The cost of financial planning

I have a lot of friends who are smart, knowledgeable, and generally wise in the decisions they make. However, a lot of them have one common characteristic. They don't actively plan their financial future.

Some do nothing at all. They don't budget, don't save, don't invest, and don't even take advantage of the 401k plan offered by their employer. I don't have very many friends in this category, but they are in the worst shape for the long term. Their future security will be at the mercy of Congress as the demographics puts a squeeze on the liquidity of Social Security and Medicare.

Others put away a little bit of money in their 401k. That will help them some, but they have no idea if it will be enough. In addition, they don't usually have a strategy to their investment selections. They could allocate their funds better inside the 401k plan, but they don't really know how. These people are gambling with their future. They may be saving too little, and be forced to work much longer than they wanted to, or to retire at a much reduced standard of living. Alternatively, they may be saving too much, needlessly constricting their budget now so that they can die sitting on a pile of money. They may also be paying a high opportunity cost for failing to more effectively invest their money. Many are taking unnecessary risks by investing in company stock or by not diversifying enough.

There is a third category of people. They recognize the importance of financial planning and don't feel up to the task of doing it themselves, so they hire a professional financial planner. This may help them to avoid some of the pitfalls, but at a very high cost. Unfortunately, the commission-driven world of financial planning brings its own set of pitfalls. There are some "fee only" planners who will provide good advice and sound management at a reasonable cost, but most of the industry is commission-based, and the planner's interests are not at all aligned with the interests of the customer.

These financial managers are not so much "planners" as salesmen, and they want to sell the product which gives them the highest possible commission, not the product which best meets the client's needs. Layer upon layer of fees and expenses eat into the client's principle and stunt the growth of the investments. A typical "financial planner" charges a management fee of 2% of assets under management. Then he invests in mutual funds with a 5% front load and 2% annual expenses. The underlying investment would have to return 10% in the first year for the client to just break even. You could do better with a bank CD.

Over the long term, how much impact does a 2% management fee have on your savings? As an example, consider Steve, a 25-year-old who earns $40k per year. Steve invests 10% of his income in a Roth IRA. Each year he gets a 4% raise, which is just slightly more than inflation. If his investments return 8% annually, by the time he is 65 years old, he will have accumulated $1,846,942. Not bad. However, if Steve had used a financial planner who charged a 2% management fee and invested in front-loaded mutual funds, his account would only be worth $1,122,862. The planner would have gradually transferred 40% of Steve's life savings into the planner's bank account. This is the difference between a secure, comfortable retirement and a job as a Wal-Mart greeter at age 78.

The sad thing is that financial planners don't do much to earn these high fees they charge. Most use outdated and overly simplistic "rules of thumb" to decide how much you need to save and how you should invest. A financial planner's livelihood depends on convincing you that he has a magic crystal ball which lets him pick better investments than you could pick on your own, and that this "value added" will more than make up for his "industry standard" fees. The facts tell a different story. More than 75% of financial planners' accounts underperform the S&P 500 index. About half underperform a "moderate allocation" index consisting of 70% stocks and 30% bonds. In other words, you could randomly select a mutual fund and have a 50/50 chance of doing better than your planner. Better yet, you could buy the Vanguard Total Market Index and have a 75% chance of outperforming your planner.

Right here on this blog I am going to present a plan which for Steve could make the difference between $1,846,942 and $1,122,862. This plan, worth roughly three quarters of a million dollars, is provided free of charge. I have no financial stake in any of the products that I name. I am only a satisfied customer of these companies.

Start off by reading The Four Pillars of Investing by William Bernstein. The $18.87 price at Amazon will make you more effective at managing your finances than many professionals who charge hundreds of dollars a month.

Read Scott Burns column. Read his archives. Read his sections on consumption smoothing, couch potato investing, indexing, Club 401, portfolio survival, and his "Seven Laws of Personal Finances".

Get familiar with Morningstar.com, a great source of data on mutual funds.

Know your own risk tolerance and don't exceed it.

Understand the different categories of risk affecting your finances.

Understand some important concepts such as the relationship between risk and reward, compounding interest, dollar cost averaging, diversification, time value of money, and Modern Portfolio Theory.

Make a budget. Any sound financial plan starts with living below your means. Start by tithing to your local Church. Then set aside money for savings. Next pay your fixed expenses. Finally, allocate what is left for other expenses and discretionary spending.

Use ESPlanner to develop a comprehensive financial plan for your family. This powerful tool developed by Laurence Kotlikoff, Professor of Economics at Boston University and Research Associate at the National Bureau of Economic Research, is light-years ahead of what the financial planning industry uses. ESPlanner uses the concept of consumption smoothing combined with dynamic programming to create an optimal lifelong plan, considering all aspects of your finances: current and future earnings, future expenses, housing expenses, home mortgage, taxes, social security, life insurance, and contingency plans for events such as the death of a spouse. Read this paper for a full description of ESPlanner. If you balk at the $150 price tag, compare it to how much you might pay for less reliable help from the financial industry, or to the cost of botching your financial plan.

Use term life insurance to provide the coverage as recommended by ESPlanner.

When you invest, don't chase past performance. Last year's hottest fund is not likely to outperform in the future. Instead, use a consistent asset allocation built with low-cost no-load index funds focusing on total portfolio performance rather than individual funds. Many managed funds charge annual expenses of 1.5% or higher, and you are right back where you started with the financial planner, so mind the expenses. Vanguard offers many funds with expenses below 0.3%. You can get adequate diversification with a fairly small number of funds. Principles from the reading suggested above will help you select an appropriate asset allocation. I like a mix of domestic and international stocks with a tilt towards value and smaller company stocks. The overall risk/return level can be adjusted by combining stock with fixed income investments.

