Texas: Blue State to Red State? Try Brown State

The San Antonio Express lead story Sunday tells about the changing face of Texas. Currently, Hispanic children now make up 49% of the K-12 public school enrollment, whereas Anglo children now make up 33% of public school enrollments.Using 2000 census figures, we can see the percentage changes over just 9 years. In 2000, Anglo children comprised 43% of the enrollment and Hispanic children slightly less at just under 40%. In slightly less than a decade, Hispanic children now outnumber Anglo children 3:2. Projections to 1940 show that the percentage of Anglo children in state schools would be less than 20%. Hispanics would make up 2/3rds of the school population three decades from now.

(source of data below from window.state.tx.us/specialrpt/workforce/demo.php)

 

As of 2006, the table below shows ethnicity changes in Texas from 1980 to 2006. As of 2006, the Anglo population was significantly higher than the Hispanic population, however the figures are virtually reversed when only considering the school age demographic. Today's voters represent an Anglo majority, if there is such a thing, in terms of ethnicity. Tomorrow's votes, as the statistics show, will represent a Hispanic majority. No group is homogeneous as far as political ideology, but the numbers are something to think about.

Exhibit 1-1

Race/Ethnicity in Texas, 1980-2006

Racial/Ethnicity Group	Percent of Population 1980	Percent of Population 1990	Percent of Population 2000	Percent of Population 2006
Anglo	65.7%	60.6%	53.1%	48.3%
Hispanic	21.0%	25.6%	32.0%	35.7%
African American	11.9%	11.6%	11.6%	11.4%
Other	1.4%	2.2%	3.3%	4.6%

 The Houston Chronical reports the following:

Almost six out of 10 Texas public schoolchildren hail from low-income families, marking a troubling spike in poverty over the last decade, a new state report finds.

The increase coincides with a significant jump in the number of Hispanic students, while fewer Anglo students were enrolled last year than 10 years ago, according to the study by the Texas Education Agency. Schools also are educating many more children whose primary language is not English.

 These figures are staggering. If these children do not rise above their current economic status, that would indicate at some point in the future 60% of the adult population could fall below the poverty level. There is no possibility that either the State or the Federal Government could provide a safety net large enough to cover all of their needs.

Our Government is Basically a Bad Bank

Have you ever considered that our country’s deficit funding is analogous to a badly run bank?

Historically, a bank loans money to qualified borrowers who use the proceeds to grow their assets, perhaps by purchasing equipment which grows their business or buying a car that allows the individual to go to work (grow someone else business) and earn money. The loan is beneficial to the borrower because the extra money allows him to grow assets he would otherwise be unable to attain. He then pays back the loan with interest which enriches the lender. Once the bank begins making a number of loans in which the proceeds are used unproductively, the bank has a problem. For example, the bank might make an unsecured loan of $3,000 to an unemployed person who then buys an HD TV. The borrower makes two or three minimum payments and then defaults. The bank loses.

If you examine the budgetary system in the United States, all expenditures in excess of tax revenue are funded by loans via treasury auctions. The holders of the bonds (pension funds, investment banks, individual investors, foreign countries, etc.) must be paid back with interest. But how is this money used? Are the majority of the funds used to build highways and electricity grids that will eventually prove to be an asset? Are most of the proceeds spent on bureaucracy, entitlement payments, welfare, billion dollar embassies in the desert and other projects practically guaranteed to never generate income? If government spending does not generate growth equal to or greater than the rate of interest paid on the bonds, eventually the government defaults and the bond holders get stiffed.

The above scenario is unfolding. Deficit spending, largely geared toward transfer payments, and other non-productive projects (for an example, see article on Boeing project) does not generate the growth needed to pay off bond holders. But unlike the community bank that has to eat losses when it makes a loan to a deadbeat, holders of US treasuries must be paid back – even if the United States government is the equivalent of a deadbeat.

Before we look at the United States, let’s examine Greece. Other European countries, particularly France and Germany, are large bond holders of Greece debt. Greece has spent massively on various entitlements since joining the European Union. Now, Greece has reached the point they cannot make interest payments on their loans, hence Germany and France have a problem. Greece, with just around 2% of the GDP of Europe, is considered too big to fail. France and most of Europe want to extend more loans to Greece which would allow Greece to be able to continue making interest payments which they currently can no longer make. It’s kind of like a person that has $20,000 on his VISA account, but no longer can come up with the minimum payment. VISA, rather than writing off a loss, extends the borrower another $10,000. Now the borrower owes $30,000, but with the $10,000 in new loans, he will be able to make minimum payments once again; for a while. Germany is reluctant to go along with the arrangement because they realize in the long run Greece will default anyway, and by bailing Greece out with additional loans, the default will only be larger.

The model in America is much the same. Our demographics are such that future entitlement funding will grow year after year and current rates will not generate enough revenue to pay for them. Entitlement expenditures are unproductive in the sense they don’t grow the economy very much (probably zero), and the interest on the bonds sold to fund these entitlements will simply result in raising the ratio of debt to GDP.

