even 100% ethanol) fairly easily and cheaply.

100% ethanol has an octane rating of 116, but higher octane doesn’t mean more power. The higher octane number means the fuel can be used in higher compression engines. If you were to use a low octane fuel, in a high compression engine, it would “knock.” If your owners manual says to use premium (92 octane) fuel, then you should buy premium. Likewise, if the car was designed to use regular gas, you will not get any benefit from using the higher grade. (By the way, E85 is 105 octane, regular gas is 87 octane.)

THE NOT-SO-GOOD

The disappointing fact is that ethanol contains about 25% less energy than gasoline. Therefore, users of E85 should expect about 25% less gas mileage than users of E10. So, if you would normally drive 400 miles on a tank of regular, you should expect to run out at around 300 miles with E85. Now if E85 was $3/gal and E10 was $4/gal, then it’s a break even situation. The cost per mile would be the same. In some areas of the country, the price difference is great enough that E85 is the most economical choice. On average though, the price spread is not great enough. (National average E85: $3.31, Gas: $4.01, July 26 2008) If you are lucky enough to own a FFV or a conversion, you’ll have to do a little bit of mental math at the pump. Multiply the E85 price by 1.33 to get the equivalent gasoline price.

Last week, a truck stop in Eagan, Minnesota had E85 for $2.51 and regular gas for $3.99. Since $2.51 x 1.33 = $3.34, the E85 was a better choice by 65 cents a gallon.

Ethanol can be made from a variety of feed stocks. In the US, corn is the major player but this is likely to change, given the high corn prices and advances in alternative ethanol production techniques. Let’s talk corn.

Last year, the US produced 37% of the world’s corn supply. According to the USDA, we planted over 70 million acres and harvested over 10.5 billion bushels of corn. That’s about 150 bushels per acre, a bit low compared to the 300-500 bushels average yield per acre that I have seen in quoted in many articles. Perhaps it was just an off year.

The U.S. currently has the capacity to produce nearly 3.7 billion gallons of ethanol annually at 85 ethanol plants. I have seen claims that these plants are able to produce anywhere from 2.5 to 2.9 gallons of ethanol per bushel of corn.

So, if corn-based ethanol is the sole answer, how much would we need to replace the 143 billion gallons of gasoline that we consumed last year with an equivalent amount of E85? Since E85 has a lower MPG, we would need 143 x 1.33 = 190 billion gallons of E85 to drive as far as we did on the gasoline. Since E85 is only 85% ethanol, we would need 190 * 85% = 162 billion gallons of ethanol to make it. This would save us about 80%, or about 115 billion gallons of gasoline. That’s got to hurt OPEC, right?

Ok, let’s head down to the feed store and get enough corn to make 162 billion gallons of ethanol. At the average yield of 2.7 gals per bushel, we will need about 60 billion bushels. Oops! That’s almost 6 times the total U.S. corn production last year. We will need to plant more…about 330 million acres more, and that’s if we intend to use 100% of it for ethanol production. If we still want to eat some of it, add another 60-70 million acres for a total of 470 million acres. That is roughly 25% of the land mass of the lower 48 states. That’s a whole lot of corn.

As you can see, corn-based ethanol alone cannot solve our problem. But it can be a contributor. Other methods of ethanol production such as from sugar cane or barley could make more efficient land use with less competition with food crops. Cellulose based ethanol promises to be even better, using any type of plant material like fast growing grasses or bamboo.

Just because ethanol is not the end-all cure-all doesn’t mean we should abandon it. We need to whittle away at that 143 billion gallons any way we can. Starting with conservation, i.e. driving less, using more efficient cars, and burning a combination of alternate fuels, we can make a huge difference. To that end, our government should require that all new cars sold in the US be flex fuel capable so that everyone can take advantage of the new fuel blends as they come to market.

Sources
http://www.eia.doe.gov
http://www.renewableenergyworld.com/rea/news/story?id=28182
http://www.fas.usda.gov

Energy Independence (Part One)

2008-07-11T14:28:00.000-07:00

Imagine if the next time you went to fill up your car, the gas pump had two nozzles: a blue one and a red one. Let's suppose that the blue nozzle pumped gas from the normal gasoline supply which is usually 60-70% imported from foreign oil producing countries. Suppose the red nozzle pumped another product which was produced domestically, 100% made in the USA. Now, let’s say that they both cost the same, both gave you the same gas mileage and neither was any more polluting than the other. Which nozzle would you use? That’s a pretty easy answer for most Americans.

Now, what if the red “domestic” nozzle was a few cents more expensive than the blue one? Would you penny-pinch and use the “blue” gas or would you be “patriotic” and buy American? If not, how much more would you be willing to spend? There is probably some price difference where most people would leave the patriotic red nozzle to rust and choose the less expensive brand to save money. That price difference may be smaller than you would expect. But what does it really cost us?

America imports about 5 billion barrels of crude oil and petroleum products EVERY YEAR. If oil prices hold steady for the remainder of this year ($147/barrel, July 11, 2008), the U.S. will spend about $630 billion in 2008 for imported oil. That’s billion with a huge capital “B”. $630,000,000,000.00! That’s more than the total, 6-year cost of the Iraq war, with enough left over to start a few new ones. Most people can’t comprehend just how much money that is. We’ve become de-sensitized to numbers like this with today’s gigabyte storage, 24-hour news channels, and balance sheets of the likes of Bill Gates and Oprah.

Let’s put it into perspective. If we paid the bill in cash, it would take a pretty fast bank teller 66 years to count out the Benjamins ($100 bills). (That’s counting 3 bills per second.) If you stacked up those $100 bills it would be 400 MILES high. (I’m not talking about worn and crumpled bills, I mean brand new, crisp, banded, money bricks stacked face-to-face, not end-to-end ($25K per inch) . That’s over 3,600 pallets (4ft x 4ft x 4ft) of moolah. Next time you are watching a football game, imagine the field covered in $100 bills, 5 feet deep!

Of course, we don't actually pay for it in cash. One reason is that there isn't enough cash in circulation. I am talking about every single $100 bill in this country and all of the $50's and $20's for that matter. (There is estimated to be less than $700 billion of US currency in circulation worldwide.) We don't even print it fast enough. We print about $750 million dollars a day. We spend over twice that every day on foreign oil.

We are spending $1.2 million dollars every minute, 24/7/365, for imported oil. That’s not counting the stuff we pump out of our own wells (1.8 billion barrels per year). This is a tremendous transfer of wealth.

About 30% of that money goes to Canada and Mexico, our biggest crude oil suppliers. Disturbingly, almost half goes to the dozen OPEC-member nations. These are people who don’t like us very much.

So, how much more would you be willing to pay to pick up that red nozzle and keep all of that money where it belongs – in America?

Now the premise of this little hypothetical may not be a reality today. And, there is much debate over how we can ever realize the All-American gas pump. If we were to stop importing oil altogether, the domestic price would quickly rise to an unaffordable level for most of us. That is, unless we have something else to take its place. The answer could be more drilling and refining capacity, increased ethanol production (from corn, barley, and switch grass), or alternatively powering cars using electricity or hydrogen (derived from nuclear, coal or solar energy). But, I'll explore that topic in another post, as it is likely going to be a multi-part answer. I don’t see any one single alternative breaking our addiction to foreign oil. There’s no magic bullet.

The point is simple. We cannot continue to give away our wealth at this rate and to be forever beholden to foreign nations for energy. All other arguments (global warming, peak oil, environment) aside, we need a domestic solution to our energy needs, now!

Sources:
http://www.eia.doe.gov/
http://www.ustreas.gov/education/faq/currency/production.shtml