Don't try to time the market. In fact, don't pay too much attention to the day-to-day ups and downs. Reacting to short-term market movements will almost always cause you to make bad decisions. Instead, pick an asset allocation which is appropriate to your goals, and stick with it. If your investments start to drift from that allocation too much, rebalance back to your target allocation, but otherwise keep your hands off. Automatically contribute to your investments on a regular basis, as recommended by ESPlanner.

Ignore any magazine article with a headline such as "Hottest 10 mutual funds" or "Top Stocks to Make You Rich". This is worthless information because past results do not indicate future performance. Professional managers of institutional accounts with hundreds of millions of dollars under their management, an army of analysts, and far greater resources than you have work around the clock to identify and exploit information which will give them an edge. Do you really think that you can beat them at their own game?

If your employer offers a 401k, use it. Contribute at least as much as your employer will match. If a 401k is not an option, consider a Roth IRA or other tax sheltered retirement accounts. Fit the 401k into your overall asset allocation strategy.

If you have kids, open a 529 account to save for their college expenses. A 529 account allows you to contribute up to $10,000 each year to each child. If you start early, this is way more than you need to contribute. Your child is the beneficiary, but you retain ownership of the account. The money grows tax free and can be withdrawn to pay qualified expenses (tuition, books, fees, room and board) tax free. If you withdraw the money for any other purpose you will pay a penalty on the growth. We use the T. Rowe Price College Savings Plan, but Vanguard also offers a good plan.

I didn't say that it was simple. It takes some time and effort to get started. But once you do, you can be a lot better off than you would be otherwise.

Booze talking

James Mee, the Los Angeles County sheriff's deputy who arrested Mel Gibson for drunk driving, downplayed the celebrity's anti-Semitic tirade as "Just booze talking". I'm not cutting him that much slack. Alcohol lowers people's inhibitions, causing them to say things which their normal self restraint would have prevented them from saying when they are sober. Alcohol does not change a person's opinions or character. It simply reveals what is inside that we usually don't let out. Unfortunately, this gives credence to Gibson's critics who attacked his film "The Passion of the Christ" as anti-Semitic. While the film did present an unflattering view of the Jewish religious leaders who conspired to put Jesus to death, it must be pointed out that the disciples who defended Jesus and Jesus himself are also Jewish. The Jews are God's chosen people, and those who try to harm them will eventually answer to a power even more fearsome than the Israeli military. In any conflict between the Jews and those who wish to destory the Jews, you will find me firmly on the side of the Jews. Some people will try to conflate Gibson's abhorrent views with Jesus or Christianity. However, one person's views which are entirely contrary to the teachings of Christ and the Christian Church reflect on that person, not on Christ. Perhaps this should be a lesson to the Church not to count on Hollywood to deliver the message that we should be communicating to the people we are in contact with every day.

Leaving things unfinished

Ten years ago, on April 18, 1996 Israel attacked Hezbollah in Lebanon. The 16-day operation called "Grapes of Wrath" drew international criticism. As other nations of the world condemned Israel for defending itself against an enemy which exists for the stated purpose of destroying Israel, President Clinton did nothing to support Israel. Instead, he said "I think that it is important that we do everything we can to bring an end to the violence." Clinton proceeded to force a cease-fire on Israel before it had fully eradicated Hezbollah. Israel is fighting this war today because Clinton didn't let them fight it ten years ago.

President Bush, on the other hand, recognizes that it is in the interest of Israeli security, American national interest, and the security of the world for Israel to proceed until the terrorist group is neutralized. This is a perfect opportunity to clean out terror cells before a terrorist state can be established on Israel's northern border. A cease-fire only delays the necessity of dealing with this threat and allows Hezbollah to amass more weapons of terror, making the threat more dire.

The distinction between Clinton and Bush highlights their differing definition of peace. To the left, peace is a cessation of fighting. But the only real and lasting definition is that peace is the prominence of justice. We could end the fighting by forcing Israel into another cease-fire. We could end the fighting in Iraq by pulling out. We could wait until Iran has the nuclear ability to carry out their threats against Israel and America. But if we are to learn from history, we must recognize that ignoring a threat will not make it go away, and putting off a conflict until a latter day only makes it worse.

What's-his-name

I worked on the algorithm design of the weapons delivery system for the F-16, which last month was used to cut short a meeting of the top-ranking leaders of Al Qaeda in Iraq, including Zarqawi and Sheikh Abd-Al-Rahman. We are proud of the work that we do and of the fact that our product helped an Air Force pilot place a thousand pounds of high explosives on one of the most evil men in the world with pinpoint accuracy.

State of the art software using sensor fusion to integrate all of the systems on an advanced fighter into one lethal weapon is something we understand very well. Arab names, on the other hand, we have difficulty with. We never have figured out how to pronounce the name of Zarqawi's successor, so we have given him a nickname.

We just refer to him as "Next".

Straight from the DNC talking points

Imprisoned former Iraqi dictator Saddam Hussein joined the insurgents in siding with Congressional Democrats by calling for America to withdraw from Iraq.

I suppose he wants us to let him go, too.

Stem Cell Pseudo-Science

Today President Bush pulled out his veto pen for the first time to reject a bill to provide Federal tax money to pay for embryonic stem cell research.

This is a good thing, not only because embryonic stem cell harvesting involves the destruction of human life, but also because the research is bogus science.

Adult stem cells, harvested from living adults without requiring that they be killed in the process, are currently used to cure 80 different diseases. There are 1175 clinical trials on humans currently underway, leading to additional uses of adult stem cells. By comparison, embryonic stem cells have zero, zilch, nada. Not one disease has ever been cured using embryonic stem cells. They haven't even gotten as far as clinical trials on humans. Why not? Two main reasons: embryonic cells tend to be rejected by the immune system, and they tend to cause malignancies called teratomas, meaning "monster tumors."