Some would argue that the economy is cyclical and will soon turn around, resulting in additional tax revenue which would reduce the amount needed to borrow. This is an incorrect assumption. Debt has saturated the economy to the point it cannot expand. Money is tight, thus personal spending is not going to increase. The rate of housing defaults will continue to accelerate. High paying jobs are being constantly phased out. As part of global wage arbitrage companies continue to outsource production facilities overseas. With government wealth transfers (spending via more debt), the economy might grow more than otherwise, but for each additional dollar of debt spent by the government, the economy will grow proportionately less than one dollar. In other words, the more the government spends to inject life in the economy, the bigger the hole that gets dug.

Europe will now begin austerity measures. Basically, austerity measures are designed to transfer the debt from the public sector to the individual citizens. If successful, the government structure remains, the bond holders continued to get paid, and the standard of living declines for the population.

When the nation began, Thomas Jefferson argued against a Central Bank. Alexander Hamilton wanted a powerful Central Bank. Hamilton eventually won. By the time the 1830’s arrived, the Central Bank was considered a corrupt institution which was beginning to bankrupt citizens. Andrew Jackson successfully dismantled the Bank and the country survived for another 80 years ago until the Federal Reserve system was founded in 1913.

How might a government run without a Central Bank? Theoretically, there would not have to be an income tax. This country did not have an income tax until the early 1900’s. People would keep all of their wages. Government would fund projects (highway systems, defense spending, etc.) by simply printing money. Wouldn’t this be inflationary? Whether the money is printed, or loaned into existence via treasury auctions (debt) as it is now, the money supply would not change. The burden on the public of having to pay back interest would be eliminated. The middlemen (the Central Bank and various bond holders) would be eliminated. If the government wanted to add entitlement programs, then I think you’d develop problems because this would involve printing money for unproductive purposes, resulting in inflation.

For now, we’re stuck with the system we have. If we converted over, bond holders would quickly sell their bonds and we’d experience an hyper inflationary currency collapse.

We should have listed to Thomas Jefferson and Andrew Jackson.

What If...?

 ...a few months from now President Obama gave a speech like the one I've written below? I think we'll get some version of this down the road. How will Americans react? How would you react?

My fellow Americans:

I stand before you tonight because it's time for every American to understand the path we've been on, where we need to go, and determine the best way to get there. 

We've been blessed to live in America. This is a land of abundance. We have the greatest agricultural system in the world, the finest educational system, and the unique benefits of pooling knowledge and experience from the most divers group of citizens in the history of mankind. However for several years now, in fact, for several decades, we have lived beyond our means. Our deficits have grown at a pace that, if continued unabated, threaten the very existence of our Republic. The national debt is now more than $13 trillion dollars and the projected spending on entitlements in the years ahead will only add to that debt if unchecked. This is unsustainable.

I know that everyone is aware of the financial events going on in Europe. Greece is relatively small country. Their GDP represents only about 2% of the entire European Union. Greece's debt got out of hand and threatened to bring down the entire currency of the Euro zone. In order to rescue the Euro, the member nations coordinated a plan with the IMF, the European Central Banks, and our Federal Reserve. Thanks to bold measures, a catastrophe has been averted. 

But the danger of a recurrence is still there. The European nations recognize their predicament and have taken steps to ensure that the stability of their respective countries remain in tact. In order to achieve long-term success and maintain the belief that their children can look forward to a bright future, the people of Europe have agreed to make sacrifices. For some, it means reduced wages. For many, it may require paying a little bit more when they make a purchase. Without these measures, it is almost certainty that the European economy would completely collapse. If that happened, the chaos and suffering would be horrific.

Folks, if we don't make similar sacrifices, we will soon find ourselves facing the same grave challenges that Europe is now facing. We can't wait any longer. I've put together a plan that will guide us through this time of struggle so that we can get our financial house in order as a country so that we can pass on our dreams to our children and their children.

I realize that many of you are out of work, and without assistance, would not have the resources to feed your family. I'm not going to cut anybody off. But the fact is, in order to continue providing the assistance that so many require, the government has to have the revenue to provide that assistance. We can't continue to borrow the money because there just isn't anywhere left for us to lend from.

In Europe, when citizens purchase an item, the cost includes something called a value added tax. In most countries the rate exceeds 20%. America doesn't even have a value added tax. This additional revenue can be put to use by the government to help pay for the important services that so many of our fellow citizens require. I'm not going to ask Americans to pay 20%, but I think a 5% value added tax is a fair price to pay in order for everyone to do their part in helping our country in this time of great challenges. When a citizen buys something, that citizen, no matter whether he or she is wealthy or poor, will have the satisfaction of knowing they've played a part in saving our country.

Entitlement expenditures are growing at a pace that cannot be sustained. Current projections show that both medicare and social security will be bankrupt before the end of the decade. I want you to know, if you currently collect social security, the government is not going to take away your benefits. Many of you listening tonight have not yet reached retirement age. Did you know that when social security was implemented, the life expectancy for men and women was less than the age where you become eligible to collect benefits? Due to advances in medicine, we now can expect to live much longer than our forefathers. In order to preserve social security so that it will be there for all of us when we reach old age, I'm proposing that we phase out the current age of ability and extend it to 75. We would implement this change over the next 15 years. Most people are still healthy and able to work well into their 70's. now. I've put together a bipartisan commission to study how we can curtail expanding entitlement spending. This was one of their recommendations.

As time goes on, we'll evaluate progress and make other recommendations that will help our country get back on track. 

Thank you and good night.