The only advantage that embryonic stem cells claimed over adult stem cells was their ability to transform into any type of cell. However, as of 2002, researchers have been able to achieve the same thing with adult stem cells, converting adult stem cells into all three kinds of cells that the body produces during early embryonic development. There is no evidence that embryonic stem cells could ever have helped Michael J Fox, Christopher Reeve, or Ronald Reagan, but last year a South Korean woman who had been paralyzed for nineteen years due to a spinal cord injury began to walk again with the help of a walker. It was not embryonic stem cells which brought about this cure, but an injection of umbilical cord stem cells into the injured part of her spine. Before that, two women paralyzed by spinal cord injuries were treated with adult stem cells in Portugal. Both regained feeling and movement, and one began to walk with braces.

One third of the members of the House of Representatives cast votes for using tax dollars to fund embryonic stem cell research AND voted against a different bill to fund other stem cell research which does not require the death of the cell donor. It seems that there are certain people who only want this research if it involves killing human embryos. And thus the real agenda of embryonic stem cell research advocates is revealed.

Adult stem cell research has produced numerous cures which are in use today, and they did it without large amounts of government money. There is plenty of private sector money being invested in such research. You see, private investors demand results and put their money where it is most likely to provide a positive return. Thus, adult stem cell research is well funded by the private sector, leaving the hapless embryonic stem cell researchers rooting at the public trough. While the privately funded adult stem cell researchers were busy curing diseases, embryonic stem cell research advocates were whipping up a huge PR campaign, making extravagant promises of miraculous cures. But if there was anything behind these promises, private investors would be clamoring to fund the research.

In the end, there is no scientifically sound reason to think that embryonic stem cells will ever cure any disease which could not more easily be cured by other stem cells which are not harvested at the cost of a human life. The only reason that Democrats advocate using tax dollars to fund this pseudo-scientific research is that it is their last fleeting hope of creating the illusion that killing babies has some benefit to society. Of course, by that logic, the Holocaust was justified: the Nazis experimented on their victims too.

Happy Cost of Government Day

Today is the day that we stop working as slaves of Uncle Sam and begin to work for ourselves.

July 12 is Cost of Government Day in 2006, falling one day later than it did in 2005. On this day, the average American family has earned enough to pay for their share of the cost of government. The 192.7 days that it takes to pay for our government is broken down like this:

Federal spending 86.5 days
State/Local spending 44.6 days
Federal regulations 39.6 days
State/local regulations 22.0 days

In spite of the growing economy, the Cost of Government Day has been moving later for the past few years. When George Bush became President in 2001, Cost of Government Day was the first day of July. Because of the failure of President Bush and the Republican Congress to control spending, it has been pushed back 12 days. By contrast, when Ronald Reagan was President, Cost of Government Day moved from July 22 to July 3, and when Bill Clinton was President it moved from July 20 to July 1. The contribution of Federal spending to these trends can be seen here:












Both Bush (Jr) and Reagan inherited a rapidly growing cost of government. Reagan reversed the trend and brought the cost down during his eight years in office. Bush has continued the trend.

The federal budget deficit we have today is attributable entirely to the rapid growth of domestic spending under the Bush administration. Domestic spending has increased by 40% in five years, which is more than it grew during all eight year of Clinton, that flaming liberal. Low taxes and controlled spending are the two essential components of a conservative fiscal policy. Bush has done well on reducing taxes, but he needs to do a lot better on the spending side.

You all know that I support Bush and consider him to be a great president. Not quite up there with Ronald Reagan, but getting pretty close. But this is one area where he has fallen flat, and with a Republican Congress, there is no excuse for this. No family or business could operate with this kind of financial irresponsibility, and the government should not be allowed to either.

Politically, cutting spending is a difficult thing to do. It is guaranteed to make someone mad, and the benefits are seen only indirectly. It is a natural response for each individual to vie for the biggest piece of the pie that he can get. People have been conditioned to view “their” share of the Federal largesse as sacrosanct. Government dependence is still alive and well, and it is encouraged by politicians eager to buy votes with your tax dollars. As long as elections are won by the one promising the largest increase in entitlement dollars, politicians have no incentive to reign in spending.

The vicious cycle of co-dependency between politicians and the recipients of government programs must be broken by the taxpayers clearly telling their elected officials “enough”.

I am not sure how to communicate this message to the Republicans in Congress. Electing Democrats would be seen as a call for MORE spending, not less. As poorly as Republicans have done in the past five years, Democrats are much worse. The only reason that Bill Clinton didn’t spend a lot more is that all of his spending proposals were mired down in a gridlocked Congress. Gridlock really is a wonderful thing. When Congress can’t accomplish anything, we all benefit. Congress can only do two things relating to domestic policy: tax us and spend our money. The less they do of either of these, the better I like it. It has occurred to me that we could benefit from more gridlock if the Democrats got control of the Senate. The biggest thing keeping me from campaigning for the Democrats running for Senate is the revolting thought of being forced to utter the words “Senate Majority Leader Harry Reid”. I would rather have a root canal, and anyone who knows me will tell you that I detest going to the dentist.

The best ways to let your Congresscritters know that you want them to start being fiscally responsible are to support fiscal conservatives in the primary elections, to write to your delegation in Congress, and to express your views in public forums. Write a blog, or write to your local newspaper, or just tell a friend. But do something! It is your money they are madly spending.

Product Placement

The Duck (TM) Duct-Tape Company recently announced their new product placement advertising contract with NASA. Company spokeman Alec Baldwin, speaking for the entire world, said "We saw this as an opportunity to promote the image that duct tape can fix anything. NASA promised that they could arrange for something to break so that it could be fixed in orbit, with a clearly visible strip of Duck (TM) brand Duct Tape."

NASA astronauts expressed relief that no tiles on the Shuttle's heat shield appeared to be damaged.

Storied?

CNN reports that "Storied former CBS News anchor" Dan Rather has a new job on a premium high-definition TV channel.

According to my dictionary, storied means "recorded or celebrated in history or story".

Alternatively, "story" refers to "a fictitious tale, shorter and less elaborate than a novel." For instance, passing off forged memos in an attempt to smear the President just before an election.

In this context, "storied" must be a past-tense use of the second definition: a has-been fabricator of fiction.

North Korea attacks Sea of Japan

(2006-07-05) — North Korean leader Kim Jong-Il today acknowledged that he had ordered yesterday’s missile strikes against the Sea of Japan in response to what he called “threatening and provocative movements” that the body of water had made against his nation’s coastline.

U.S. sources said that as many seven missiles, including one long-range, short-flight Taepodong 2, penetrated the surface of the sea in a terrifying display of North Korean ballistic technology prowess.

“This clearly demonstrates our status as a global superpower,” said Mr. Kim, “The Democratic Peoples Republic of Korea is quite capable of raining fire from the sky upon any body of water that approaches our shores, or even thinks about it, with only forty-two seconds notice. Surely now Iran will not be the only nation to be paid handsomely for not becoming a nuclear power.”

The North Korean leader said the attack should “put other seas on notice that our precision-guided munitions can strike you at any time. We have many more missiles just like those we demonstrated today.”

The public interest

The New York Times editor Bill Keller justified their decision to alert Al Qaeda and other terror networks that we are tracking their financial transactions by saying that the story was "in the public interest".

There are a few other things which I would like to remind the Times are also in the public interest.

We are currently fighting an enemy who wants to kill us.

They don't approach this goal with the same style of warfare that was used in World War II and most of the other wars which preceded this one. Instead of relying on airplanes, tanks, and infantry brigades, they hide among the civilian population, using the same women and children who they intend to murder as a shield and as camouflage. Their goal is that we never recognize who they are or what their intentions are until they hijack an airliner, bomb a building, or use some other method to murder hundreds of innocent civilians. Our military might is nearly useless against this kind of threat. There is no advancing column of troops to attack, and our high-tech Air Force is useless against an enemy that we can't find.

To fight this enemy, we first need to identify and locate them.

Thus, intelligence is the most critical element in the War on Terror. And there are only a few ways to obtain that intelligence. When we capture a terrorist, we can squeeze him for information which will be useful in thwarting the plans of his companions. We can trace and intercept terrorist communications. Or we can track the flow of their money, a necessary ingredient to turn their murderous intentions into action.

Intelligence -- finding out where the enemy is and what they plan to do -- is a necessary part of any war. George Washington said that the “necessity of procuring good intelligence is apparent and need not be further urged…. upon Secrecy, Success depends in Most Enterprises ... and for want of it, they are generally defeated.” Conventional wars often turned on an intelligence breakthrough rather than a military victory. In World War II, we broke the Japanese code and used the resulting information to give us the edge in ending the war. Today, intelligence is even more important because of the asymmetrical nature of the conflict -- terrorists rely on being undetected because they can not fight a war on a level playing field.

The goal of intelligence in the War on Terror is to give us an advantage by gathering information about our enemy which we can exploit to prevent them from committing their acts of mass murder. This information must be used in such as way that it does not reveal our methods of gathering the information, or alert the enemy to what we know. Without secrecy, intelligence gathering is useless. Just a few weeks ago, an Iraqi informant revealed the location of twenty safe houses used by Zarqawi, the murderous leader of Al Qaeda in Iraq. If the identity of the informant had been announced before he could provide this crucial information, he would not have lived long enough to help us achieve a major victory in the War on Terror. Once we had the list of safe houses, if we had started randomly raiding them one at a time, we would have alerted Zarqawi that his network of safe houses had been compromised, and he would not have been meeting in one of them on that fine Thursday morning when two F-16s cut his meeting short. Instead, we waited until the right moment to raid all twenty safe houses and take out Zarqawi in one highly coordinated swoop.

The New York Times is highly committed to exposing government activities which it deems to be "in the public interest". Bill Keller, the editor of the Times complains about the lack of checks and balances, but what are the checks and balances on Bill Keller? Why should this one man who is not accountable to the voters be allowed to make decisions which will cost American lives?

If you want to talk about legality and the public interest, someone in the US Government is illegally leaking classified information to the media which is compromising the security of our nation and endangering lives by undermining our ability to collect the intelligence needed to prevent another terror attack. It is in all of our interest to know who it is. The New York Times knows. But they would rather tip off Al Qaeda to the fact that we are tracking their money transfers.

The New York Times is willing to give a tactical advantage to the enemy during wartime because they have unilaterally declared it to be "in the public interest" but they are not about to expose a public official who has violated both the law and his position of responsibility and betrayed his country by leaking classified information to the media for political gain. It seems to me that their commitment to "the public interest" is not as deep as they would like us to believe.

70% is not good enough

Science is always trying to accomplish the same results obtained by simply obeying God, but they can never equal the blessings of obedience.

A recently released study found that using a condom during sex could reduce the risk of cervical cancer by up to 70%. Of course, for it to work that way, a condom must be used every single time without fail.

More than 99% of invasive cervical cancers are caused by HPV, human papillomavirus, a sexually transmitted disease. Studies have shown that roughly 90% of all people who have had multiple sexual partners during their life carry HPV. HPV can cause genital warts and lesions, but it can also cause abnormal cells on the cervix which if untreated can lead to cervical cancer. Pap smears can detect these cells and alert a woman to the need for further diagnostic tests and immediate treatment to prevent cancer from developing or spreading.

Now I love my wife very much, and I don’t want to be the cause of her death from cervical cancer. Reducing the risk by 70% sounds good, but are we really going to use condoms for our entire married life? Not likely. I am not going to play the odds, hoping that she won’t die as a result of something I did years before I met her, when I was young and stupid. I want a better solution. And there is a better solution which is a lot more than 70% effective. If I never get HPV and she never gets HPV, then we can’t give it to each other. It is so simple that the experts have not even figured it out yet.

The experts say that it can’t work because it requires that we exercise some self-control rather than act as hormone-driven animals that just can’t help what they do. It requires a decision of the will to trade immediate gratification for a blessing which lasts a lifetime. It calls for a young man to have the maturity to value the life of his future bride, even if he has not met her yet, over a short-lived thrill. The experts say it can’t happen. I am testimony to the fact that it can.

Which revolutionary scientific research study found this method to prevent cervical cancer? Which medical journal reported the findings? And when will the FDA approve it? Actually it can be found in the Bible, written thousands of years before man invented condoms, understood viruses, or studied oncology. It is God’s plan for marriage. It is a man and a woman saving God’s sacred gift of sex for each other only, and only within the covenant of marriage. It is further proof that God knows what he is doing and acts in the best interest of his creation. And the blessings go far beyond preventing HPV and cervical cancer. Being “the one and only” is an indescribable gift that you and your spouse can give to each other, laying a foundation of trust and faithfulness to build a lasting marriage on. Let me tell you, God’s way is not easy, but it is the best.

My prediction for the 2006 election

The Democrats are convinced that they are going to win big in November.

I predict otherwise.

Most of the Democrats' hopefulness is based on George Bush's approval poll numbers. Democrats forget that Bush is not up for re-election. They also forget that Bush's poll numbers don't mean a thing if their numbers are not any better. And they have consistently failed to turn Bush's sinking poll numbers into rising numbers in their column.

For many months, the unveiling of the Democrats agenda for the future of America has been as imminent as the indictment of Karl Rove. They assure us that they will have figured out what they believe any day now, one of these months. What is clear is that they still have not learned the lessons of the past.

They keep pushing the failed policies of the Great Society, with a firm belief that prosperity comes from pouring more money into more government programs. But government can not make a country innovative or industrious. Higher taxes, more bureaucracy, and increased entitlement spending will not spur our economy on to create more and better jobs. More regulation and a higher tax burden on businesses will not promote entrepreneurialism, the driving force behind our nation's greatness. America is not the strongest nation on earth because of our government. We achieved our current stature because of the private sector and the hard work of our people, and we did it in spite of government. The best thing that our government can do is get out of the way and let Americans do what we do best. But Democrats don't understand that. Their policies are based on the assumption that government is the only solution to any problem, and that you can tax a nation to prosperity.

Democrats also believe that if you are nice to terrorists, they will go away. This was the policy during the eight years of Clinton. When terrorists bombed the World Trade Center, attacked the USS Cole, or bombed our military barracks and embassies, President Clinton got on television and bit his lower lip. Then he vowed to find the people responsible for this awful crime and bring them to justice. But in the end, Clinton spent more money and resources going after Bill Gates than he did going after terrorists. His response was more like the investigation of a crime scene than engagement in a war. The only concrete action was the bombing of an aspirin factory and blowing up a few tents. Our appeasement paid off on 9/11 when they crashed airliners into the World Trade Center and Pentagon. But Democrats still have not learned. They want to go back to Clintonesque policies, leave the terrorists alone, bury our heads in the sand, and hope that Bin Laden and his crew will be touched by our kindness and stop trying to kill us.

So the Democrats will lose in November, because they offer nothing. They count on the rest of the country hating George Bush as much as they do. The only thing they offer the voting public is that "I'm not George Bush." But when people begin to compare the Democrats to George Bush, they will find solid and consistent leadership from Bush and nothing but name calling and triangulation from the Democrats. Most of the voters will see through the Democrats ploy, and in the end, the big win that the Left has been salivating for will not happen.

If you think that you liberal co-worker was devastated by the death of Zarqawi, just wait for November 8.

Sincere Condolences

I offer my sincere condolences to all liberal Democrats and their propoganda branch, the mainstream media, who today have lost a brother in their struggle against President George Bush.

What tax rate are we paying?

One of my handful of faithful readers had a question about my "Productivity Curve" concept. He wanted to know what our current tax rate is. He said that he pays a lot less than 33% in taxes.

He probably pays more than he thinks.

We all pay layers and layers of different taxes to the federal government, state government, and local government. Some are direct and others are indirect. Some are visible and some are hidden. My Federal income tax bill is also quite a bit less than 33% of my income. It is somewhere around 10%. But adding up all of the taxes that I pay is a daunting task. The payroll taxes for Medicare and Social Security are about 15%. My property tax bill each year is also quite large. It is not determined as a percentage of my income, but if it was, it would be another 6% or so. That gets us up to 31%, and we have not started to account for sales tax, gasoline taxes, and all of the other tax expenses passed on to me in the cost of the things I buy.

As an example, when I buy one gallon of gasoline at the current price of $2.75, the government takes 53 cents in direct taxation. 18.3 cents goes to the federal excise tax, and the rest goes to the state. But that is not all. The government imposes 43 different taxes on the import, production, and distribution of gasoline. These costs are passed on to me in higher prices. In all, I pay 73 cents in taxes on every gallon of gasoline I buy. But to pay $2.75 in after-tax dollars, I have to earn significantly more than $2.75. At my total marginal tax rate of 40% (including income tax and payroll tax) I have to earn $4.58 to take home $2.75. So to buy $2.02 worth of gas, I must earn $4.58. The government takes the difference: $2.56. My effective tax rate on the money I earned is 55%.

The tax rate varies widely depending on who earns the money and what they do with it. A lower income person pays a lower income tax rate, but a higher payroll tax rate. They also tend to pay more in sales taxes. A higher income person pays a higher income tax rate and lower payroll tax rate. The tax rate is higher if the money is spent on certain high-tax items. It is lower if the money is invested in a tax-sheltered account.

There is one way to determine the national tax rate, including all direct and indirect taxes, and even future tax liabilities created by deficit spending. Total government spending as a percentage of the size of the economy is the ultimate measure of the tax rate. Whatever the government spends, it takes from the economy in some way: either by direct taxation, by borrowing the money obligating them to take it at a later time, or by printing money and diluting the value of the existing money. Each year the Tax Foundation computes the tax rate using this method, and determines the "Tax Freedom Day". Last year, Tax Freedom Day was April 26, meaning that everything we produce and earn from January 1 to April 25 goes to fund the government. This is a 31.8% tax rate. The highest tax rate since World War II occurred during President Clinton's term, when the tax rate hit 33.6%.




As a whole, our government consumes roughly one third of what the private sector creates. There are other countries with higher tax rates. However, the truth remains that no nation has ever taxed itsself to prosperity. America achieves prosperity in spite of government, not because of it. The best thing that the government can do to increase prosperity is get out of the way.

The Productivity Curve

The debate about whether we are undertaxed or overtaxed as been raging for decades, and I doubt that I am going to solve it here, but I am going to pour some more fuel on the fire.

The mathematics of economics and tax policy is not an exact science. Any model is bound to be overly simplistic and not take all factors into account. That being said, there are important principles which can be distilled from a mathematical analysis of tax policy.

The Laffer Curve is a concept promoted by economist Arthur Laffer, which shows the relationship between tax rates and tax revenues. It is not intended to be an exact function relating tax revenues to a single variable, but rather, it shows that increasing tax rates does not always increase tax revenues.

We know that the value of the Laffer Curve is zero at 0% taxation, and we also know that it is zero at 100% taxation. There is not an exact value of the Laffer Curve for all points in between. The tax revenues generated are a function of countless interrelated variables, and tax rate is just one of those determining factors.

While we do not know the exact value of the Laffer Curve, we do know a lot about its shape and properties. It is an arch, skewed towards the lower tax rates. The partial derivative of the Laffer Curve with respect to tax rate is fairly well behaved. In English, this means that if you hold all other factors constant, there is a predictable change in tax revenues resulting from a small change in tax rate. In the example above, a 33% tax rate generates the greatest tax revenues. If the current tax rate is 33%, any change would result in a decrease in tax revenues. If the current tax rate was less than 33%, a small tax increase would increase tax revenues. If the current tax rate was more than 33%, a small tax cut would increase tax revenues.

Remember that the Laffer Curve is not precisely known. In reality, instead of being a single line, it is a band with some thickness, to account for the other factors which affect tax revenues. Instead of having a distinct peak, there is a range which contains the peak, but the precise location of the peak can not be determined because of all of the other factors which affect tax revenues.

There is reason to believe that our current tax rates are close to the peak of the Laffer Curve. This means that Republicans have been successful at achieving their goal of implementing a supply-side economic policy. Democrats argue for a tax rate higher than the rate which maximizes tax revenues. They take this position for reasons that I will go into later.

Republicans have argued for years that tax revenues can be increased by cutting tax rates. This argument was made by President Kennedy when he reduced the top marginal tax rate from 90%, and it was made by President Reagan and President Bush. It has proven to be true in every case. However, I claim that maximizing tax revenues is the wrong goal. Only if you want bigger government and more government and you believe that it is better for the government to spend your money rather than you spending your money should you try to maximize tax revenues. If you recognize that government is too big, too intrusive, and too unproductive, your goal should be to reduce tax revenues and increase private sector productivity.

I suggest that instead of attempting to maximize tax revenues, we should instead maximize productivity. A second curve can be derived directly from the Laffer Curve. I’ll call this the productivity curve. It predicts the relationship between tax rates and productivity of the nation’s economy. It is mathematically certain that the productivity curve peaks at a lower tax rate than the Laffer Curve. For the Laffer Curve to peak, the productivity curve must be sloping steeply downward, indicating that it is past its peak. The standard of living of the country is determined not by tax revenues, but by the production of the economy. Prosperity does not come from the government; it comes from the private sector. If we maximize productivity instead of tax revenues, we will increase our national standard of living.

Recognize that the chart above represents the results in a single year. The long-term results look even better for the maximized productivity tax rate. Economic growth is directly related to productivity, maximizing productivity in the current year also increases economic growth for future years because it results in greater reinvestment in the economy. The longer the term you consider, the better the maximized productivity tax rates look. In fact, if you look long term, more tax revenues will be generated by maximizing productivity than by maximizing current tax revenues.

Considering that it is mathematically certain that our nation would be more prosperous if we maximized productivity rather than tax revenues, why have we spent decades chasing after the wrong goal? Primarily it is because we have let the politicians frame the debate. Republicans have argued for a tax policy designed to maximize tax revenues, while claiming to be the party for smaller government. Democrats have taken an even more incomprehensible position, seeking tax rates higher than the rates which maximize revenues. This increases the power of the government, which means that it increases their own power. The further to the right you go on this graph, the larger the share of the economy that the government controls. Liberals believe that government control of the economy is a good thing. This is clearly a self-serving belief for the politicians, but they convince their constituents to buy into that belief by demonizing corporations and business and portraying government as the solution to every problem. By being further to the right on this graph, they give themselves more leverage to buy votes with government money and services, justified in the name of equality.

Neither approach serves the best interests of our nation. Democrats will say that cutting taxes will benefit the rich and increase the gap between the “haves” and the “have-nots”. The reality is that an increase in the prosperity of the country creates more opportunity for anyone to achieve success and share in the prosperity. Democrats don’t like this because it means that they are not the ones providing the wealth redistribution. Government can only transfer wealth. It can not create it. The private sector creates wealth. Government tries to impose equality by changing the way that the “pie” is divided up. The private sector bakes a bigger pie so that everyone can have more without taking it away from someone else. If you prefer the government’s approach, by all means maximize tax revenues. On the other hand, if you prefer unlimited opportunity to equality of outcome, it is time to make major changes to the way we set our tax policy.

The Bible Code

Amidst all of the attention given to the fictional "code" in Dan Brown's fabrication, The Da Vinci Code, another code has gone almost unnoticed.

The Bible, a collection of 66 books writen by dozens of different authors over more than a thousand year's time, contains one cohesive code which runs from beginning to end. The secrets revealed by this amazing code are unknown to most of the world, and carry with them the power to transform lives. To decypher this code, one must analyze a series of ancient symbols arranged according to certain phonetic and grammatical patterns.

Here on this blog I will reveal the secret to break the code and unlock the supernatural power it holds.

First, place a Bible on a table face up, spine to the left. Open the cover to reveal the first page. Carefully examine the text on that page, starting at the upper left and proceeding first from left to right, and from top to bottom. When you reach the end of the first page, turn the page and proceed to the second page. Repeat this process until the secret is revealed.

Dire Warning

Dihydrogen Monoxide (DHMO) is a colorless and odorless chemical compound, also referred to by some as Dihydrogen Oxide, Hydrogen Hydroxide, Hydronium Hydroxide, or simply Hydric acid. Its basis is the unstable radical Hydroxide, the components of which are found in a number of caustic, explosive and poisonous compounds such as Sulfuric Acid, Nitroglycerine and Ethyl Alcohol.

Although the U.S. Government and the Centers for Disease Control (CDC) do not classify Dihydrogen Monoxide as a toxic or carcinogenic substance (as it does with better known chemicals such as hydrochloric acid and benzene), DHMO is a constituent of many known toxic substances, diseases and disease-causing agents, environmental hazards and can even be lethal to humans in quantities as small as a thimbleful.

Research conducted by award-winning U.S. scientist Nathan Zohner concluded that roughly 86 percent of the population supports a ban on dihydrogen monoxide. Although his results are preliminary, Zohner believes people need to pay closer attention to the information presented to them regarding Dihydrogen Monoxide. He adds that if more people knew the truth about DHMO then studies like the one he conducted would not be necessary.

A similar study conducted by U.S. researchers Patrick K. McCluskey and Matthew Kulick also found that nearly 90 percent of the citizens participating in their study were willing to sign a petition to support an outright ban on the use of Dihydrogen Monoxide in the United States.

Each year, Dihydrogen Monoxide is a known causative component in many thousands of deaths and is a major contributor to millions upon millions of dollars in damage to property and the environment. Some of the known perils of Dihydrogen Monoxide are:

Death due to accidental inhalation of DHMO, even in small quantities. Prolonged exposure to solid DHMO causes severe tissue damage. Excessive ingestion produces a number of unpleasant though not typically life-threatening side-effects. DHMO is a major component of acid rain. Gaseous DHMO can cause severe burns. Contributes to soil erosion. Leads to corrosion and oxidation of many metals. Contamination of electrical systems often causes short-circuits. Exposure decreases effectiveness of automobile brakes. Found in biopsies of pre-cancerous tumors and lesions. Often associated with killer cyclones in the U.S. Midwest and elsewhere. Thermal variations in DHMO are a suspected contributor to the El Nino weather effect. Related to the tsunami which killed 200,000 people in 2004.

Despite the known dangers of DHMO, it continues to be used daily by industry, government, and even in private homes across the U.S. and worldwide. Some of the well-known uses of Dihydrogen Monoxide are:

• as an industrial solvent and coolant,
• in nuclear power plants,
• by the U.S. Navy in the propulsion systems of some older vessels,
• by elite athletes to improve performance,
• in the production of Styrofoam,
• in biological and chemical weapons manufacture,
• as a spray-on fire suppressant and retardant,
• in abortion clinics,
• as a major ingredient in many home-brewed bombs,
• as a byproduct of hydrocarbon combustion in furnaces and air conditioning compressor operation,
• in cult rituals,
• by the Church of Scientology on their members and their members' families,
• by both the KKK and the NAACP during rallies and marches,
• by pedophiles and pornographers (for uses we'd rather not say here),
• by the clientele at a number of homosexual bath houses in New York City and San Francisco,
• historically, in Hitler's death camps in Nazi Germany, and in prisons in Turkey, Serbia, Croatia, Libya, Iraq and Iran,
• in World War II prison camps in Japan, and in prisons in China, for various forms of torture,
• by the Serbian military as authorized by Slobodan Milosevic in their ethnic cleansing campaign,
• by many terrorist organizations,
• in community swimming pools to maintain chemical balance,
• in animal research laboratories, and
• in pesticide production and distribution.

What you may find surprising are some of the products and places where DHMO is used, but which for one reason or another, are not normally made part of public presentations on the dangers to the lives of our family members and friends. Among these startling uses are:

as an additive to food products, including jarred baby food and baby formula, and even in many soups, carbonated beverages and supposedly "all-natural" fruit juices in cough medicines and other liquid pharmaceuticals, in spray-on oven cleaners, in shampoos, shaving creams, deodorants and numerous other bathroom products, in bathtub bubble products marketed to children, as a preservative in grocery store fresh produce sections, in the production of beer by all the major beer distributors, in the coffee available at major coffee houses in the US and abroad, in Formula One race cars, although its use is regulated by the Formula One Racing Commission, and as a target of ongoing NASA planetary and stellar research.

One of the most surprising facts recently revealed about Dihydrogen Monoxide contamination is in its use as a food and produce "decontaminant." Studies have shown that even after careful washing, food and produce that has been contaminated by DHMO remains tainted by DHMO.

Our children are in peril, and we must act now! Contact your Senators and Representatives! Contact the EPA and FDA! Contact the Sierra Club, Earth First, and Al Gore! Let them know that we must end this assault on our health and our environment today! Before it is too late.

Duh Vinci Code

One of the biggest movies of the summer is sure to be The Da Vinci Code. I read the book, and I could write pages and pages about the mis-information in the book. If you are interested in that, there are plenty of sources which will provide a thorough debunking of the pseudo-historical premise of the book. In the end, it is easier to list the factual content of the book than the misinformation. The facts in Dan Brown's Da Vinci Code can be summarized as follows:

1. London is in England
2. Paris is in France
3. Leonardo Da Vinci was a painter

Some people will defend the book and the movie on the basis that it is a work of fiction, and therefore by definition, is not factual. However, Dan Brown, the author of The Da Vinci Code, on a page right after the title page asserts that "All descriptions of artwork, architecture, documents, and secret rituals are accurate." Thus, from the beginning, the book claims to be more than pure fiction. Brown went to great lengths to muddle fact and fiction, leading readers to believe that the premise of the book is plausible and supported by fact. The following is the most recent review on the Amazon web site. It is typical of many of the other reviews:

Once I began this extraordinary book, I could not put it down. "The Da Vinci Code" is so much more than a gripping suspense thriller. Dan Brown takes us beyond the main plot and leads us on a quest for the Holy Grail - a Grail totally unlike anything we have been taught to believe. With his impeccable research, Mr. Brown introduces us to aspects and interpretations of Western history and Christianity that I, for one, had never known existed...or even thought about. I found myself, unwillingly, leaving the novel, and time and time again, going online to research Brown's research - only to find a new world of historic possibilities opening up for me. And my quest for knowledge and the answers to questions that the book poses, paralleled, in a sense, the quest of the book's main characters. What a trip! What a read!

People are looking to this fictional work in their search for truth. It is a sad sign of our times that people will accept a novel as their source of truth, but we should not be surprised. The Apostle Paul said that this would happen:

For the time will come when they will not endure sound doctrine; but wanting to have their ears tickled, they will accumulate for themselves teachers in accordance to their own desires, and will turn away their ears from the truth and will turn aside to myths. (II Timothy 4:3-4)

One response is to blame Dan Brown for writing the book, or Hollywood for making the movie. The reality is that these people are simply responding to a need for answers to spiritual questions, and this need exists because the Church is failing to provide those answers. As believers, we are partially to blame for Brown's success at passing off fiction as fact. We, as a group, don't know what we believe and why we believe it, and we are not adequately prepared to offer something better than Brown's myth.

I see this movie not as a cause for outrage, but as an opportunity to address real issues which people struggle with every day. The interest in this book and movie shows that people want to know who God is, who Jesus is, and what He means to their lives. The Church has the only real and lasting way to meet this basic need. The response of the Church will distinguish Christianity from other world religions: we will not take to the street in angry mobs burning cars, hurling stones, and killing people in rage at the perceived indignity. But we must go one step further than simply refraining from these reactions by proclaiming the truth that people are searching for: Jesus offers grace and forgiveness which changes our lives and gives us fellowship with God.

The tag line of the movie is "Seek the truth." If people are willing to honestly seek the truth, I am confident that fiction will be revealed as false, and the truth of the Bible will stand. If this movie causes people to embark on this kind of search, it is a good thing.

But we, the Church, must be ready to address the questions which will arise and help to direct people to the truth of the transforming power of Jesus Christ. Instead of looking for truth in a fictional novel, perhaps they should start in the non-fiction section of the library. Then examine the Bible in the light of historical reality. Most importantly, we need to let them see that Jesus is more than a hisorical figure. He is alive and active in our lives today.

This is how Paul instructed us to respond:

Preach the word; be ready in season and out of season; reprove, rebuke, exhort, with great patience and instruction. ... But you, be sober in all things, endure hardship, do the work of an evangelist, fulfill your ministry. (II Timothy 4: 2,5)

Let's not miss the opportunity that this movie provides, but use every opportunity to let the light of Jesus shine. When we present the truth to the world, they won't need to look to pulp fiction pretending to be fact for their answers.

CBS News hires Moussaoui

(05-08-2006) CBS News today announced plans for convicted terror conspirator Zacarias Moussaoui to take the place of Dan Rather as anchor of their evening news. It was unclear when Moussaoui, who "defeated" America by being sentenced to spend the rest of his life in a concrete room instead of dying by lethal injection, would be available to perform his anchor duties.

CBS President Arnold Harbinger said, "Mr. Moussaoui is an ideal replacement for Dan Rather because the two share many common interests, viewpoints, ideologies, and delusions of self-importance. Both exhibit the zeal to advance these viewpoints, using unconventional methods when necessary. Mr. Moussaoui's improvised identification documents prove that he is up to the high standard set by Dan Rather. And we believe that Mr. Moussaoui will bring depth and balance to our news desk. The 'wave the white flag, cut and run, appease the terrorists' crowd is already well represented, and CBS is a bit thin in the 'kill Americans and destroy the Zionist Satan' department."

In related news, an audio tape has surfaced in which Osama Bin Laden can be heard, speaking from his subterranean headquarters, expressing gratitude to America for sparing the life of Moussaoui, and repealing the murder of 3,000 Americans on 9/11 as a token of his new appreciation for the American justice system.